How to cost transport operations

Operating a commercial vehicle? NICK PORÉE has some invaluable advice for anyone entering – or wishing to learn more about – the transport industry.

One of the most critical factors for success in the management of transport operations is the cost calculation for owning and operating vehicles. Expenditure (current spending) does not give indications of the actual costs being incurred; operating costs increase over the life of a vehicle.

Brakes, clutches, and tyres wear out and must be replaced at some future date. So, the costing model must take into account future expenditure, and accumulated earnings must be set aside to make provision for large potential future costs (such as a set of tyres for R150 000 over 60 000 km, or a clutch overhaul that will cost R185 000 at 350 000 km).

Accurate estimates of the cost of operating commercial vehicles require new transport operators to seek guidance, as future costs are unknown. Performance and maintenance costs will depend on the make, model, and specifications of the vehicles concerned. Vehicle specifications and configurations must be matched to operations, while quotations and budgets must include total costs.

Drivers must be trained to operate vehicles economically. This includes gear selection to optimise fuel efficiency; driving and braking technique to negotiate downhills with minimised reliance on brakes; forward observation and planning to avoid harsh deceleration; and dangerous steering. Driver performance must be continually monitored, as it is a critical factor in reducing vehicle costs.

These costs should be separated into “fixed” costs (the costs that are constant with time) and “variable “ costs ( the costs that are variable with distance travelled).

Fixed costs

Fixed costs include the following items, which must be calculated as a rate per hour in the charge-out to users:

• Vehicle finance
• Insurance
• Licence fees
• Salary of the driver or crew
• Cost of overheads (management and administration)
• Depreciation (the cost of “using up” the vehicle)
• Training and external costs
• Markup – this must be included in the charge-out rate per hour if there is to be any profit from the operation. The markup is typically 12% of costs, but may have to be discounted in order to obtain business

The amount spent on finance and insurance will depend on the vehicle, interest rates, and risk for the insurer, but will remain the same for at least a year. For example, a heavy commercial vehicle purchased for R1,7 million at a prime interest rate of 10,5%, with no down payment over 60 months, will have an instalment of around R37 000/month.

The insurance on a commercial vehicle is roughly 7% of the purchase price. For this hypothetical vehicle, insurance would thus cost around R119 000/year.

There are alternative finance and insurance options for transport operators. Many vehicle manufacturers offer leasing or renewal programmes that include insurance, maintenance, and repairs. These programmes can assist operators to renew their fleets regularly and minimise unplanned costs associated with repairs.

Generally, license fees are paid at the beginning of each year. Again, the costs will vary depending on the vehicle. For a six-axle combination the annual fee is R28 000/year; for an interlink it is R38 000.

Salaries will be determined by the number of drivers or assistants employed, driver skill level, and job requirements. Average salaries are about R10 000 per month, but long-haul, dangerous goods, and shift drivers might be paid more for overtime or risks associated with the job.

Variable costs

Variable costs fluctuate with the changing prices of the input factors, distance travelled, condition of roads, and driver behaviour. They sometimes include damage or breakages, although the main variables are:

• Fuel (with fluctuating fuel prices throughout the year)
• Maintenance and repairs
• Tyres

Fuel is the most volatile of the variable costs, as fuel prices depend on international trends and may decline or increase dramatically throughout the year. Fuel consumption per kilometre is affected by vehicle specifications, maintenance level, driver behaviour, road conditions, and terrain. It must be very closely monitored daily, as it accounts for 30% or more of the total vehicle operating cost.

Fuel consumption is usually expressed as litres/100 km. If consumption is 50 litres/100 km for 400 km of travel and the cost of diesel in 2022 is about R26,20/litre, the cost per kilometre can be calculated as follows:

Fuel used (50 litres x 4) x R26,20 divided by kilometres travelled. Thus, (200 x R26,20)/400 = R13,10/km.

There are many options for vehicle maintenance, but it must be done effectively or costs will rapidly increase. If facilities and trained personnel are available, operators can do their own maintenance. Alternatively, this can be done through a reputable workshop, or by maintenance contract with the vehicle supplier. Regardless, management of finances must always include reserves for unexpected repairs.

Tyres are another unpredictable expense. Although most tyres are expected to last for up to 120 000 km, wear from braking, road conditions, and tyre quality will impact longevity; the quality of a tyre should never be compromised for price. Transport operators travelling between Johannesburg and Durban twice a week for the full 52 weeks in a year can budget for at least two to three sets of tyres annually. A set of 20 new tyres on a six-axle articulated combination (at R6 600 per tyre*) will cost around R132 000. This may be somewhat reduced by the use of retreads (R2 200 on average) on the trailer and drive axles.

To manage some of the more volatile costs, such as fuel and vehicle maintenance, transport operators can invest in telematics solutions. It is important to evaluate the costs and benefits of technological systems, as they increase costs but can potentially offer savings. However, this only happens with regular and effective management action.

OPERATIONAL COSTS

In addition to vehicle costs, there are external operational costs that depend on the nature of the operations and the routes used. These may include the following, which must also be factored into the charge-out rate:

• Toll fees
• Permits (harbour, abnormal, cross-border)
• Extra costs associated with transporting dangerous goods

QUOTING AND ESTIMATING

The foregoing discussion describes the basic principles of vehicle costing. When quoting a customer (or evaluating a tender, or planning a transport operation) it is important to include the overheads or administrative costs incurred in running the business.

The overheads should include anything required to keep the operation going, including office or workshop facilities, parking areas, dispatchers, clerks, telephones, and ancillary vehicles. These costs should be divided by the estimated available vehicle hours which can be charged out in order to derive a rate per hour.

After accounting for all additional expenses, transport operators also need to include a profit margin. In order to quote efficiently, there should be a rate per kilometre and a rate per hour for each category of vehicle. For any operation, once the distance and the estimated time are known, it is possible to produce a quote. If there is a need to be more competitive to attract business, the fixed costs can be discounted by a process of reducing the markup, reducing the contribution to overheads, or making other reductions. There should never be an alteration to variable costs, though, as this will mean operating at a loss.

In the highly competitive freight transport market, cost accounting is critical for success.

* New tyre pricing can be anything from R3 800 to R8 500, depending on make, model, and application.