Taking a Peek at Peak Season Surcharges:
Budgeting for Transportation Costs in Uncertain Times

Emerge Editorial

For reasons that are easily understood, the most unpopular acronym in the world of logistics and transportation is “PSS”. As anyone familiar with shipping terminology knows, “Peak Season Surcharge” is the name given to price increases placed on certain transportation services during periods of high demand. Of course, here in the U.S. peak season is associated with the run-up to the Holidays that begins in early fall and continues until just after New Year’s.

Whereas the overall definition of Peak Season Surcharge is self-explanatory, the details behind the true meaning of PSS depend on factors like mode of transport, service type and service level within a given mode. Found in transportation areas as diverse as small parcel, ocean container shipping and air freight, it is very important for shippers to understand how a given PSS is levied, how long a surcharge will be in effect and most importantly, how these additional costs will impact a transportation budget.

Particularly true for companies that ship both domestically and internationally and that use multiple modes of transportation, the process of budgeting and managing surcharges that only come into play at the end of the year can be a difficult task. Given the complexities behind Peak Season Surcharges, this blog is dedicated to pointing where they’re most often applied, how they’re structured from a cost perspective, and how companies can budget for expenses that may or may not come to fruition.

Peak Season Surcharges Differ by Mode of Transport

The first thing we’ll say about PSSs is that a Peak Season Surcharge should never be confused with what’s known as a “GRI”, or a “General Rate Increase”. By definition, a PSS is temporary, which means that as soon as peak season subsides, so does the surcharge. A GRI, on the other hand, is a permanent rate increase that can be implemented at any time of year as a reflection of market conditions that are of a more permanent nature.

It should also be pointed out that a PSS should not be mixed up with other fees such as a “Fuel Surcharge” (FSC) or a “Security Surcharge” (SSC). As the names indicate, these are charges that are separate from a PSS and that are charged in addition to a Peak Season Surcharge. Found in different modes of transport, FSC is charged in trucking, air freight, and ocean freight (known as “Bunker Surcharge” for ocean freight), and an SSC is most predominant in air freight.

With the above clarifications made, the growth in e-commerce has caused PSSs to be mostly associated with B2B and B2C deliveries. Although it’s true that PSSs levied by the integrators (DHL, FedEx, and UPS) get all the headlines, they’re quite common in other modes of transport, too. The key distinction to be made across transport types is the unit of measure upon which charges are based. In the case of ocean freight for example, a PSS will be by container size, whereas for international air freight, a surcharge is expressed on a per kilo basis.

Given the different ways that carriers structure a PSS, it is critical for shippers to have a handle on units of measure, as well as factors like dollar amounts, the presence of any volume thresholds (i.e. when a PSS kicks in) and expected duration of the surcharge. Without knowledge of these variables, it will be very difficult for any shipper to budget and/or accrue for expenses during the latter months of a calendar year.

Peak Season Surcharges for Residential Deliveries Continue to Go Up

As noted, how shippers budget for a PSS is a function of the type of transportation service they use and the volumes that they ship at different periods throughout the year. Within that broad framework, it must be acknowledged that e-commerce shippers face a substantial financial burden from PSSs specific to residential deliveries. And even though DHL, FedEx and UPS make a valiant effort to explain surcharges on their respective websites, they can still be confusing.

One thing that is easy to understand about residential delivery surcharges is that they’re calculated on a per-package basis. So, theoretically, if a PSS is $2.00 per package on a given service, that should be simple to calculate. Unfortunately, with residential delivery service types like, “Ground Residential”, “Next-Day Air Residential” and “All Other Air Residential”, as well as volume thresholds that trigger the application of a PSS, one needs PhD in Calculus to figure out what all this stuff means!

To elaborate on the above point further, each integrator creates its own volume threshold that’s based on shipping quantities from a non-peak, previous month. Driven by the total volumes from ALL service types, if an integrator establishes a threshold of 10,000 packages per week and if a shipper’s overall volume exceeds that amount, then the PSS is invoked. It should also be noted that a PSS can be “progressive”, meaning that as a shipper’s volume grows and exceeds the threshold more and more, the higher the per-package PSS becomes.

Clearly a complex exercise from a cost perspective, residential delivery surcharges are further complicated by fees such as, “Special Handling” and “Over-Maximum Shipments”. Whether it’s a charge for a carton that’s too heavy, or if a box exceeds dimensional limits, these charges are often unknown to the shipper until freight moves. Taken in conjunction with volume-based PSSs across multiple service types, these surcharges make it hard to know the cost of a shipment until an invoice is received.

Tips on How to Budget for Peak Season Surcharges

Needless to say, creating a reliable transportation budget for all modes of transport during a twelve-month period is not easy. Also, when one considers that most PSSs are likely to be invoked only in the fourth quarter, accurate budgeting is next to impossible. In recognition of this problem, there are measures that can be taken by shippers to devise a reasonable estimate of what those end-of-year additional costs will be. Here are a few suggestions that might help shippers with their budgeting efforts.

  1. Make the best use of historical data. While recognizing that a previous year’s shipping volumes and surcharges aren’t 100% indicative of what will happen in an upcoming year, shippers should still use historical data for budgeting purposes. In the case of PSSs, shippers have the advantage of knowing the details of each integrator’s PSS structure from prior years, as well as what their own volumes were and ultimately, what they paid. By no means perfect, historical data can be used to help predict increases or decreases in PSSs, which in turn can be baked into a budget.
  2. Use your company’s sales forecast as a guide for transportation budgeting. In addition to using historical volume and cost data, it is essential that transportation professionals utilize their company’s upcoming sales forecasts, too. By measuring forecasted sales for existing, as well as for new products, shippers can improve accuracy when budgeting both domestic and international shipping. For sophisticated residential shippers, the ability to link item-level sales forecasts to the dimensions and weight of the cartons used to ship those items will improve PSS budgeting by an order of magnitude that most companies can only dream of.
  3. Use accruals to level-set Peak Season Surcharges. In addition to a budget, shippers need to make short-term adjustments that reflect the reality of their transportation costs. Accrual accounting helps in this regard because it allows companies to capture actual expenses as they occur. In the case of PSSs that are coming in higher than budgeted, an accrual can be increased. Should lower volumes cause a PSS to trend downward, an accrual can always be reduced. Although not a panacea for PSSs, accruals do drive down the probability of budgetary surprises at the end of the month or quarter. 

The trouble with all Peak Season Surcharges is that they’re not only expensive but inherently difficult to calculate prior to goods being moved. Whether it’s an inbound ocean container carrying imported goods for Black Friday, or a PSS on residential Next-Day Air shipments, every mode of transport and service level has its fair share of nuances and confusing calculations.

Given the above challenge, shippers need to get a “peek” into Peak Season Surcharges long before they’re implemented. Depending on a company’s shipping profile, that means understanding units of measure and volumes by transport mode, service types and service levels, and most importantly, the math behind each PSS. From there, shippers can use their own best practices along with the suggestions found in this blog to create budgets that are not only reliable but that can be adjusted through well-timed accruals.

Share on facebook
Share on twitter
Share on linkedin
Share on pinterest
Share on reddit
Share on tumblr
Share on vk
Share on stumbleupon
Share on telegram

Stay Connected!

Get the latest news and cutting-edge industry updates from Emerge, straight to your inbox!

Read Next

Read Next