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Making Your Miles Count

Choosing a Trucking Company: The Contract - Part I

By Robert D. Scheper

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ease Operators and Owner/Operators have vastly different business models and contracts. Owner/ Operators (paid percentage) are subject to feast and famine rate fluctuations while Lease Operator contracts (paid by the mile) are designed for simplicity and predictability. Prior to the late 70’s there was no such thing as an Owner/ Operator or Lease Operator. There was either a trucking company or a company driver. Contrary to popular opinion, all Lease Operator contracts are not the same. The same truck may not produce similar results at different companies. The very life or death of a Lease Operator can be buried in the pages of a contract. Here is the business principle: the higher the level of risk, the higher the level of return. A driver must accept personal financial risk to have the opportunity for higher income. Driver performance contributes to all successful truck operations. The contract operator concept began as a win/ win situation. The driver reaped the rewards of their risk and effort while the company eliminated a capital requirement and retained motivated drivers at a contracted price. The concept took hold and the majority of high performing business minded drivers bought trucks and switched to Lease Operator contracts. The niche grew to an estimated 8-12% of all drivers. Don’t be fooled about 14    June 2011

this. Trucking companies knew exactly how much it costs to operate a highly depreciating asset. Contracts were created using a “cost plus structure” and Operators had to outperform the average driver in order to gain an increased return on their investment. It was an honorable and achievable challenge for most. Lease Operator positions began as an exclusive club of mechanical, business minded professionals with almost the entire contract relationship based on the honor system. In fact, prior to the 1990’s an estimated 40% plus of all Lease Operators ran down the road without

so much as a written or signed contract (violating DOT regulations). In the mid 1990’s and later, heated competition impacted the once honorable business model and margins began to fall. By the end of the decade many business minded operators either became a trucking company themselves (cutting out the middleman) or left the industry. Companies reacted two ways. First, Operator contracts morphed into their own competitive world (due in part to deregulation). For example, they began to “change” so as to attract more operators. They swung from detailed (listing all

costs such as: license, insurance, workers compensation, administration costs, decals, service charges, HVUT, etc.) all the way to zero based contracts (those listing only revenue and fuel) or sometimes a combination of both. They went back and forth trying to find the perfect marketing presentation. I followed one company who materially changed their contract three times in twelve months. It was bizarre! Contract comparisons were charted out on napkins all across Canada. The problem was most napkins recorded the same assumptions about revenue, fuel and

maintenance producing similar financial margins in many (but not all). The unknown factors were usually shrugged off (layovers, routes/lanes, and uniqueness of freight, customer base, power/ spec requirements, hidden risks/liability and other miscellaneous demographics). What seemed like a lot of options usually boiled down to very few. It was during this time the myth that “all contracts are about the same” was generally adopted. Company salesman (recruiters) “sold” contracts on a supply/demand basis rather than searching out contracts scientifically evaluated

by Operators. Companies only had to pay what the local market would bare (supply) and adjusted terms only when demand increased (enough operators complained or quit). R o b e r t D. S c h e p e r operates an accounting and consulting firm in Steinbach, Manitoba. He has a Masters Degree in Business Administration and is the author of the Book “Making Your Miles Count: taxes, taxes, taxes” (now available o n CD ) . You c an fi n d him at www.thrconsulting.ca and thrconsulting.blogspot.com or at 877.987.9787. You can e-mail him at robert@ thrconsulting.ca.

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#37 June  

Eastern Trucking News, Issue 37, June 2011

#37 June  

Eastern Trucking News, Issue 37, June 2011