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Reckoning With Demurrage

15th February 1952
Page 52
Page 55
Page 52, 15th February 1952 — Reckoning With Demurrage
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Which of the following most accurately describes the problem?

—Can Be Done Either by Assessing What the Vehicle would Earn if it were Running on the Road Instead of Standing Idle, or by Calculating a Deterrent Charge

MANY hauliers make use of me as an arbitrator and employ letters from me as endorsement of their claims for better rates. Let us imagine a haulier who has long been dealing with one particular customer, carrying his traffic at a rate agreed upon some time ago but which is now unremunerative. He approaches his customer and asks for an increase, but finds that whilst the customer agrees that an increase is justified, he does not

. . acquiesce with the amount.

The haulier writes to me, giving such meagre details as occur to him as helpful and asks me to quote a rate based on current costs. He then uses my letter as a means for persuading the customer to accept either the rate the haulier himself has already proposed or that which is suggested in my letter, putting forward, as is natural, the one which would be more profitable to him. As a rule, I am kept in ignorance about the result of these negotiations.

I have on my desk a typical case of this . kind, relating to the operation of a 7-8-ton oiler On a C-hiring margin. The inquiry runs: "1 have for some time been carrying machinery for a firm 'in the Midlands. Hitherto, I. have invoiced each job .separately and have, I believe, given satifaction boat as regards the service given and the prices charged. However, I am now asked to quote a flat rate per mile lead. I have put my quotation forward, but have been told that my rate is too high. I am writing to ask you to let me know what, in your opinion, my charge should be, and I propose to put your letter forward in support of my case. The particulars are as follows;— Bulk Machinery Carried

"The vehicle is a 7-8-ton oiler, with a platform body. The machinery is in bulk, with full loads every journey, returning empty. One snag is terminal delays, whichmay he anything from one to four hours. The vehicle averages 500 mites per week.

"One thing I would like you to bear in mind is that this service is in operation seven days per week, and I have put in for extra payment for journeys done on Sundays to cover the double-time wages. I have, in my quotation, put forward a request for extra payment when the terminal delays exceed one hour, and I should be glad if you will give me your views on that and some idea of how much I should charge for this demurrage."

The first thing to do is to get some basic figures for cost of operation. The first cost of the vehicle of the type described in the letter can be taken to be £2,400: that is painted, lettered and ready for the road. The tyres, 36 by 8, cost £215 per set, so that the net value of the vehicle A34 without tyres is £2,185, and. if I assume that the residual value is £285, I am left with £1,900 as a basis for assessment of depreciation.

I propose to take nine years as the life, so that the sum for depreciation amounts to £210 per annum. Half of that, £105, I put under the heading of standing charges; the other half must be spread over the 25,000 miles per annum which the vehicle is expected to run. That is roughly Id. per mile. Interest on initial outlay at 4 per cent. is £96 per annum, or £1 18s. per week.

Fixed Charges

I can now set out the operating costs beginning with the fixed charges, which are as follows: Road Fund licence, £1 8s. per week; wages, including provision for National Insurance, workmen's compensation and holidays with pay, £6 10s.; rent and rates, ICts.; insurance, £1; depreciation (half), £2 2s.; maintenance (d), £1 5$.; interest on capital outlay, £1 18s.; total, £14 13s.

If I take £3 17s. per week for establishment costs, that makes the total of fixed charges £18 10s. The profit margin can be assumed to be approximately 15 per cent., as this is a fairly regular contract, that is £2 15s. per week, so that my total revenue on account of fixed charges alone must be £21 5s. per week, or 9s. gd. per hour for a 44-hour week.

Now for the running costs: for fuel I assumed 13 m.p.g. and 3s. per gallon, so that the cost per mile for fuel is 2.8d.; for lubricants, 0.2d.; for tyres, reckoning 24,000 miles per set, 2.15d.: for maintenance (e), 1.5d.; depreciation (half), from above, Id.; total, 7.65d. If I add profit at 15 per cent. to that, I get 8.75d. as the charge to be made per mile.

In the ordinary way, the next step is to find the running cost per week, reckoning on a mileage of 500. That is £18 4s. 7d., which, added to the fixed charges, £21 5s., gives me £39 9s. 7d. per week as the revenue which the vehicle must earn. The quotation, however, is to be per mile lead, so we must first of all find the charge per mile and for that we divide £39 9s. 7d. by 500, which is ls. 7d. per mile. For every lead mile the vehicle actually runs two miles, so that the charge per lead mile must be 3s. 2d.

The usual way of calculating the charge is not strictly applicable; why that is so can be discussed after I have gone into the other two points in the letter, namely, the charge to be made fot Sunday work and demurrage.

Regarding the extra charge for Sunday work, I shall assume that this is an eight-hour day and that the extra pay is 2s. 9d. per hour, double-time being 5s. 6d. per hour. That amounts to El 4s. per day. Assuming also that the 500 miles are spread evenly over the week and, therefore, that 72 miles are run on the Sunday, the extra cost per mile is about 4d., to allow for a small profit on the payment. That makes the charge per mile run on Sunday tc: be Is. lid: and the charge per lead mile 3s. 10d.

Charge Must be Increased

Now to consider the question of demurrage. First let me state quite definitely that the charge for this must not be limited to the 9s. 8d. which has been calculated as the proper charge per hour for the vehicle. It must be more. There are two ways of reckoning the charge to be made.

One. which gives the minimum rate,' is to assess it on the basis of what the vehicle would gain if it were earning for mileage as well as time. The other way is to regard it as demurrage pure and simple and calculate it so that it becomes in effect a penal or deterrent rate, The first of these 'figures is easily calculable. Beginning with the figure quoted above as the hourly rate, 9s, 8d., we should make provision for earning on the mileage which the vehicle can reasonably be expected to cover should it not be detained. Assessing that on the basis of average speed at 12 m.p.h., the profit to be earned on the running costs is 1.1cl. per mile. For 12 m.p.h. that is about Is. Add that to the 9s. 8d. fixed charge per hour and we get 10s. 9id. as the demurrage charge per hour. The round sum of Ils, per hour can be taken to apply.

That is a reinimurn amount for demurrage as assessed in that fashion. Let us now ,suppose that the charge is to be used as a deterrent' to the customer, so that he will be anxious net to incur it too heavily. Actually, of course, there is no limit.. It might be as much as £2 per hour, except that that would look a bit too much like wielding a big stick. One way would be to charge 24s. per hour, double the amount calculated above, but even this, I think, would savour too much of dictation; probably 15s. per hour is sufficient. On Sundays the charge should be 18s, per hour to covel the extra wage bill.

Flaw in the Argument

1 had got so far with my calculations and was proposing to write to the inquirer when I realized that there was a serious flaw in the argument, at least as regards a charge for demurrage. The rate already calculated included payment for waiting time inasmuch as it included payment for the whole week's work, so that any additional payment would be unfair as it would be charging twice for the same thing.

I have calculated the cost of 'operating the vehicle in a complete working week to be £14 I3s., and I have added E3 17s. per week for establishment costs and £2 1.5s.

for profit, making £21 5s. in all. I have assessed the running cost per mile to be 7.65d., and by adding 1.1d. per mile for profit have arrived at a charge of 8.75d. per mile.

1 have taken 500 miles per week-the operator's own estimate of his weekly mileage--and made out the total mileage charge on that basis to be Kl8 4s. 7d. From that I deduce that the weekly minimum revenue should be £39 9s. 7d., which is, of course, the sum of the two totals, and from that have arrived at the 'prices of Is. 7d. and 3s. 2d. per rn;le, run and per lend mile respectively.

Those charges therefore include provision for the full use of the vehicle per week, but not for any overtime. It seemed likely that in he event Of there being many

occasions when the waiting time approached the four-.hour maximum mentioned in the letter, there would have to be overtime if the 500 miles were be be covered in a week. I therefore wrote to my correspondent advising him that there were serious difficulties in the way of charging for demurrage and at the same time asked him if there were any appreciable amount of overtime worked by this particular vehicle.

He replied that the average week involved 50 hours, i.e., six hours overtime apart from Sunday. That would, of course, increase his total outlay on fixed expenses by approximately £1, and raise his charges by £1 5s., the mileage charge being higher by 0.6d.

I pointed out that his total weekly profit was £2 15s. for time and 500 times 1.1d. for mileage-nearly £2 6s. per week-so that his total profit was £5 Is,' per week, which -seems fairly reasonable, so that I cannot in all fairness recommend him to make any provision for charging for demurrage.

It is true that profit is reduced by £1 5s. per week. That deficiency should be met by increasing the charge per mile run from Is. 7d, to Is. 8d., and the charge per mile lead . from 3s. 2d. to 3s. 4d,

Not Strictly Applicable The normal way of calculating the charge is not strictly applicable. It is satisfactory as a basis for assessing charges on time and mileage, because the payment, for time, assessed on the basis of a 44-hour week, is still reasonable and profitable although a lot of overtime is worked. In assessing the time• charge on the basis of a 44-hour week, provision has to be made for the operator to recompense himself for all his standing charges, his establishment costs and wages up to and including the, normal rate. Whenever overtime is worked, instead. of the operator losing by having to pay overtime, he can actually make more profit than he can during the basic 44 hours, even although he pays his driver time-and-a-quarter or tirne-and-a'-half. in this particular case that does not apply. I have taken the total of the standing 'charges amounting to £18 10s. .per week, plus £2 15s. profit, making £21 5s. per Week but, instead of dividing that over 44 hours I have taken it to apply to thewhole week's work. . .

In a subsequent -article I shall take the same figures and work out the same problein in the' way in which it should properly he done. S.T.R.


Organisations: Road Fund

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