Choosing a Trucking Company: The Contract

Choosing a Trucking Company: The Contract

Lease 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 O/O or L/O, there was either a trucking company or a company driver.

Contrary to popular opinion all L/O contracts are NOT the same. The same truck may not produce similar results at different companies. The very life or death of a L/O 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; therefore the contract operator concept began as a win/win. 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 mostly high performing business minded drivers bought trucks and switched to L/O contracts. The niche grew to an estimated 8-12% of all drivers.

Don’t be fooled about this, trucking companies knew exactly how much it cost to operate a highly depreciating asset. Contracts were created using a cost+ 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. L/O positions began as an exclusive club of mechanical and business minded professionals with almost the entire contract relationship based on the honor system. In fact, prior to the 1990’s an estimated 40%+ of all L/O’s ran down the road without so much as a written or signed contract (violating DOT regulations).

In the mid 1990’s + 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 them self (cutting out the middleman) or left the industry.

Companies reacted two ways, first operator contracts morphed into its 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 some combination of both. Back and forth they went 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 misc. 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 bases rather than searched out and 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/quit).

The second way companies reacted was to offer in house lease/financing for trucks with much less than standard upfront (or even backside) risk, dramatically changing the L/O culture. The upside for the company was both containing drivers and minimizing… or even eliminating risk. My favorite L/O contract quote is: “…we reserve the right to deduct: any amount, at any time, for any reason, without notice…” Awesome! Nothing like hiding your intentions in plane sight.

Operators could be charged for any and all conceivable costs without any recourse by labor boards. The niche moved away from an inter-dependent professional business agreement and moved more towards co-dependency, affectionately referred to as a never-never plan.

The average business sense of Operator’s dropped, it had too, it was more of a recruiting tool than a true business venture. Operators became: less mechanical, less service oriented, less professionally minded and with less skin in the game, had minimal long term commitment to success. Those professional operators still out there can drive a very lonely and isolated road.

Combine these nasty stats with decades of abusive and insulting regulations (complements of OTA, CTA etc) and it seems the industry is determined to develop brain-dead drivers. If the regulations keep getting shoveled in we’ll soon be facing “anti-drooling legislation”. But I digress.

Fuel prices were flat lined for decades before 1998. They were “Out of sight, out of mind”. Virtually no contract featured a fuel surcharge or fuel cap before 1998. Even then, once fuel started to climb it took years for some companies to properly address it (if ever). Meanwhile operators absorbed higher and higher costs in their already dwindling margins. The result was frustration and even more turnover. Of course there have been numerous exceptions to the gouging but good news was rare and traveled much slower than bad. It started looking up in 2003+ but Operator trust and moral had long flat lined at a low level.

Then came 2009. A year that exposed heartless crooks. On my desk I have a stack of some of the most outrageous theft I’ve ever seen. In prior recessions companies were usually ashamed, but the saddest part in 2009 was that companies started communicating as if this type of business logic was “standard business practice”.

When business science is abandoned for blind trust abuse is never far behind.

The solution is far from simple. L/O’s must take back their own industry. They must understand their business model and reject any unjust contract terms. I’ve outlined two sub-par terms in the past few months: paying shortest route and non-indexed fuel subsidies (or unacceptable conversion formulas). Without having scientific standards for contracts, unjust terms will continue to be the death of the L/O industry.

It is essential for each operator and ultimately the entire industry that every operator individually reject abusive contracts and educates their five friends about the perpetrators.

Robert Scheper

Robert D Scheper has a Masters Degree in Business Administration and is the author of two books, “Making Your Miles Count: Taxes, Taxes, Taxes” and "Making Your Miles Count: Choosing a Trucking Company".

0 0 votes
Article Rating
Notify of
Inline Feedbacks
View all comments