Transportation costs are highly unpredictable. Any market shift, from shortages to increases, bottlenecks and capacity constraints, can and will impact the cost of freight. In fact, economists often study trucking rates and shipment patterns as a key indicator of economic activity.
Spot Market Rates vs. Contract Market Rates
It’s important to understand rate structures, specifically the difference between spot market rates and contract rates. A spot market rate typically involves a one-time shipment, usually with time sensitivity. Spot market rates are the most volatile, as they are directly related to shipping capacity, market conditions, or carrier preferences.
Shippers who know the volume and frequency of their transportation needs are at an advantage to lock in a favorable rate. Contract market rates are negotiated prior to the shipment’s release and are agreed upon for a set period. These rates are largely based on regularity of volume, route, carrier, load requirements, and frequency.
Most times spot rates are more expensive than contract rates but not always. If capacity is high, and there are plenty of available carriers, spot rates will be in the shipper’s favor. Conversely, when capacity is low, it drives the price up, because carriers are not as available. The predictability of a contract, or dedicated lane, stabilizes balance sheets and allows shippers and carriers to build trustworthy and reliable partnerships.
One key element to developing a contract rate is looking at historical spot market data. “When creating any rate, we look at several different elements, one of which is 30-60-90-day review of the spot rates,” says Dave Goleb, Manager of Transportation & International Operations, at Evans Distribution Systems. “We also reach out to our preferred carriers to gauge their current capacity levels.”
Negotiations and Rate Increases
Contract rates have a definitive end date. At that point, the dedicated lane can go out for bid or can be re-negotiated with the carrier or 3PL. When contracts are out for bid, it creates competition via rate shopping between carriers. In this scenario, a shipper might decide to go with a lower rate with a lesser-known carrier or they may decide to pay a higher rate with a provider that they know and trust to deliver on-time and damage-free. If the carrier decides to stay with the incumbent carrier, rates will likely increase with normal yearly inflation or expanded scope of shipping requirements.
Shipping Requirements: Every Load is Unique
There are many considerations that go into a rate, whether contract or spot market. These requirements fall into two categories: basic requirements and accessorials. An accessorial fee is related to specialized handling requirements, changes, or other unforeseen challenges that require additional fees. Every transportation agreement is subject to accessorials.
Basic Information Requirements
- Distance
- Weight
- Dimensions
- Product type
- Truck type (Flatbed, Dry Van, Tanker, Reefer, etc.)
- Number of pallets or packages
- Ship & Delivery Dates
- Name of Shipper & Receiver
- Load/Unload Requirements
- Full Truckload, Less-than-Truckload, Container
- Frequency of Loads
- Appointment-based Pick Up or Delivery
Common Accessorials
- Hazardous Goods & Endorsements
- Live Unload or Drop and Hook Delivery Requirements
- Floor Unload or Palletized Cargo
- 40’ or 20’ Container Size
- Tarping
- Tanker Endorsements
- Trailer Pool Requirements
- Stackable vs Non-stackable
- Liftgate Requirements
- Additional Stops (More than One Pick Up/Delivery)
- After Hours or Before Hours (Outside 8AM – 5PM)
- Blind Shipments
- Bill of Lading Change
- Detention (More than 2 Hours)
- Diversion Miles (Driving to a Different Location from the Location on the Paperwork)
- Lumper Fees (Loads that Require Additional Labor Support)
- Fuel Surcharge
- Layover Fees (Driver is Forced to Stay Overnight)
- Limited Access (Location Requires Identification/Clearance)
- Metro Pick Up or Delivery (Major Metro Areas)
- Oversized Freight (Greater than or Equal to 12 Feet in Length)
- Packaging or Shrink Wrapping
- Redelivery (Unable to Deliver with the Driver Not at Fault)
- Reclassification or Reweigh (Correction to Weight of Class Info)
- Sort and Segregation
- Tolls
- Truck Ordered Not Used (TONU) (Last Minute Cancellation)
This list of fees may seem extensive but most of these charges can be avoided by being upfront about specialized requirements and providing accurate documentation to carriers. A 3PL like Evans Distribution, that operates an in-house freight brokerage known as Evans Logistics Inc., will know
what questions to ask a shipper and relay the information to the carrier, to eliminate accessorials whenever and wherever possible. This will help shippers keep their freight costs down and their shipments delivered on-time and damage-free. Interested in current market rates? Check out this free rate data from ACT Research.