When maintaining freight forwarding operations, logistics managers face multiple challenges to try to keep up with industry trends and fluctuations. Deciding on the best freight rate strategy, including negotiating freight rate contracts and navigating the spot freight market, is one of these challenges.
Part of the planning process for the rate strategy should involve understanding when to apply both contract and spot freight rates. Learning to take advantage of their different formats is what will give you the competitive edge.
So in this article we’ll explain:
- What contract rates are
- The benefits of contract rates
- What spot rates are
- The benefits of spot rates
- Which type is right for your business
Ultimately, arming you with the knowledge to decide on spot vs. contract freight rates.
What are contract rates?
Freight contract rates are fixed commitments for a capacity and route to a fixed price. You agree with a carrier or operator to use their transport route over a period of time, usually between six months and a year, to a negotiated price. The rule of thumb is that the more freight volume you commit to for a route, the better the rates will be.
Most carriers and operators have a minimum volume requirement to even offer contract rates. Make sure you check with your desired contract partners to ensure that you are able to fill their minimum standard.
After negotiating a deal, you can better forecast your spending, as it won’t normally change due to shipping rate volatility (something that continuously haunts logistics departments).
You can break down contract rates into:
Base rates: The cost of transporting cargo between two specific points.
Accessorial rates: Surcharges that can raise shipping costs for a carrier or operator. The most common accessorial rates are:
- Detention fees
- Fuel surcharges
- Re-consignment fees
- Stop-off charges
- Lumper fees
- Layover fees
- Truck order not used (TONU) fees, etc.
Contract rates benefits
- Security: The opportunity to guarantee price and capacity is the most common reason why transport managers look for contract rates. By maintaining the agreed bottom line, you don’t face the impact of recent capacity shortages in Europe, for example.
- Predictability: Especially for businesses with regular shipping schedules and/or high shipment volumes, having fixed rates and capacity agreements allows efficient forecast and budgeting.
- Administrative and operational efforts: By not having to negotiate new rates with different carriers constantly, you can save time and manpower. You are also able to build strategic relationships with subcontractors.
When you shouldn’t opt for contract rates
If you have:
- Irregular volume, timings, and routes: If you have irregular or low volume demands, times, and routes each month. In this situation, it’s impossible to have predictability to stay within your contract terms, or to negotiate good enough base rates to make the commitment worthwhile.
- Diversification business strategy: When you do not wish to be dependent on or locked into certain transport options or subcontractor agreements, it makes little sense to negotiate set rates with specific subcontractors.
Do you already have negotiated contract rates with subcontractors? If you are finding it hard to keep track of the freight rates and surcharges and that calculations for RFQs take too long, then rouvia eQuote is the solution. Our rate management tool helps logistics businesses to manage their contract rates is a fast and efficient manner. Get in touch with us to learn more and schedule a free demo.
What are spot rates?
Spot rate is a one-time quote provided by an operator or carrier to take a shipment from point A to B during a determined date range with a specific mode of transport.
Pricing and shipping capacity are constantly shifting, meaning the rates change daily based on the current supply and demand. Factors that cause rates to fluctuate are, for example, seasonal impact, oil prices, weather disruptions, mass strikes, and changes in load volumes.
Supply and demand is the most important factor for spot rates, but weight, shipment distance, and mode of transport naturally also matter when calculating the price. With this in mind, forecasting for your budget plan becomes almost impossible.
It should be noted that spot rate transports do not come with the same guarantees as contract rate shipments. This means that spot rate transports will be the first to be dropped by a carrier or operator if market conditions have changed significantly by the time of shipment.
On the other hand, if you receive a last minute shipment order, a spot rate shipment could be the better option as you make a deal with the carrier or operator immediately.
It might be easy to think that negotiated contract rates are the best, but the best forwarders know that a strategic mix of contract rates and spot rates is necessary. Booking transports with spot rates will be necessary for unexpected shipments and lack of availability with contracted subcontracted carriers and operators.
Spot rates benefits
- Flexibility: Spot rates are for forwarders that do not have structured transport order patterns and therefore require more flexibility in their shipping arrangements.
- Competitive advantage: Spot rates let forwarders respond quickly to market opportunities, supply chain disruptions, or customer demand. For example, a freight forwarder can quickly fulfill an unexpected transport order or capitalize on favorable market conditions – to win new business or retain existing customers.
When you shouldn’t opt for spot rates
If you have:
Recurring shipments: If you periodically make similar shipments to the same location, it’s better to negotiate a contract rate. It’ll offer guaranteed stability, predictability, and capacity.
Time-sensitive shipments: Carriers prioritize contract shipments over spot shipments. This could mean that a contract shipment brings a more reliable service.
Limited carrier options: Because of regional limitations or specific cargo, there might be limited carrier options available or longstanding capacity shortages. In such cases, it’s hard to find a favorable spot rate, if at all.
In the end, though other factors such as capacity and delivery time also matter, what most of us will pay most attention to is the price. So are spot rates or contract rates cheaper?
Spot rates vs contract rates: what is cheaper?
Usually, contract rates are cheaper as carriers and operators are more willing to agree on a cheaper rate with a steady, guaranteed freight volume in return.
However, depending on the current state of the shipping market and the ability to negotiate rates with subcontracted partners, it is not uncommon to see that spot rates are cheaper or, simply, the same as your contract rates.
Ultimately, neither spot and contract can exclusively meet a shipper’s or forwarder’s needs. Transport costs are a very important factor for all freight forwarders, but for a long term strategy one must go beyond individual cost per load and consider the major benefits of stability and predictability. It is therefore essential for you to know and understand your transport needs as accurately as possible.
Being able to forecast your needs based on freight volume, routes, and timelines will put you in a better place when negotiating base rates with carriers and operators. Additionally, if you invest additional time into tracking market rates, you can easier spot pricing trends and use them to your advantage.
You could leave your regular transports to contract rates, while capitalizing on opportunities with spot rates for unplanned shipments. Or, knowing how peak season impacts spot rates, you could attempt to negotiate enough capacity with contract rates to account for forecasted non-regular shipments.
Spot rates vs contract rates summary
To help you compare the rate options, we have created a handy table for you.
In summary, there are pros and cons to both spot rates and contract rates. You need to establish what works with your freight volume projections and business strategy.