Understanding the intricacies of freight contracts is essential for businesses seeking seamless logistics operations. Below are the basics of freight contracts and how to negotiate and manage effective agreements like a pro.
Freight contract meaning
A freight contract is a legally binding agreement between a shipper and a carrier (freight company or transporter), also known as an annual shipping contract. It delineates the terms, conditions, fixed and discounted freight rates for transporting goods, regarding long-term cooperation, often a year.
Usually, this freight agreement isn’t confined to particular shipping modes and can cover air, sea, road, or rail transport. Furthermore, it may also extend to additional services beyond transportation, like customs clearance, liability insurance, etc.
Common types of freight contract
1. Freight broker agreement
When you engage a freight broker to handle your goods, it works as a partnership agreement. It establishes the rights and responsibilities of each party in the shipping transaction.
To enhance your understanding, we provide a freight forwarder contract template as a reference.
2. Freight rate confirmations
The shipping rate confirmation is an agreement between the shipper, third-party providers (if involved), and the carrier. It details the specific rates for the shipment and safeguards against potential overcharging by the freight carrier.
3. Load tenders
A load tender, or load confirmation, encompasses all the essential details for each cargo. Both parties contribute information in the load tender document before the truck departs, such as destination address, trailer type, dimensions, and cargo weight.
4. Accessorial contracts
Many agreements cover a set of accessorial charges that carriers can apply in addition to the rate confirmation.
These refer to extra payments agreed upon by the shipper related to additional equipment, handling, or added peak surcharges, among other considerations.
5. Bill of lading
A bill of lading (BoL) is a legal document issued by a carrier to a shipper. It offers a receipt confirming the safe transfer of the shipped goods. For more details, you can check this article.
For shippers, crafting such annual freight contracts is advantageous for budgeting and securing freight capacity, especially when dealing with significant shipment volumes regularly.
However, negotiating freight contracts, often involving a process called freight tender (or bulk discount negotiations), can present a complex and formidable task.
To help you get an in-depth understanding and make a well-informed decision, keep reading to get a more comprehensive guide.
What is a freight tender?
A freight tender is the process of choosing and negotiating with carriers or freight forwarders to find the best shipping rates and services. Since many shippers and buyers do not have their own transportation networks, they need to rely on logistics providers to handle their shipment needs.
This approach is worth considering when your annual shipping volume exceeds 1000 TEUs.
Throughout the freight tendering process, multiple freight forwarders provide freight rates or quotes for specific routes in a defined period.
Then, you can assess and compare their services to pinpoint the most suitable match for your requirements, ensuring a better ROI.
Nevertheless, like a coin with two sides, annual freight tenders come with certain drawbacks.
As freight prices fluctuate with the seasons, it’s not rare for carriers to be unable to service at the tendered price or for shippers to seek renegotiation if prices decline.
For instance, if prices suddenly surge during the peak season, additional fees may still be necessary to secure the shipment on the vessel, making freight contracts meaningless.
In a nutshell, freight tendering can be time-consuming and stressful. However, with some advanced preparation, you could tackle these challenges.
Best time to negotiate your freight contract
Most freight contracts undergo negotiation on an annual or biennial basis. While it can occur throughout the year based on trade lanes and customer requirements, the beneficial time to contract negotiations typically happens early, around March to April.
This period often coincides with the off-peak season in international cargo shipping, characterized by lower demand or surplus capacity. Negotiating during these times may provide you with more favorable rates.
On the other hand, if you already have an existing freight contract, consider negotiating during the contract renewal period. It allows both parties to reassess terms based on performance and prevailing market conditions.
It’s important to note that there is no one-size-fits-all answer. Stay informed about upcoming industry changes to gain a competitive advantage in your negotiations.
Tips to consider when contracting
1. Identify your shipping requirements
First and foremost, you should list and understand your cargo volumes, target destination markets, and specific needs.
This analysis will enable you to negotiate terms and conditions that align with your business objectives. And also ensure you receive the dedicated services at a fair and competitive price.
2. Know the market trends
Keep an eye on the current market state. It is essential to consider potential shipping disruptions due to strikes or sudden accidents like chaos on the Red Sea, which can influence pricing or availability.
Assess the validity periods of freight rates and monitor exchange rates. Being familiar with the market, you can better anticipate the unexpected and make informed decisions.
3. Cover all aspects
Have a comprehensive negotiation with your carrier or freight forwarder, covering various aspects of the contract. It could involve rates, routes, freight services, fuel surcharges, free days of warehousing, equipment availability, and other pertinent factors.
Additionally, Establish clear payment terms, specifying the payment method, frequency, and due dates, including any penalties or interest for late payments.
4. Choose the right shipping partner
It’s crucial not to focus solely on the price. Evaluate suppliers based on their expertise, financial stability, global service capabilities, and risk profiles. Clearly and assertively communicate your requirements, but also remain open to compromise.
To reassure you, we at Airsupply can offer clear and transparent communication throughout the contracting process. Our team is dedicated to ensuring that you understand the terms and services outlined in the freight contract.
Furthermore, we will help you navigate the best shipping rates and provide customized logistics solutions, strategies, and contingency plans.
