Mastering how to calculate freight costs is essential for businesses and individuals alike who are involved in shipping goods. In this article you'll learn the importance of having accurate shipment specifications to obtain the most meaningful quote. You will also learn how freight costs are calculated for the various modes of freight transportation: ocean, rail, truckload, intermodal and LTL.
What are freight rates?
A freight rate, also known as a freight charge, is the fee charged by a freight provider for transporting goods via land, air, or ocean from origin to destination.
Factors that Affect Freight Costs
The methods to calculate freight shipping costs differ by freight mode although the factors that affect freight costs are similar.
Each transport mode has its own rates and fees, influenced by the following factors:
- Shipment weight and dimensions
- Volume on the freight lane being quoted
- Shipping origin and destination
- Transit requirements by transportation mode (ocean, air, truck, rail)
- Cargo type and commodity (general, refrigerated, hazardous, oversized, etc.)
- Additional services required (customs clearance, insurance, etc.)
- Economic conditions
In the end, how to calculate freight cost involves a delicate dance of variables that determine the freight shipping rates.
Shipment Weight and Dimensions
Carriers use a shipment's weight and dimensions in their freight shipping calculators as a means to charge for the amount of space they need to allot on their equipment for a customer's product.
Within the realm of the shipment weight and dimension pricing component there is a balance between cubic feet or meters and max payload capacity.
The previous statement is true, with the exception of truckload, intermodal and ocean because they are freight modes where a shipper is paying for the exclusive use of the full trailer or container. There are some truckload carriers that price higher for heavier loads than for lighter. The thinking is heavier shipments, such as paper or steel, need to be compensated for the additional fuel consumption that comes with freight loads running near the max payload capacity.
LTL, Air and LCL Dimensional Weight Freight Rating Calculation
LTL (less-than-truckload), air and LCL (less-than-container ocean shipments) have their pricing very much aligned by the amount of capacity used on their trailers or planes, respectively, making it a necessity for shippers to accurately weigh and measure their cargo before dispatching or be surprised with a re-weigh billing adjustment.
While LTL takes into account a few more variables that will be discussed later, we'll start with the more easily explained side on how to calculate LTL freight costs which is around weight and dimensions.
To get an understanding of LTL weight and dimensional rating we need to talk a bit about the legal weight of a tractor, trailer and all its contents: 80,000 pounds. After subtracting the weight of a tractor, fuel and trailer weight leaves an average payload an over-the-road trucker can haul at 44,000 pounds, with 4,050 cubic feet of space.
With the basis of 44,000 pounds and 4,050 cubic feet, the LTL industry developed dimensional pricing or "dim pricing" to calculate the amount of space a shipment occupies in relation to its actual weight - to ensure they make money whether a shipper is moving styrofoam or lead ingots. Using the previously mentioned commodities, a full trailer of styrofoam would weigh 12,642 pounds, while lead ingots maxing out the 44,000 trailer payload would occupy only 63 cubic feet in a trailer.
So, in short, the chargeable weight is the weight used by LTL carriers to determine the shipping cost, calculated based on either the actual weight or the dimensional weight, whichever is higher. Old Dominion offers a handy calculator to determine your freight's dimensional weight calculated for your freight.
Volume on the freight lane being quoted
One question that often arises is whether freight carriers offer better pricing to shippers who can provide more shipments along a specific freight lane. The answer is yes and it lies in the economics of scale that drive efficiency.
Frequent shipments along a particular route allow carriers to plan their resources more effectively, leading to optimized routes and reduced empty miles. This efficiency translates into cost savings for the carrier, which can then be passed on to shippers in the form of lower freight rates. Moreover, establishing a consistent volume of shipments strengthens relationships between shippers and carriers, potentially leading to preferential treatment or capacity during peak seasons.
- Economies of Scale: Bulk shipments enable carriers to operate more efficiently by consolidating loads, thereby reducing per-unit transportation costs.
- Better Route Planning: Consistent demand allows for improved planning and vehicle utilization, minimizing wasted space and fuel consumption.
- Risk Mitigation: A steady flow of goods reduces financial risk for carriers by ensuring regular income; this stability can result in lower prices as a reward for reliable business.
The impact on freight cost calculation, therefore, hinges significantly on shipment frequency within specific lanes. Keep in mind that by utilizing tools like an online freight calculator, businesses miss out on the impact volume has on pricing since online freight calculators are spot rate oriented. Another heads-up on volume is to not embellish on volumes by lane because it will negatively impact rates and the relationship if those volumes are never obtained.
Shipping Origin and Destination
Shipping origin and destination impacts freight costs in two ways: distance and through the origin - destination zip codes.
Impact of Distance on Freight Shipping Costs
The distance between the shipping origin and destination plays a critical role in determining freight shipping rates. As one might expect, longer distances generally result in higher transportation fees due to increased fuel consumption, driver hours, and wear on transportation vehicles.
While we say distance makes a difference, it's not just about the mileage. Geographical location also influences rates due to varying regional demand for carrier services. The more densely populated the region the more likely multiple freight carriers will be in the area, which drives competition and the likelihood there will be plenty of capacity options for a shipper.
How Origin - Destination Zip Code Combinations Affect Freight Pricing
Backhaul and headhaul are important concepts in pricing. A headhaul market is one in which there is more outbound freight than inbound freight and pays a higher rate per mile (RPM), while a backhaul market is where the imbalance of capacity occurs when there is less demand by shippers than there is for carriers in the market.
The supply and demand dynamics drive backhaul market pricing down for shippers, while headhaul markets are priced higher.
Transit requirements by transportation mode
Freight pricing is more than just a rate to move products from origin to destination. Even the best cost calculators miss impact choosing the correct freight mode for transit. In fact, mode has the biggest impact on freight price and it’s for a reason. Modal conversion is how to push price down and increase margin.
All said, transportation mode—ocean, air, truck, or rail—is the biggest choice a shipper can make to improve its freight rate calculations. Understanding how these modes differ and more importantly how similar they are is essential for businesses looking to reduce their freight costs while expanding freight capacity options.
Most Price-Effective Freight Mode (listed best to least):
- Ocean
- Rail
- Intermodal
- Truckload
- LTL
- Air
Ocean Freight
Ocean freight is often considered one of the most cost-effective methods for transporting large volumes of goods over long distances. The economies of scale achievable with ocean transport can lead to lower per-unit costs, especially for non-time-sensitive shipments. However, factors such as port congestion and customs delays can add unpredictability to delivery times. For an in-depth look at how ocean freight pricing works, visit this comprehensive guide on sea freight pricing.
Rail Transport
Rail is another economical option particularly suited for heavy loads moving over long distances. Rail is also more environmentally friendly than road transport, though it is less flexible because it relies on fixed tracks from point A to B. Rail tariffs are generally stable but may vary based upon commodity type, cargo weight, and distance traveled. An excellent resource exploring rail transport benefits is available here: American Rails' overview on rail freights.
Intermodal
Intermodal brings together the best of truckload (flexibility) and rail (cost and reduced carbon footprint). The combination is a game changer in the freight and logistics space. Intermodal in essence refers to the use of multiple modes of transportation with a notable distinction being that the freight remains in the same container - unhandled - throughout its journey.
The key difference between intermodal and general rail freight is that intermodal specifically involves containers and trailers carried on trains via special chassis that can be transferred directly to and from trucks, ocean liners and railroads. No transloading is required with intermodal, like many straight rail options do.
Intermodal shipping is optimized for freight lanes of 700 miles or more. Domestic intermodal encompasses all of North America, as there are class I railroad lanes heading as far south as Mexico City and as far north as Prince Rupert in Canada, with plenty of locations throughout the U.S. being served as well.
Truckload (TL)
Road transportation provides flexibility that other modes cannot match. It's capable of door-to-door deliveries without the need for transloading points. Trucking rates are affected by fuel prices, driver availability, tolls/taxes along certain routes, seasonal demand fluctuations, and more. For detailed insights into TL versus LTL shipping decisions check out this article comparing TL vs LTL shipping choices.
Less Than Truckload (LTL)
LTL freight is ideal for shipments that do not require the entire space of a truck, but are larger than what parcel carriers service.
The essence of less than truckload involves an LTL freight carrier consolidating multiple customers with similar origins and destinations to fill a trailer to allow for it to optimize its hub and spoke operating network.
The decision between using less than truckload vs full truckload services boils down primarily to shipment size and frequency. Often, smaller enterprises lean towards LTL transport due to its adaptability in handling varying cargo volumes and the financial benefits it offers in these cases. A notable advantage is that since you're only paying for the portion of trailer space your goods occupy, you avoid overspending on unutilized capacity typical with FTL shipments.
Air Freight
In contrast to sea freight, air transport offers speed and reliability, but comes at a premium price. It's ideal for high-value or perishable items that require fast delivery times. Air freight rates are influenced by several factors including cargo weight and volume, fuel prices and airport fees. Companies might choose airfreight when the cost of shipping quickly is favorable to inventory holding costs or potential sales losses due to stockouts.
Summary of Freight Rate Calculations Based on Mode
Selecting the right transportation mode requires careful consideration not only about direct expenses associated with each method but also indirect effects like transit time reliability, inventory carrying costs, and environmental impact which all play crucial roles in optimizing supply chain performance.
Companies like InTek Freight & Logistics Inc., aim at leveraging this knowledge alongside advanced technology solutions to empower companies in transforming their supply chains into competitive advantages through informed decision-making around modal selection strategies.
Cargo Type and Commodity: Impact on Freight Pricing
When it comes to shipping products throughout the United States, understanding how cargo type and commodity influence freight pricing is another crucial point for companies aiming to optimize their logistics operations.
The Role of Cargo Characteristics in Determining Freight Costs
Different types of cargo have unique requirements that significantly impact transportation costs. These can range from general goods to more specialized categories such as refrigerated items, hazardous materials, or oversized loads. Each category requires specific handling, equipment, and safety measures which are reflected in the overall freight charges.
- General Cargo: Typically involves goods that do not require temperature control or special handling. However, even within this category, density and pallet configuration can affect pricing due to space utilization considerations.
- Refrigerated (Reefer) Freight: Goods requiring temperature control demand specialized reefer units. The additional fuel consumption for cooling systems alongside stringent delivery schedules elevate costs compared to standard shipments. Learn more about refrigerated shipping options with InTek.
- Hazardous Materials (Hazmat): Shipping dangerous goods necessitates adherence to strict regulations by the Department of Transportation (DOT). Specialized training for handlers and drivers plus insurance premiums contribute to higher fees. Understand DOT hazmat regulations here.
- Oversized Loads: Items exceeding standard dimensions require special permits and routing plans. Often escorted by pilot vehicles for safety reasons; these factors collectively push up transport prices.
National Motor Freight Classification
The ultimate in cargo characteristics impacting freight rate calculations is the national motor freight classification (NMFC) driven through the National Motor Freight Traffic Association (NMFTA).
As was discussed in the weight and dimension freight pricing section, there is more to know with LTL, with the more being the NMFC freight classifications. The freight class classifications are based on the following four characteristics:
- Density
- Freight Stowability
- Ease of Handling
- Liability
There are 18 classifications that take into account the LTL commodity characteristics. The lower the class, the lower the freight rates and cargo liability coverage.
Quite often LTL providers will price shippers on an FAK (freight all kinds) basis to classify all a shipper’s freight at the lowest possible NMFC classification.
Shippers need to know that when they price LTL freight costs to pay close attention to the total liability coverage of their shipment. This is because they will often need to buy additional cargo insurance to cover the difference in what the provider can cover under the NMFC classification and the actual value of the shipment.
Understanding How Additional Services Impact Freight Pricing
In the complex world of logistics, calculating freight shipping rates involves more than just measuring weight and distance. Companies shipping products must also consider the impact of additional services on their overall freight pricing.
Lift Gate Services
When shipping goods to locations without a loading dock, lift gate services become essential for loading and unloading cargo from a truck. This service represents an additional cost due to the specialized equipment and extra time required for handling.
Detention Fees
Time is money in the transportation industry. Detention fees are incurred when a driver is forced to wait beyond the allotted time at pick-up or delivery points. These fees compensate for lost time that could have been spent driving.
Sort & Segregation (Sort & Seg)
The process of sorting and segregating cargo based on destination or other criteria adds another layer of complexity—and cost—to your shipment. It requires additional labor and organization, impacting overall pricing.
Lumper Fees
Lumper fees are charged when third-party workers known as lumpers are hired to load or unload your goods at warehouses or distribution centers. Since this service bypasses your carrier's crew, it incurs separate charges directly affecting your total freight cost.
Cargo Insurance
To mitigate risks associated with transportation damage or loss, investing in cargo insurance is wise for shippers looking to protect their investment during transit—a decision that while increasing upfront costs can save substantial amounts down the line in case of mishaps.
Fuel Surcharges
Fuel is the lifeblood of transportation, and its cost can greatly impact your freight charges. Most carriers implement a fuel surcharge to account for fluctuations in fuel prices. These surcharges are calculated as a percentage of the base freight rate or in the instance of truckload and intermodal may be priced as a rate per mile.
Shippers need to take note that fuel surcharges can change every week, so pay close attention to your freight provider’s fuel matrix and its relationship to the national diesel fuel average posted every Tuesday morning by the US Energy Information Administration (EIA).
Peak Season
The ultimate in market condition pricing is the peak season charge that hits the transportation market at various times throughout the year. It's important to factor peak season surcharges into your shipping budget when an extremely tight freight capacity market is expected or during the peak retail shipping season. These seasonal surcharges can add a significant amount to your freight costs, so it's best to plan ahead and ship early if possible to avoid them.
Economic Market Conditions and Their Impact on Freight Pricing
The relationship between economic market conditions and freight pricing is a critical aspect that companies must navigate to optimize their shipping strategies. The economy's health directly influences freight rates through supply and demand dynamics, fuel prices, and more.
Supply and Demand Dynamics
In periods of economic expansion, consumer spending typically increases - leading to higher production rates. This surge in manufacturing activity boosts the demand for transportation services as goods need to be distributed to retailers and ultimately customers.
Consequently, supply and demand principles dictate that freight rates will rise due to increased competition for limited transportation resources. Conversely, during economic downturns when consumer spending declines, there is less need for transport services which can lead to decreased freight rates.
Fuel Price Fluctuations
Fuel cost is a significant component of overall freight charges. Economic conditions heavily influence oil markets; hence fluctuations in fuel prices are common based on global events or shifts in policy that affect oil production levels or consumption patterns.
Companies should monitor these trends closely as they have an immediate impact on shipping expenses. The U.S Energy Information Administration (EIA) provides valuable insights into current energy market trends including diesel price forecasts which are particularly relevant for logistics planning.
Calculating Freight Price Formulas for Shipping Quotes
Now that we've covered the factors used in calculating shipping costs, let’s take a quick look at how each freight mode is priced to customers.
Most Common Methods of Freight Pricing by Freight Mode
- Ocean
- FCL (full-container-load) Priced per container, plus fuel and accessorials.
- LCL (less-than-container-load) Priced on per pound or hundredweight (CWT), plus fuel and accessorials
- Rail
- Priced per equipment used, plus fuel and accessorials.
- Intermodal
- Priced on linehaul, plus fuel and accessorials.
- Truckload
- Priced on linehaul, plus fuel and accessorials
- Linehaul is often priced on a rate per mile.
- Priced on linehaul, plus fuel and accessorials
- LTL
- Priced on a percentage off freight class base freight rates, plus fuel and accessorials.
- Air
- Priced on per pound or hundredweight (CWT), plus fuel and accessorials
Types of Freight Pricing Quotations
There are various types of freight pricing methodologies and using the best pricing methodology for the shipment requirements will net the very best price.
Contract
Contract pricing is a rate promised to move a shipper’s freight for a set lane over a set period at an assumed volume level. Contract rates are typically negotiated annually, with the volume consideration as the major assumption in the pricing.
Contract pricing gives the shipper the opportunity to lock in price and capacity over an entire year, which essentially creates an insurance policy against peak retail season surges. On the downside, locking in a contract as freight prices decline may lead a shipper to miss out on additional savings.
Spot
Contrary to contract pricing, spot rate pricing is negotiated at the time a shipper needs to move its freight. Since the shipper is asking for an immediate pricing for its freight capacity requirement, rates are based on the market supply and demand conditions at the time the freight quote is requested.
Spot rates fluctuate throughout the year based on seasonal patterns, along with a multitude of other economic or severe weather impacts floating in combination with supply and demand for a freight lane. This allows shippers to take advantage of a weaker freight market, but also opens them up to being burned when freight rates rise rapidly - a worry contract shippers largely avoid.
Project
Project pricing is utilized for, as the name indicates, special projects. Special projects typically entail shipments with volume outside of what would be considered the “norm” or expected quantities.
Project pricing allows firms to take advantage of favorable prices over a shorter period of time because of guaranteed freight requirements they can promise a freight broker or motor carrier during this window that allows either logistics provider to dedicate capacity to the shipper.
Who Pays the Freight Charges?
Freight charges are the expenses charged by a carrier for shipping freight to a destination location. The individual (or business) who wants the goods carried from one place to another is responsible for paying the freight charges. Usually, the freight charges will be paid by the shipper, receiver, or a third-party logistics provider, depending on the shipment terms and agreements.
Shipment Terms and Agreements
The terms of the shipment agreement determine who pays the freight charges. Some common terms include:
- Consignee Collects: The consignee (receiver) pays the freight charges upon delivery.
- Cash on Delivery (COD): The consignee pays the freight charges and the cost of goods upon delivery.
- Free on Board (FOB) Origin: The consignee pays the freight charges and assumes responsibility for the goods once they leave the shipper's location.
It's crucial to clearly outline these terms in the shipment agreement to avoid confusion and ensure a smooth transaction.
Tips for Reducing Freight Costs
As someone who has been in the freight industry for multiple decades, I've learned a thing or two about reducing freight rates. Here are some of my top tips: One of the easiest ways to save on freight charges is to optimize your packaging. This means using the smallest possible package size and minimizing weight wherever possible. Consider using your own boxes instead of the carrier's to avoid additional fees. Every inch and pound counts when it comes to freight shipping rates.
Leveraging Relationships
Building strong relationships with carriers and freight forwarders can go a long way in reducing costs. When you have a good rapport and consistent business, you may be able to negotiate better rates or unlock discounts. Don't be afraid to shop around and leverage your relationships to get the best deal.
Improving Reliability
Believe it or not, improving your shipment reliability can also help reduce freight shipping rates in the long run. When you have fewer damaged or lost shipments, you spend less on claims and replacement goods. Implement strict quality control measures and choose reliable carriers to minimize these issues.
Compare Carriers
While it is important to stick by your trusted incumbent freight providers that have proven themselves as being consistently reliable on service and integrity, it's important to stay in tune with the freight market. Not every freight market is the same and not every freight carrier is the same within the market.
So, it makes sense to talk with freight carriers often, read up on current and forecasted market conditions and compare rates with the market rates to see how others are performing in the same freight lanes. We recommend Freight Costs: An Insider’s Look on Freight Pricing Buyers Should Know for a more comprehensive look at managing and negotiating freight rates
Conclusion on How to Calculate Freight Rates
Shipping costs are typically one of the highest budget items for a company, so knowing how a freight calculator prices its business is of paramount importance. Determining freight rates is not easy, but the most accurate quotes come through knowing your shipment details —weight, dimensions, mode, distance, commodity type and additional services. These data points shape your freight quotes.
Market conditions, along with origin and destination locations will also impact rates, so keep your ear to the market to understand if either or both will have a temporary impact on calculating freight costs pricing.
In summary: Precision pays off. Whether it’s choosing the best freight mode for the job or properly classifying your LTL freight, small steps lead to big savings and smarter shipping strategies.
Make informed decisions about how to get your products from point A to point B in the most efficient manner possible.
Check out credible sources for more information on freight shipping and don't always look to the largest freight providers in the industry. Often the best answers will come from the medium-sized logistics companies that are of the size to have high-quality teams and the time to sit down and explain your company's freight shipping options in detail.
If you're looking for help deciding on the freight shipping options for you, let us know by filling out our brief Request a Quote form. We'll be happy to get back to you to discuss your unique needs. If you need more information about this or other freight topics, browse our Freight Guides for free eBooks and comprehensive articles, or check out more of our blog.
