Navigating the intricate landscape of shipping fees and surcharges within the freight industry can be an overwhelming endeavor, leaving many feeling lost in its complexities. Fear not, though, for you are not alone. We're here to explain the complexities of freight charges and freight fees, equipping you with the knowledge and confidence to traverse the realm of shipping costs with adeptness and precision.
Digging into freight charges, we unravel the intricacies of the various fees, from the more obvious to the lesser known. And we discuss how overall economic conditions impact freight rates, ensuring you are well-prepared to confront them head-on as the ever-moving balance of the supply of freight capacity and the demand by shippers to use it create the largest swings in freight pricing. Rest assured, amidst the maze of charges, this article will serve as your guide.
What are freight charges & freight fees?
At their core, freight charges and freight fees represent the monetary compensation shipping companies require for the transportation of a shipper's goods, whether by land, air or sea (or, in many cases, some combination of the three). In other words, freight costs stand as the toll for the conveyance of cargo from origin to destination.
Factors influencing freight costs
The calculus of freight costs is multifaceted, contingent upon the carrier, freight forwarder and/or Non-Vessel Operating Common Carrier (NVOCC) chosen. These freight shipping costs are created through an array of variables, including:
- Dimensions and mass of the shipment
- Cargo types (general, hazardous, oversized, etc.)
- Mode of transportation (truckload, intermodal, rail, ocean, air)
- Distance traveled
- Commodity
- Ancillary services demanded (accessorial chargers, duty & customs clearance, insurance, etc.)
In all, it is the interplay of these factors that ultimately shapes your freight expenditure.
Exploring common types of freight charges
Diverse in nature, freight charges manifest themselves in various ways on a freight invoice - but there are some common ones.
Ocean freight
For large cargo volumes with no particular sense of urgency, ocean freight emerges as the preferred avenue for international transport. Predicated upon container size, weight, and shipping lane, ocean freight expense is the cornerstone of global commerce.
Air freight charges
When the fastest transit is important, air freight emerges as the preeminent choice. Renowned for its speed in domestic and global transport, air freight, though commanding a premium, offers unparalleled speed.
Air freight charges are primarily calculated based on shipment weight, volume, origin, destination and transit.
Over the road truck & LTL freight charges
In the realm of domestic logistics, truck freight stands as a stalwart. Facilitating door-to-door service, over-the-road truck freight - between full truckload and less than truckload (LTL) - caters to a diverse spectrum of shipment sizes and commodity types.
Truck freight rate calculations depend largely on which of the two over-the-road truck options are used: LTL or truckload.
How truckload freight charges are calculated
Truckload is the most versatile land mode with its ability to pick up and deliver in an infinite number or origin and destination combinations.
Truckload (TL) freight charges are largely driven by the cost of moving a dedicated truck for a single shipper from origin to destination - making distance the main driver of the freight charge.
Calculating LTL freight rate
Shippers turn to LTL when they cannot fill a full truck with their own products.
LTL shipment rates are regulated by NMFTA (National Motor Freight Traffic Association) codes to simplify the pricing process for carriers and to ensure customers receive unbiased pricing.
For anyone new to LTL, the navigation through the NMFC codes is confusing, yet incredibly important. Understanding how NMFC categories affect price and liability is critical in protecting a company's bottom line. At its core, freight class refers to the aforementioned NMFC, which categorizes goods into 18 classes ranging from 50 to 500.
The NMFC is the standard guideline for determining the cost of moving freight based on its density, stowability, handling and liability.
How to calculate intermodal freight charges
Intermodal transportation is an alternative to over-the-road truckload for freight cost savings and a much-reduced carbon footprint. To make comparisons between intermodal and truckload easy, intermodal charges are also calculated using the full 53’ intermodal container and the distance from origin to destination.
Additional freight fees and surcharges
Complicating freight charges further are the additional freight surcharges, which are known as accessorial fees. These ancillary expenses, though seemingly innocuous, harbor the potential to disrupt freight budgets.
The accessorial charge line item will be present on almost every freight invoice, while all other accessorials are specific to a shipment and driven by whether the overall shipping process (origin and destination) goes outside of the freight quote parameters.
The easiest example of an accessorial going outside the scope of a freight quote is detention. Truckload and intermodal shipments are quoted with a definitive amount of free time at origin for loading product onto the trailer and a definitive amount of free time at destination for unloading. If the trucker is required to stay longer than the allotted free time, then the freight carrier will charge for the excess time.
Before jumping into some other common accessorials, it is important to understand that if you, as a shipper, know a particular mitigating factor will happen every time due to a particular route, product, etc., then by all means call it out during your freight negotiation. Doing so will typically allow you to negotiate down the accessorial charge and include it in the base freight rate.
Fuel surcharges are always part of the freight invoice
Fuel costs are a big portion of the total cost to run freight. As such, in the majority of cases, freight charges will most always be a base fee, plus a fuel surcharge. In other words, don't forget to include fuel in your freight calculations.
The fuel surcharge is either a percentage of the base freight rate or, in the cases of truckload and intermodal, is often calculated on a per mile basis. The fuel calculation is done by taking the national EIA diesel fuel price posted every Tuesday and identifying where it sits on the fuel surcharge the carrier provided during their quote.
Fuel is of paramount importance when negotiating the best freight rate. Complicating the matter of the fuel surcharge is the volatility of freight charges because of fluctuations in diesel fuel prices. Prudent budgeting demands their inclusion in the calculus of shipping expenses.
Peak season surcharges
During periods of heightened demand, such as holidays, the freight landscape undergoes a metamorphosis, punctuated by the emergence of peak season surcharges. A reflection of capacity constraints, these surcharges underscore the imperatives of foresight and strategic planning in navigating the ebbs and flows of shipping demand.
The peak season charge is typically added when a shipper has more demand for capacity than a rolling period of time window.
Insurance fees
Safeguarding cargo is of great importance, and there will be a high risk security surcharge to cover the variance of insurance risk that is outside of contractual terms. When a shipper asks a carrier to move a shipment more than the agreed cargo liability coverage within the contractual arrangement, the carrier will tack on a cargo insurance surcharge to boost its baseline cargo coverage.
Handling fees
Handling fees, emblematic of the labor entailed in shipment processing, are an accessorial charge assessed to cover a freight provider's need to increase the amount of labor to handle a standard shipment.
Handling charges come in an assortment of flavors. Some of the more common ones where a company pays a surcharge include:
- Detention: The fee covers the extra time a driver is held at the pick-up or delivery location longer than what was negotiated in the pricing agreement.
- Sort and Seg: This charge applies an additional cost when a carrier is required to sort consignor or consignee shipments.
- Driver Assist: This charge becomes a part of a shipment if the driver’s labor is needed to either load or unload the shipment from their trailer.
- Lumper: Similar to driver assist, shippers pay when an outside party is used to unload a trailer of their product. This accessorial is very common at grocery warehousing locations.
- Layover: A layover charge comes into play if the carrier’s driver needs to stay overnight because cargo could not be loaded or unloaded during the allotted time a location is open for business.
- Rework: The time and material charge when a carrier is required to move product around in their trailer / container if a load shifts, there is damage or there is an overweight situation that needs to be corrected before the carrier can complete the load.
- Scale: One way to get avoid overweight issues is to request scaling on every load, but be aware there is an additional charge for this request.
Demurrage, per diem or storage fees
- Demurrage: Demurrage is a charge assessed for cargo that is left at the terminal beyond the allotted free time.
- Per Diem: This fee is a fixed rate per day that a carrier charges against another carrier or customer for use of its containers, trailers or chassis.
- Storage: Storage charges apply and are assigned to the shipper or consignee for holding containers or trailers at an intermodal terminal beyond the free time allotted to them.
Customs and special equipment fees
The nexus of international commerce, customs imposes its own fiscal toll in a myriad of customs clearance fees, including brokerage fees, customs duty, taxes, and sundry governmental impositions. Moreover, shipments (domestic and international alike) necessitating specialized equipment, such as cranes or forklifts, bring additional fees, underscoring the multifaceted nature of logistical expenses charged by a shipping company.
Keep in mind that all destination ports charge the same customs duties and not all destination ports are allowed to receive the product because of government restrictions.
Other common accessorial charges
- Reclassification & Reweigh: When a shipper misclassifies the NMFC code used on their LTL shipment or reports the incorrect weight of a shipment, an LTL carrier will correct the freight bill with this accessorial line charge.
- Oversized / Overlength: When a shipment occupies more than a standard pallet position on a trailer, a fee is accounted for to address the additional volume the shipment occupies. The fee is often cited when the shipment is over 12 feet.
- Residential: A delivery fee used in all domestic freight modes for shipments delivering to a residential address.
- Liftgate: This accessorial is often associated with LTL shipments where a dock is not equipped in such a way to load and unload directly onto a trailer.
- Truck Order Not Used (TONU): A common accessorial freight charge that is assessed when a carrier arrives at the designated location on the shipment tender, but is turned away because the freight service is no longer required.
- HAZMAT: A charge based on the carrier transporting hazardous material.
- Bunker Adjustment: A bunker adjustment factor is an ocean shipment charge to account for changes in fuel usage - named that way as ships use bunker fuel.
Navigating freight charge calculations
Having gone over freight charges and ancillary fees, we now pivot to calculation methods.
Factors in freight charge calculations
Freight charge calculations are predicated upon the below variables:
- Shipment weight and dimensions
- Density metrics (pounds per cubic foot)
- Shipping distance and route
- Modal preferences
- Freight class categorizations (for LTL shipments)
- Ancillary charges and accessorial surcharges
Common freight charge formulas
While no universal format exists for freight charge calculation, industry-standard formulas offer a semblance of clarity:
- Cost per pound or hundredweight (CWT)
- Cost per mile
- Flat rate pricing, which rolls fuel and all other surcharges into one price
Key takeaways
In summary, freight charges are the linchpin of logistical commerce, their basis rooted in a matrix of shipment dimensions, types, distances, and transport freight modes.
Attentiveness to ancillary fees and what drives them help manage them down.
How economic conditions affect freight pricing
In addition to understanding the nature of freight charges and their associated factors, it's imperative to grasp how broader economic dynamics intersect with shipping costs. The relationship between the supply of freight capacity, the demand from shippers, and prevailing economic conditions exerts a profound influence on freight pricing, shaping the landscape in which businesses navigate their logistics goals.
Supply of freight capacity
At the heart of freight pricing lies the availability of shipping capacity. Fluctuations in the supply of freight capacity, influenced by factors such as fleet size, infrastructure investments and regulatory changes, can significantly impact pricing dynamics.
For instance, an increase in the global fleet size driven by investments in new vessels may temporarily alleviate capacity constraints, exerting downward pressure on freight rates.
Disruptions in supply chains or regulatory interventions that limit the availability of shipping capacity can lead to capacity shortages, prompting carriers to command higher rates.
Demand by shippers
On the flip side, the demand for freight services, propelled by economic activity and trade flows, plays a pivotal role in shaping pricing dynamics. Strong economic growth and robust consumer spending typically drive heightened demand for goods, necessitating increased shipping activity and thus, increased demand.
Economic downturns or trade disruptions may dampen demand for freight services, leading to softer pricing as carriers vie for a finite pool of shipments. Furthermore, shifts in consumer preferences and industry trends can catalyze changes in demand patterns, necessitating agility and adaptability in navigating freight pricing dynamics.
Economic conditions
The broader economic environment, characterized by factors such as GDP growth, inflationary pressures, and geopolitical developments, casts a shadow over freight pricing. Strong economic fundamentals, typified by robust GDP growth and buoyant consumer confidence, tend to bolster demand for freight services, exerting upward pressure on pricing.
On the other side of the equation, economic uncertainty or geopolitical tensions may dampen trade flows and investment sentiment, constraining demand for freight services and leading to pricing pressures. Moreover, currency fluctuations and commodity price volatility can introduce additional issues into freight pricing, requiring stakeholders to remain vigilant and responsive to evolving conditions.
Navigating the interplay between supply and demand
In navigating the interplay between supply of freight capacity, demand by shippers, and prevailing economic conditions, businesses must adopt a strategic and comprehensive approach to freight management.
This entails proactive monitoring of market trends, leveraging data analytics and forecasting tools to anticipate pricing fluctuations. Equally important is fostering collaborative partnerships with carriers and logistics providers to optimize shipping strategies.
In addition to the previously mentioned items, diversification of supply chains and contingency planning can blunt the impact of unforeseen disruptions, enhancing resilience and agility in the face of evolving freight pricing dynamics.
By embracing a nuanced understanding of the intricate interplay between supply, demand, and economic conditions, businesses can navigate the complex terrain of freight pricing with confidence.
Through strategic planning, prudent risk management, and collaborative engagement with industry stakeholders, businesses can harness freight pricing dynamics as a source of competitive advantage, driving operational efficiency and sustainable growth in an increasingly interconnected global economy.
Charting a course towards cost mitigation
Drawing upon (eh hem) decades of experience with freight pricing, I offer a quick look at strategies for freight cost reduction:
- Picking the best freight mode for the job
- Optimizing packaging dimensions and weight
- Continuously cultivating relationships with carriers, freight brokers, IMCs and freight forwarders
- Demanding consistently reliability shipment execution
- Vigilance against demurrage and detention fees
By operationalizing these strategies, one can be both fiscally responsible and operate efficiently.
Conclusion
In the world of commerce, the mastery of freight charges stands as a linchpin of success. So, while we all see free freight online, there really is not such a thing.
Someone is paying for it and it's of utmost importance to get the proper cost of the freight rates associated with shipping products. We hope you've picked up new insights that will allow you to go out into the freight market with confidence and assurance.
Remember, keeping your eyes on the market both now and in the future is key.
If you are looking to reduce your freight costs, we can help with your transportation strategy. Just request a quote using our brief form, and we'll follow up to go over your shipping needs. For more information about InTek, or the logistics and supply chain space in general, check out our Freight Guides.
