Freight Pricing Methods Defined: Contract -Project - Spot
Methods of Freight Pricing - Contract, Spot or Project
There is more to a freight rate than the dollar figure given by a freight provider that is then input to a spreadsheet equation.
In today's world where logistics professionals are constantly managing the price, service and capacity equation a person needs to determine not only the most effective freight mode, but also the type of pricing that works best for the situation.
So, to help understand what works best for each situation, let's walk through the three pricing methods.
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.
When it comes to intermodal contract pricing, the guaranteed capacity is based on a prior "X" number of weeks rolling average, which is different than truckload where a guarantee is not as precise. Typically, with truckload capacity the price is guaranteed, and the volume is a continual negotiation throughout the year.
In other words, truckload guaranteed capacity commitments typically only come through a dedicated fleet strategy.
Spot Rate Pricing
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 off 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.
Spot freight rates can change on a day-to-day and even an hour-to-hour basis.
Often shippers have no choice, but to move all their freight on freight spot rates because they do not have the required volume to obtain contract rates.
A fallacy some shippers have is spot rates are always cheaper than contract, which is just not the case and recommend reading the first two articles listed in the other reading list at the conclusion of this article.
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 a short period of time that allows either logistics provider to dedicate capacity to the shipper.
Intek provides a weekly trendline analytics on intermodal spot rates for your convenience.
For more on methods of freight pricing:
- Freight Contract Rates vs. Spot Rates - Comprehensive Guide
- How to Negotiate Best Intermodal & Truckload Market Pricing
- Cost of Managed Transportation Services
- Cost of Intermodal Transportation