When setting up a freight and logistics budget for the year (or more) ahead, it's important to include the freight rates that dovetail with a shipper's needs. Freight rates that can affect a budget largely reflect the type of transport a company uses, whether it be truckload, LTL, intermodal, rail, ocean, air freight, or most likely a combination of methods. That of course would include whether international shipping is involved as well. We've gone over some other tips in this regard lately, including how to budget shipping costs and preparing a freight and logistics RFP, so now let's take a closer look at freight rates.
How do you calculate freight rates?
Freight rates are calculated using a mixture of
- The method of transport
- Supply and demand for a given route
- Fuel surcharge
- Weight & size of a load
- Accessorials
Further simplified, you calculate freight rates using a combination of linehaul (which is the cost of taking a load from a specific origin to destination - including load size & weight in many cases), fuel surcharge (to adjust for fluctuations in diesel prices), and accessorials, which are really a catch-all for a variety of additional charges relating to the load, delivery, wait times, and more. Generally then, a load that goes into a container on one end and is unloaded only once at its final destination without needing much - if any - special treatment, will be less expensive. The method of transport is key as well, as depending on the mode, the cost per pound typically goes (from least to most)
- Ocean
- Rail
- Intermodal
- Truckload
- LTL
- Small Parcel
- Air or Expedited
Loads may require combinations of these methods or modes, but if a shipper is looking to save money, moving up a level - via modal conversion - will help. As one may expect, while freight rates go down, the delivery time typically increases, so that should always be part of what you calculate. If shipping internationally, there may be added costs such as taxes & tariffs, additional insurance, and security to name a few. And finally, freight rates vary depending on whether a shipper leverages spot rates or contract rates.
What is the difference between spot rate and contract rate?
In freight and logistics, a spot rate refers to the rate a carrier charges for a specific load to go a specific route at one time, while a contract rate is an agreed upon rate for a given route/freight lane over a longer period of time - typically a year. So a simple method to remember the difference between a spot rate and a contract rate is, a spot rate is the rate on the spot, while contract is not. Spot rates are far more volatile, as they're based almost purely on supply and demand and market conditions at the time of shipment.
Contract rates are negotiated prices based on forecast volume and shipping requirements looking ahead over the length of the contract. Keep in mind though, that contract rates are just rates, not guarantees that a carrier will have capacity for every load a shipper wants to ship at a specific time. It's highly recommended for shippers to play the spot market only when absolutely necessary, so negotiating multiple contracts provides important backup if capacity challenges arise with one.
What is the going rate for freight per mile?
Freight rates per mile are constantly changing and depend on mode of transport, load, and route. They also depend heavily on market conditions. Find the latest intermodal spot rates, truckload rates, and diesel fuel prices update weekly - with analysis - at our Intermodal Spot Rate Pricing Trendline Analysis page. This of course relates to spot rates, while contract rates depend on negotiations through the RFP process.
Staying on the budgeting and rate theme, we've also got several helpful articles, like:
- How to Negotiate & Manage a Competitive Freight Rate RFP
- How-to Negotiate & Execute Best Freight Rates: Comprehensive Guide
- Freight Contract Rates vs Spot Rates - Comprehensive Guide
If you're ready to take the next step, at InTek Freight & Logistics, we can help. Just tell us what you need and we'll discuss how our expertise can help with the unique shipping challenges your business faces. Rather do a bit more research first? View our Freight Guides for comprehensive articles and eBooks on all things freight and logistics.
