How to Optimize Freight Contracts to Save Money

By Shipware July 24, 2020 Contract Negotiation, Invoice Auditing, News, Shipping Knowledge

Freight contract negotiation is a prime way to improve operating expenses. Shipping is expensive and a vital function of many companies. Optimizing the transportation contract, whether with a shipowner, trucking company, or parcel carrier, means a leaner supply chain and better financial. Below we’ll cover different freight contracts and offer different freight shipping tips that will help you optimize your contract.

Types of Freight Contracts

There are various types of freight contracts. In the big picture, they detail the liabilities and responsibilities for the carrier and those of the freight broker or shipper. Freight contracts typically include information about the freight carried, the agreed-upon rate, the delivery time range, and any necessary verifications required for delivered freight. Freight contracts can be signed on a yearly basis or for a set time period, or they can be one-off contracts where you get spot market rates for less frequent or variable shipments. Volume freight shipping also impacts contracts and rates depending on if it’s for FTL or LTL shipping.  

Broker-carrier Agreement

The broker-carrier agreement (also called a motor carrier-broker agreement) includes the broker and the carrier’s contact information and corporate names, and the motor carrier (MC) number. The agreement contains the date, delivery fee, how many days the shipper has to pay, any invoicing procedures, and liability and insurance information. It may specify subcontracting rules, how to handle pricing or other disputes, and customs compliance information. This may be considered a master contract for the relationship, with details such as rates and destination changed or negotiated per shipment. That resulting information would then be on the rate confirmation and load tender agreements.

Bill of Lading

The freight broker or shipper provides a bill of lading before the cargo is hauled. It’s considered a receipt that is given to the consignee by the freight carrier. It includes details about the freight, special instructions, destination, and delivery time period. It acts as proof of delivery and is often needed to submit for payment. The bill of lading might have a separate rate confirmation page or the rate may be included on the bill of lading.

Load Confirmation or Load Tender

This type of freight contract includes logistics details like pick-up and delivery address, hours of operation, the trailer type and details (measurements), anticipated weight, and freight description. It may also include a trip number for tracking purposes. If there is a commission or brokerage fee structure, that would be included as well.

Accessorial Charges

Even if the payment is already determined, accessorial charges are sometimes added if the services exceed the transportation service scope. They might include waiting time, shipment refusal, storage, tarping, fuel surcharges, or other delivery parameters. Contract labor is not necessarily an accessorial charge, but may be an additional fee if contract laborers will be used to unload the truck at the consignee’s location. A separate receipt may be given for this.

Rate Confirmation

This confirmation can be an independent freight forwarder agreement or part of a load tender form. The rate confirmation clarifies the rate to be paid to the carrier by the shipper or freight broker, and it must be signed by the carrier to be valid.

Optimizing Your Freight Contract Through Negotiation

Negotiation is an important tool in controlling each shipping cost whether it’s pallet shipping cost or accessorial charges. If you’re asking, how much does freight shipping cost, the answer depends on each carrier’s rates. Shipping can be a huge expense for companies, and those who don’t negotiate the best rates will be hurting their bottom line. If shipping overseas, the shipper will likely negotiate through freight forwarders to get pricing from shipowners. Freight negotiation with shipping companies for larger shipments like full truckload (FTL) or partial truckload (PTL) may be separate than negotiating contracts for parcel services.

Areas to Optimize For

There are a number of areas for carrier contract optimization negotiating. Here are some of them.

Exclusivity

Parcel carriers are always trying to figure out how to get contracts with shippers, either new companies or taking away parcel shipping services from their rivals. This provides shippers with some leverage. They can promise all their parcel shipping to one carrier in exchange for lower rates. Or they can negotiate with multiple carriers, but know that the rates per carrier may be higher as a result. It may be worth it, if committing some of that capacity to regional carriers. Carriers want to qualify shippers for discounts using revenue bands, and shippers commit to a certain volume to get these discounts. Being exclusive to one freight carrier is a good way to stay in the revenue band.

Charges

Minimum charges and dimensional pricing are two areas where charges can greatly differ for each shipper. Carriers like to assess a minimum charge to ensure they are making a certain amount of money on each package, no matter the size or weight. Dimensional pricing has changed over the years. The carriers use a dimensional (DIM) weight, which is calculated as length x width x height, divided by a standard 139 divisor. That divisor is not set in stone. The number has gone down in recent years, which makes it more expensive for the shipper. The number, however, is negotiable as part of the contract freight rates. The minimum charge is also negotiable.

Accessorial Costs 

Just like accessorials are part of the freight contract for large shipments, they’re part of the parcel contract as well. Accessorials are surcharges for conditions outside of what the carrier sees as typical. They added fuel charges when fuel costs were high, and those stuck around. Carriers charge extra to deliver to residential addresses, to deliver oversize packages, those that won’t easily run through their automation equipment (e.g. additional handling), and those delivered outside the major service areas. 

Reviewing Services

A shipper might be getting services that aren’t necessary, which costs more money. For example, a shipper can opt for SurePost which charges no residential delivery fee, instead of sending residential items through UPS. They may be using air cargo instead of ground service, when ground would get the parcel to its location in a reasonable timeframe. Companies can also negotiate for faster transportation service or better customer service instead of a rate decrease.

Negotiating freight contracts is best done with an understanding of your shipping needs, your past shipping history, and your shipping characteristics. There is a lot of data to parse and analyze, and it can be confusing to know all the details are necessary for the most effective negotiation. Understanding how much of the shipping falls under DIM weight and minimum weight is key, as is understanding which accessorial charges are most frequent and driving up your freight costs. These are just a few of the characteristics that drive negotiation requests. 

Shipware, through our parcel rates negotiation consulting services, helps shippers gather and analyze the data and a negotiation plan. Our shipping consultants worked as executives at the big carriers and know what areas they can negotiate, and by how much. Some shippers go it alone and are able to make a dent in their contract rates and services, but Shipware can see the negotiations and the shipping contracts holistically. We can walk you through the process behind the scenes, guaranteeing that you will get a better carrier contract and a cheap freight shipping cost than you’d get on your own.

Optimizing your Freight Contract Through Parcel Audit

Negotiating freight cost and contracts with shipping companies is important. But ensuring you are not paying charges you shouldn’t be paying is important too. Parcel audit is sometimes called audit recovery. Carriers make promises to deliver a package by a certain time or you get your money back. Companies don’t have the time or resources to track every package and compare the delivery time to the invoice, and then follow up with a credit request. There are other charges that come through as well, that are even less obvious. That might include charging accessorial charges that are incorrect. Perhaps a package went to a business address but was tagged as a residential delivery. Your company would be paying an additional fee for that, if it’s not caught and tagged by a parcel audit.

Save Money with Shipware 

Having a team of parcel auditors will save your company money, and not necessarily cost you anything. For Shipware it starts with a free analysis of your parcel service to identify whether you are paying for services you’re not getting, or if there are recoverable mistakes on your invoices. Shipware uses a software system that combs through each invoice at the end of the day, requiring no shipper work. It identifies errors and automatically requests a credit from the carrier. The system flags any questionable items, followed up by an auditing expert who can manually investigate the charge and request a credit if needed.

Using a parcel auditing service is like finding money on the ground. It may have fallen out of your wallet when you weren’t looking, but it’s your money. The service costs the shipper nothing, and results in cost savings. The auditing fee comes from the amount saved, so the shipper comes out ahead no matter what. These shipping errors will not be highlighted by the carrier. It’s up to the shipper to find and request them. It’s a great way to lower the cost of shipping while making no effort.

Freight negotiation with shipping companies and for parcel contracts is an important way to lower your transportation costs. It can be time-consuming initially, to get ready for an effective negotiation. But the cost savings are worthwhile. Shipware can be your partner in this process, making it easy for you to negotiate better contract rates and terms. Reach out to us to see how we can help.

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