What is Contract Freight?
1 Jun 2023
As a small shipper, it can be difficult to feel like you have the upper hand in your business when the cost of truckload transportation is a constant wildcard. Factors like supply and demand, equipment availability, driver shortages, and more can cause the cost and capacity to change rapidly.
To help combat this uncertainty and increase stability, one option you have is to arrange contract freight rates for your truckload shipments. It offers more peace of mind when projecting transportation expenses and securing capacity for your shipments.
In this blog, we will define what contract freight is, cover the pros and cons, share the best times to use it, and advise how you can request contract rates from carriers.
Defining Contract Freight
Contract freight is a long-term rate agreement between carriers and shippers for the movement of truckload shipments.
The shipper promises to provide the carrier with a consistent volume and type of freight (produce, liquids, dry goods, clothing, etc.) in specific lanes for an extended amount of time.
In exchange for the promised capacity, the carrier agrees to charge a fixed price per mile to move the cargo over the term of the contract. While contract length may vary, they usually span between 6 to 12 months.
Benefits of Contract Freight
The primary benefit of contract freight is that it offers a level of stability for both shippers and carriers in a highly unpredictable trucking market.
For a shipper, this means benefits such as:
- Having consistent and reliable capacity for shipments in lanes you use most often
- More predictable, stable pricing to move your goods, making it easier to forecast transportation costs
- The opportunity for lower shipping costs, as most carriers are willing to negotiate if they are guaranteed consistent capacity
- Being able to build relationships with your carriers, which can lead to better service and familiarity with your business
For carriers, the advantage is having guaranteed loads over the term of the contract. This means more stability for their business and their drivers. Working with the same shippers also gives carriers the opportunity to build a steady client base through providing reliable service.
Limitations of Contract Freight
When moving truckload freight, you can either negotiate a contract rate with a carrier or use spot freight. While contract freight provides you a consistent rate throughout the agreement, the spot market can change daily in response to market conditions. So, if spot market rates fall below your contracted rates during the term of your agreement, you risk losing money by paying the higher rate.
When to Use Contract Rates for Your Freight
When it comes to the best scenarios to use contract freight, you will find that consistency is key. Here is when you should consider contract freight for your truckload transportation:
You have consistent capacity: When you have approximately the same volume of freight that needs to be shipped on a consistent schedule, it is a good fit for contract freight. It allows carriers to count on having loads to move and to optimize their schedule. Knowing volume ahead of time also helps the carrier make sure they have capacity for your freight.
You ship consistent lanes: Contract freight is quoted based on lanes that freight will be moved on. So, when you request a contract quote, make sure your freight needs to be transported over the same routes.
You ship a consistent type of freight: The type of freight you are moving (dry goods, perishable, oversized, etc.) determines the type of equipment needed to haul it which has an impact on price. So, the kind of freight moved must be the same throughout the contract to get a fixed rate.
How to Secure Contract Rates from Carriers
While it may be easier for high volume shippers to secure contracts with certain carriers, there are no volume minimums that you have to meet to qualify.
If you choose to pursue contract rates for your freight, this is usually done by sending multiple transportation providers a request for proposal (RFP). In the RFP, you should include:
- Requested shipping lanes
- Estimated volume of freight
- The frequency of your shipments (daily, weekly, etc.)
- The requested time frame of the contract
Based on the information provided, the carriers will respond to your RFP with quotes for the rate per mile they will charge. At that point, you would compare the quotes and choose the carrier that you determine is the best fit. Depending on the length of your contract, you may go through this process annually or multiple times a year.
It’s important to know that the base rate quoted is not the only amount you will pay for transport. Contract rates include both the base rate (the agreed upon pricing) plus the fuel surcharge (FSC). The FSC is added on to account for fluctuations in fuel pricing during the agreement.
Securing Stability with Contract Freight
If you are shipping by truckload, contract freight can bring stability and predictability to your transportation strategy. Here is a quick recap of what to keep in mind:
- Contract freight is a long-term agreement for moving truckload freight where a carrier provides a set rate per mile in exchange for consistent capacity from a shipper.
- This arrangement works best for your shipments that are consistent in capacity, schedule, lanes traveled, and types of freight.
- While contract rates do make it easy to forecast your transportation spending, you do run the risk of spending more if spot rates fall below your contract pricing.
Want to learn how Spot Freight compares to Contract Freight? Find the answers in our blog here.
