Freight spot vs Contract rates – What is the difference?

Apr 27, 2023

Both contract freight and spot rates are the two primary ways businesses are priced for delivering their cargo. Neither is better than the other by default, both contracted, and spot rates have their place in a company’s supply chain.

In fact, few businesses run their entire freight volume exclusively on spot or contract rates. Instead, most will use a mix of both due to seasonal fluctuations, last-minute shipments, or those that may not have an extensive network of multiple carriers. Understanding when to use either is essential to keeping supply chain costs low.

What are spot rates?

Spot rates (or spot quotes) are a one-time fee presented by transportation providers for delivering a shipment to a destination. Any offer is generally only valid for a single transaction, restricts the delivery services to a single vessel, truck, or aircraft, and can be used within a specific date range.

As such, the spot market is subject to freight pricing fluctuations as they reflect the real-time balance of supply and demand. Yet, simultaneously, it means there’s some opportunity for getting better deals. Spot market rates will generally fall whenever the (global) estimated shipping volume is low, or the conditions are right.

For example, when oil prices are low, shipping costs fall, which can be passed on to the spot market. On the other hand, holiday periods will have retailers sending greater freight volumes, raising rates. Understanding market conditions and factors affecting supply chains will let you land better deals.

Finally, it should be noted that fewer guarantees are provided for spot deals. For example, it may be dropped if the volatile truckload market conditions change, so the agreed-upon deal is no longer valuable to the carrier.

What are contract rates?

A contract rate is a fixed and stable pricing a carrier or transportation provider presents for regular cargo volumes. These commitments will generally be only possible for somewhat larger shippers as minimum truckload freight volumes will often be provided.

A shipper, however, gets numerous benefits out of contracted rates. First, while the volume requirements may be pressing, the stability and security provided by the contract will ensure that the logistics provider will maintain the required stream of deliveries.

Additionally, it’s much easier to measure performance, assess future truckload freight requirements, and establish strategic carrier relationships. All of these benefits are highly conducive to further business expansion.

What are the differences between spot rates and contract rates?

There are two primary differences between them: contractual obligations and price fluctuations. Spot market rates provide little to no contractual obligations for both the carrier and the shipper, which means they can potentially be cancelled. Additionally, many restrictions are placed, such as being assigned to a specific vessel, on a specific date, etc.

On the other hand, contract freight rates come with many contractual obligations, but a major part of the benefit is the shipper. Contract carriers will be obligated to deliver freight, cancellations may be costly, and cargo insurance may be provided.

Conversely, contract pricing is generally stable as it’s usually a fixed rate paid over time. Since carrying full truckloads is more beneficial to carriers, companies with a higher freight volume will have better negotiation leverage. As such, large companies can benefit a lot more from contracted rates.

Spot market rates will be much more volatile than contracted rates as they are directly affected by day-to-day changes, supply and demand, and numerous other factors. They are also provided only for a single shipment. Yet, they may be lower than contracted rates if the timing is right.

Benefits of spot rates

It may seem that contracted rates are always better, as with good leverage and negotiation skills, companies may get great deals; however, that’s not always the case. Some companies may be unable to fill in the minimum truckload freight shipping volume to get a good contract rate. As such, spot rates have a time and place as they bring in these benefits:

  1. It can cover last-minute changes or when carriers cannot fulfil a shipment.
  2. It can be used to cover unexpected shipments.
  3. Rates could be lower if global truckload freight shipping volumes are low.
  4. Rates could be better if a company cannot get enough freight density or volume to negotiate a good contract rate.

As such, spot rates are usually utilized by companies that either have a lot of changes in shipment or are price flexible. Retail, for example, is less flexible in pricing, and, as such, it may use contracts much more. However, they also have a lot of truckload freight shipping volume to negotiate a great contract rate.

Generally, companies use spot markets more when they have less structured order patterns and require less consistent deliveries. While mixing both is quite common in the industry, using softening markets when rates are low can drive down costs significantly.

Benefits of contract rates

Contract rates can immensely benefit those with a lot of negotiating power. They are much more stable, which can be both a blessing and a curse, but they also come with security guarantees for the shipper. Some of the major benefits of contract rates are:

  1. Stable contract pricing makes costs more predictable.
  2. Performance is easier to measure.
  3. Creates partnerships with carriers.
  4. Higher chances of securing capacity.
  5. Stable deliveries and consistent orders.

Contract pricing is best utilized by companies with a consistent volume of freight that needs to be delivered. Carriers will be much more inclined to give better contract pricing if they know they’ll get their vessels filled consistently with large volumes.

Also, contract rates are great for sensitive goods (e.g., pharmaceuticals) that must be delivered with care. Contracts usually have numerous obligations signed by both parties, so insurance and guarantees may be provided, which are of great importance to those that ship sensitive or high-value goods.

Why ship your spot freights with Spotos?

Spotos is the most advanced digital freight forwarding platform that connects carriers and shippers through an easy-to-use website. In addition, our platform will give you a ton of handy features that will make finding carriers much easier:

  • One of the largest carrier pools with over 40 000 trucks available on our platform.
  • Our pricing algorithms will reduce costs by up to 30% when using spot rates.
  • A single contract for all carriers.
  • Real-time freight and truck visibility.
  • Great customer support.
  • No subscription fee.

All of our features are accessible completely free of charge. Spotos will allow you to benefit from having a large carrier network without establishing them yourself while providing AI-driven competitive pricing for each spot rate.

Frequently Asked Questions

What are cheaper, contract rates or spot rates?

Contract rates will often be cheaper than spot rates, especially long-term. However, exceptions may occur due to favourable market conditions or when a shipping company does not have enough volume to negotiate good contract rates.

Do contract rates guarantee capacity?

Contract rates will almost always guarantee capacity, often the basis of negotiations and pricing.

Why wouldn’t a business exclusively use spot rates?

Spot rates are volatile, unpredictable, and can be unreliable. In addition, using spot rates exclusively would make measuring logistics costs and business performance hard.

Why wouldn’t a business exclusively use contract rates?

Contract rates only guarantee capacity that has been agreed upon. Exclusively using contract rates would make performing any last-minute or unexpected shipments impossible. Additionally, clever use of spot rates can reduce business costs.

What are the factors that affect spot rates?

Spot rates are primarily affected by supply and demand. However, costs may also change due to seasonality, overall market freight volume, oil prices, freight value, shipment requirements, backhaul availability, and global politics.

How often are contract freight rates renewed?

Contracts are usually signed for a duration ranging from a single quarter to a year. Carrier companies may perform annual bids between Q4 and Q1 to secure freight for the coming year. In rare cases, contracts may be signed for more than a year.

How much freight volume do you need to get contract rates?

There’s no general limit. Transportation RFP (Request for Proposal) must only include consistency in a shipping lane, an estimate of freight volume, and a time frame. Carriers will then evaluate such a proposal. However, higher freight volumes tend to find more success than lower ones.

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