As far as the trucking industry is concerned, keeping the transportation costs is the top challenge a business may face. Transportation costs will make an impact on the company’s overhead. Further issues in this industry is having consistent and reliable carrier capacity. There are ultimately two types of shipping options: contract and spot rates.
Contract rates are also known as primary rates, bid rates, or dedicated rates within the industry. These rates offer long-term and stable pricing for truckload freight. These are typically set during an annual bid, also known as a Request for Proposal (RFP). With an RFP, businesses take their forecasted shipping needs to transportation providers for a committed long-term pricing.
After the bid process, the shipper will award lanes to specific providers based on rate, service, capacity and many other considerations. This is a win-win scenario for both shippers and carriers. Shippers give committed load volumes and carriers give fixed transportation rates.
The truckload industry is highly fragmented with many carriers and shippers, each with their own agenda. Since the market is constantly changing, it can become extremely difficult to predict whether you are on the supply or demand side of the market.
- Easier budgeting & forecasting
- More reliable capacity
- Ability to build strategic carrier relationships
- More accountability from providers (KPI tracking)
- More predictable revenue
- Consistent, and more efficient, driver scheduling
- Increased driver satisfaction
Most shippers like to have a mixture of contract rates and spot rates as well. Spot rates are short-term, transactional freight pricing, which will reflect the supply and demand market pricing.
Shippers tend to use spot rates for three major reasons. One of the main reasons for shippers to use spot rates is if their primary and even backup carriers cannot cover a shipment. A second reason is if there is an unexpected shipment. Finally, if there is not enough freight density or consistency to justify contract pricing.
There are a few key differences that set the two forms of shipping. Contract rates tend to have long-term pricing, while spot rates are short term. Furthermore, contract rates are more stable while spot rates are dynamic. This means that spot rates are more reliant on the economic market. In addition, contract rates cover a shipping lane, spot rates on the. Other hand covers a single shipment.
The rates are established during a procurement event for contract events, while spot rates are established as a one-time quote. Contract rates tend to favor the shippers as they have an established rate long term, while spot rates favor carriers. This is especially true when the market has a high demand for carriers. Contract rates are given as a base rate + FSC, while spot rates are given as all-in. Finally, contract rates are tracked with detailed KPI’s, spot rates have less performance oversight.
At the highest level, contract rates are typically cheaper for shippers. Carriers will tend to be more willing to negotiate with the shippers in order to get guaranteed volume. However, it ultimately depends on the current state of the market, what the freight is, and even the relationships between the shippers and carriers.
Shipper’s markets are easy to spot as capacity is simple to secure and the carrier competition for available loads is difficult. Within this market, the spot markets are typically lower than the contract pricing.
In a carrier’s market, the capacity is much tighter, making shipper competition for available drivers more intense. Thanks to this environment, spot market rates are usually higher than contract pricing.
Spot market rates will have a major impact on the contract rate negotiations. If spot market rates are going up, that will force the contract rates to go up as well. If the spot markets are lower, it will keep the rates stable, or could even force year-over-year decreases.
Overall, both spot and market rates are essential to have within the trucking industry. Both spot rates and contract rates have their own advantages and disadvantages. Shippers tend to use each rate depending on the current economy.
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