If you’re looking to save on freight shipping, deciding between contract and spot rates can be key to cutting costs. Shippers often use both less-than-truckload (LTL) and full truckload (FTL) services, balancing contract and spot rates depending on market conditions and shipment needs. Here’s a breakdown to help you understand the advantages, drawbacks, and the best times to use each rate type.
What is a Contract Rate?
A contract rate is a fixed price agreed upon with a carrier for consistent freight movement within a specific shipping lane over a set period, typically 12 months. This agreement is based on market rates at the time of signing, providing stability against future rate hikes.
Benefits of Contract Rates
- Consistency: Contract rates lock in pricing for the agreement term, allowing you to forecast shipping costs accurately and establish customer pricing with confidence.
- Strong Carrier Relationships: Working with a dedicated carrier allows you to build a trusting relationship, align expectations, and enjoy reliable service.
- Protection from Rate Spikes: During a freight recession, like the one ongoing since 2022, excess carrier capacity often means lower prices, securing you from potential rate hikes when the market rebounds.
- Reduced Administrative Costs: With set rates, you save on time and costs associated with regularly searching for and negotiating rates.
Carriers also value contract rates as they ensure steady business, making it easier to fill cargo space and manage capacity.
Drawbacks of Contract Rates
When the market shifts back to a carrier’s market — expected possibly by late 2024 — demand may exceed capacity, driving prices up. If you’re locked into a higher contract rate during these times, you won’t benefit from any temporary rate drops.
Ideal Companies for Contract Rates
Businesses with predictable shipping patterns, shipping the same types of goods with consistent frequency, benefit most from contract rates. Such companies value the assurance of reserved cargo space and cost stability.
How to Secure Contract Rates
To obtain a contract rate:
- Conduct thorough research on carriers, considering factors like reputation and service.
- Submit a Request for Proposal (RFP) with detailed information on shipment volume, frequency, commodity type, weight, equipment needs, and service expectations.
- Timing matters; negotiate when demand is low, typically around March, for the best rates.
For shippers without a dedicated logistics team, working with a third-party logistics (3PL) provider can simplify the process. A 3PL has pre-existing relationships with vetted carriers and can often secure competitive rates on your behalf.
What is a Spot Rate?
Spot rates are short-term rates based on daily market conditions, ideal for single shipments or irregular, seasonal, or urgent needs. Unlike contract rates, spot rates fluctuate and can vary greatly from day to day.
When to Use Spot Rates
Spot rates are useful when the market is in your favor, particularly if you can schedule shipments when rates dip. However, waiting for lower rates can risk limited cargo space or sudden rate hikes if demand surges.
Benefits of Spot Rates
Spot rates offer flexibility, allowing you to take advantage of the market’s current condition. During freight recessions, like now, demand for space is low, enabling shippers to benefit from reduced spot rates.
Drawbacks of Spot Rates
Constantly searching for low rates can prevent you from developing strong carrier relationships, risking inconsistent service and unknown reliability. Additionally, spot rates expose you to market volatility, which can increase costs in a carrier’s market.
Information Needed for Spot Rate Quotes
When requesting spot rates, provide specific shipment details, including commodity type, classification, weight, dimensions, origin and destination, transport mode, and any special services required. Working with a 3PL can help streamline this process, as they already have carrier relationships and access to discounted rates.
Choosing a 3PL Partner to Help Navigate Contract and Spot Rates
For many shippers, finding and negotiating with carriers can be time-consuming. A 3PL like Match Freight Lines can simplify the process with access to a vetted carrier network, pre-negotiated discounts, and a transportation management system (TMS) for easy comparison of services, availability, and pricing across LTL and FTL shipments.
Want to Learn More About Spot vs. Contract Rates? Match Freight Lines Can Help!
Match Freight Lines has decades of experience in logistics, managing over 48 million shipments annually across industries. Our team can guide you in choosing the best rate option for your business and connect you with industry-leading shipping solutions.
Ready to transform your freight shipping? Contact Match Freight Lines for a free consultation today!
