Anyone that has attended our training has learned the difference between contract & spot rates. We discuss how to use the tools available to calculate a rate, how to do the math, and the best way to use one or the other.
For those that don’t know, in a nutshell the contract rate is what a shipper pays a truck while the spot rate is what a broker is paying a truck. As a contract rate is a shipper’s rate, the contract rate is normally higher than a sport rate, that is until now.
With the ELD’s, low capacity, driver pay increases, and higher fuel costs, spot rates have shot up very quickly. These rate increases have left the contract rates behind, causing spot rates to be much more than contracted rates. As one client stated just the other day, $5 is the new $3 rate.
You may be asking why the contract rates aren’t keeping up with the sudden rate increase? Contracted rates are just that, rates contracted between a shipper and carrier. The key word is contracted. A carrier and a shipper sit down at a table and negotiate their contracted rates with a lot of other goodies such as fuel surcharge, detention time, number of loads, lanes, spot trailers, and more.
These contracts are for a specific amount of time, normally one year. This means that the shipper and carrier are protected from sudden changes in the market. What’s happening today is one of the first times that I’ve seen carriers be on the loosing end of a well negotiated contract. Normally a carrier negotiates a contract to protect themselves from sudden changes, such as an increase in fuel prices.
The contract rates aren’t going up, yet. At least until the carrier’s current contract with a shipper has expired and/or the contracts are renegotiated. When that happens, the contract and spot rate correction will begin. Often these contracts expire during the first quarter of a new year.
The point is, contracted rates currently are NOT reflecting the current market correctly. They will in a couple of months, just not yet. Knowing this should allow you to choose the correct tool in which to calculate a more accurate rate for a shipper. Keep an eye on the contracted rates though, the correction will happen.
Thanks, and talk soon…