When To Choose Spot vs Contract Freight Rates for Shipping

Freight shippers have multiple options they must look at when trying to get the best deal on shipping costs. Two options that you should be aware of are contract rates and spot rates. Companies that leverage full truckload (FTL) and less-than-truckload (LTL) shipping use both at different times and for very different reasons. Regardless of whether you are currently navigating a stable or turbulent economy, understanding spot and contract rates for your shipments can save you money and time.

This breakdown of contract and spot rates will help you understand the difference between the two and when to use them, along with their benefits and drawbacks.

What is a contract rate?

A contract rate is a set price negotiated with the carrier to move consistent loads of freight shipping in a specific lane for the extent of the agreement. The rate is based on the market price at the time the agreement is finalized. Because of the fluctuation of shipping rates, contract agreements typically run for 12 months but they could be as few as three months or as long as 24 in some cases.

Benefits of a contract rate

Consistency is the best reason to go the contract route. Not only is the price set for the duration of the agreement, but you’ll work on a consistent basis with the same carrier. That gives you both an opportunity to build a trusting relationship and establish expectations.

With set freight shipping rates, you'll be empowered to forecast shipping expenses more accurately and, in turn, calculate customer prices. Currently, we're experiencing a continuing freight recession that began in 2022. This gives shippers the upper hand since carriers with excess capacity are willing to offer lower prices. That simply means once you're locked in, you're safe from price hikes when the economy rebounds and freight rates normalize. Plus, you'll save on administrative costs by not having to find carriers and negotiate pricing for every shipment.

Carriers like contract freight rates because they can count on the business. They benefit by knowing their cargo spaces will be filled at the agreed-upon rate, capacity and frequency. This is especially important to them during a freight recession.

Drawbacks of a contract rate

Freight shipping rates will increase once the economy shifts back to a carrier market, which some analysts say could happen later in 2024. When the demand for cargo space is greater than the amount available, the market price for freight shipping will spike. Negotiating a contract rate when carriers have the upper hand will lock you into a higher rate, meaning you won’t benefit from dips in the rate during the length of the agreement.

What type/size of companies are best suited for contract rates?

Companies that have a long-term cadence for shipping the same commodity, using the same type of equipment and shipping in the same lane are prime candidates for contract rates. Companies like this appreciate contract arrangements because they are guaranteed cargo space for their shipments.

How to get a contract rate

You can work on your own to find carriers and negotiate contract freight rates. Because you'll enter a long-term relationship with the carrier, it's important to research how they do business. Use our guide on How to Choose the Right Freight Carrier. You should also do parallel research on multiple companies to find the best fit for your shipments. After you've made your selection and contacted several companies for availability, submit a request for proposal (RFP) to your selected carriers to give them an opportunity to bid for your freight loads.

When writing an RFP, provide as much information as possible to the carrier, including:

• Shipment volume
• Shipping frequency for the specific lane
• Commodity type, value and freight class
• Average weight of the shipments
• Equipment needed for pickup, transport and delivery
• Service requirements and key performance indicators (KPIs)

The best time to negotiate annual contract rates or work with a new carrier is when demand for cargo space is low — generally in March. Some logistics researchers who analyze rate fluctuations say contract rates typically rise and fall simultaneously with spot rates. That means keeping a keen eye on the market is key to getting a low rate relative to the economy.

When to bring in a 3PL provider

Unless you're accustomed to procuring carriers for freight shipping, it can be time-consuming to find carriers and difficult to know if you're getting a good contract rate. Working with a third-party logistics (3PL) provider or freight forwarder can help alleviate those challenges. These companies already have relationships with a vetted network of carriers that are selected based upon reputation, safety and service offerings. Naturally, carriers are more willing to negotiate pricing with a 3PL who can bring them consistent shipping business. Plus, 3PL analysts know if the quoted rate is fair and reasonable.

What is a spot rate?

Spot rates are short-term pricing agreements to move single, multi-stop or partial freight loads from point A to point B. The price shippers pay is dependent on the market and supply/demand pricing for that specific day. Shippers mostly request spot rate quotes for one-off shipments which could be planned, unplanned, sporadic, seasonal or urgent in nature.

Both FTL and LTL freight are eligible for spot rate pricing. In fact, shippers who typically choose contract rates could benefit from spot rates in some instances — depending on the type, size, dimensions and volume of the freight.

When to negotiate a spot rate

If you pay attention to fluctuations, you can negotiate your rates when they decrease. In fact, if you can schedule several months ahead of time, you can take advantage of current rates which may be more economical than those down the road. Just remember, waiting for a potentially lower rate can backfire and you might not find available cargo space, or carriers could raise their rates on shippers desperate for service.

Benefits of a spot rate

Unlike contract pricing, spot rates are not locked in for the long term. As is reflected in its name, spot rates fluctuate depending on the market and can be different day-by-day. The current freight recession is favorable to shippers since demand for cargo space is low and carriers have dropped rates. In the end, shippers are not locked in with spot rates and they can enjoy lower costs when the market is in their favor.

Drawback of a spot rate

Shopping around for the lowest rate and continually changing carriers does have its challenges. It lessens your chances of developing strong shipper-carrier relationships and you won't know firsthand how new carriers conduct business, if they're reliable or timely, or if you can make specific service requests. Plus, as mentioned, you will have to ride the ebbs and flows of the market and take what pricing is available.

What goes into a spot rate?

When negotiating spot rates, be clear about what you’re shipping. The carrier needs specific information to give an accurate quote, including:

• Commodity type
• Classification and NMFC codes
• Shipment's weight and dimensions
• Shipping origin and destination
• Equipment needed for pickup and delivery
• Mode of transportation
• Delivery speed
• Specialty service needs

How to get a spot rate

You can request quotes from carriers on your own, or work with a 3PL to save time and effort since they will already have relationships with carriers. Some, like 澳门威尼斯人直营网站, have vetted their carriers and have negotiated pricing with them. You can connect to the 3PL network of carriers through its transportation management system (TMS) and use it to compare carrier availability, services and rates for LTL and FTL shipping.

Have questions about spot rates vs contract rates? 澳门威尼斯人直营网站 can help!

澳门威尼斯人直营网站 has more than 30 years of success in the logistics industry and helps thousands of small to midsized businesses (SMBs) move products with great efficiency. We are also part of WWEX Group, alongside Worldwide Express and GlobalTranz. Combined, these three companies make up one of the largest and most diverse 3PLs in the industry, providing shippers with top solutions and financial stability that helps them succeed. We can also help you find spot and contract rates from our network of 75+ LTL and 85,000+ FTL freight carriers.

See how 澳门威尼斯人直营网站 can help you transform your freight shipping and help you navigate spot vs contract freight rates. If you are ready to talk to an expert, reach out for a free consultation today!