Demurrage is a dirty word among
Freight forwarding is currently a buyer’s market. If you’re in a procurement role, finding a balance between cost and services rendered might be a priority, but a singular focus on the rate when choosing a freight forwarder can result in unanticipated consequences like demurrage fees, which can quickly accrue and eat up your savings.
Demurrage Fees Are Increasing
Demurrage fees have attracted much attention in recent years.
According to research conducted by the Federal Maritime Commission (FMC), instances of demurrage fees have increased nearly every year since 2014, as well as the costs associated with them.
These fees were initially instituted as a way to incentivize importers to move their cargo out of ports quickly, and they were measured with a metric known as “terminal velocity.” In theory, this makes sense. Everyone benefits from a more efficient supply chain.
However, in the wake of 9/11 and evolving customs regulations, many delays fall outside the control of importers.
It’s not uncommon for a government agency to flag a specific type of good for additional evaluation. Your cargo ends up sitting in the terminal for weeks waiting for a government agency like the Federal Transit Administration (FTA) to give you the green light on delivery. By that point, you’ve far exceeded whatever free storage the terminal allows.
As the importer of record, those demurrage fees fall on you to pay, regardless of who caused the delay.
Demurrage vs. Detention Fees
Demurrage and Detention are terms often used interchangeably, but they describe two very different types of penalties.
Just as terminals wanted to protect themselves from losing money by storing cargo for free long after its arrival date, shippers found they were losing money on containers that were kept by one client for an excessive period.
It resembles the difference between leasing a car and paying for parking. One payment is for your vehicle, and the other is for the space it occupies in certain situations. If you rented your car from your parking garage, those fees would be consolidated. Most likely you are paying one company for the use of your vehicle and another for a place to park it.
With shipping, these penalties can accrue quickly and at a high cost.
Some shippers and terminals will add to fees over time, compounding your expenses while you wait on a logistical issue to resolve itself. This is why having a strategy to avoid these fees is so important. They represent the interests of two different parties and avoiding them hinges on a variety of dependencies.
Some factors are in your control, such as filing the right documents on time, and some aren’t, such as random inspections by a government agency.
Avoid Demurrage With a Standard Operating Procedure
One way to avoid a lot of the headaches common to international freight forwarding is to institute a standard operating procedure (SOP) with your freight forwarder.
Alternatively, you can lean on your freight forwarder to provide an SOP based on an evaluation of your business and their collective process knowledge. Whichever approach you take, an SOP will help you avoid the demurrage fees that are within your control.
It might sound like an intimidating exercise, but an SOP can be very simple. Many elements of a good SOP are the same as the information needed to clear customs.
Beyond capturing your process, the SOP can function as a single source of truth for a particular shipping lane or product. Including the following information will help you optimize your SOP:
- Standard rates for your shipping line and terminals
- Exporting company’s address
- Importing company’s address
- Contact information for individuals within your company who need to be alerted if issues with cargo or logistics arise
- Contact information for Customs broker (if applicable)
- An escalation point should a severe problem occur
Building a relationship with a freight forwarder is another way to avoid fees.
If you’re switching your provider with every shipment, you expose yourself to varying degrees of service and industry knowledge. Some freight forwarders might have great relationships with many popular terminals that allow them to negotiate more favorable terms on your behalf, but others won’t.
These are some of the intangibles you should seek to uncover in evaluating freight forwarders.
What Should My Freight Forwarder Do for Me?
For better or worse, freight forwarders and others in the logistics space have no control over demurrage fees.
They fall under the purview of warehouses and terminals. Depending on how long your freight forwarder has been in business, they might have a relationship with the warehouse where you accrued demurrage fees.
In this scenario, your freight forwarder can help you with forensics. It’s not uncommon for an importer to learn of demurrage fees only once the final bill arrives. A freight forwarder can help you determine what part of the shipping process caused this penalty.
Was it a random inspection that just happened to include whatever commodity or product type you’re importing? Did you send the appropriate documents on time? Did they go to the right address?
A freight forwarder can help you determine who is actually at fault. From there, depending on their relationship with the billing company, they might be able to use this information to decrease your penalties.
It’s important to recognize who actually gains from demurrage fees. It’s certainly not your freight forwarder.
The FMC is currently investigating these fees following an industry complaint in 2016. The complaint implies that shipping companies and warehouses are using demurrage and detention fees to offset profit losses. By decreasing the number of free days allowed, importers are finding themselves with increasingly little wiggle room when it comes to unforeseen delays, inspections, and mistakes. If you’re a small importer, the cost of demurrage can rapidly outpace any profit you stand to gain from your cargo. In some cases, companies will take a loss rather than pay the fees.
As the industry awaits the FMC’s findings and recommendations, it’s important to do what you can to avoid demurrage fees. By instituting an SOP and developing a partnership with a freight forwarder, you can establish an importing practice that minimizes the chance that you’ll end up with unforeseen penalties.
