A negotiated transportation rate between a carrier and shipper, often based on a long-term agreement.
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What is the Contract Rate & How is it Calculated?
A contract rate in shipping is a negotiated rate between a shipper and a carrier for the transportation of goods over a specified period of time, usually for a year or more. This rate is set in advance and is typically lower than the spot market rate, which is the rate for a single shipment at the time of booking.
The calculation of a contract rate can vary depending on the specific terms of the agreement, but it usually takes into account several factors such as:
- Volume of shipments: The more shipments a shipper commits to over the contract period, the lower the rate can be negotiated.
- Freight density: The density of the cargo can affect the rate. Higher density cargo takes up less space, which means more cargo can be transported on a single shipment, resulting in lower rates.
- Distance: The distance between the origin and destination of the cargo can affect the rate. Longer distances typically result in higher rates due to increased fuel and operating costs.
- Equipment type: The type of equipment required for the shipment, such as standard containers or specialized equipment, can affect the rate.
- Market conditions: The current state of the market can affect the rate. If there is excess capacity, rates may be lower, while rates may be higher during periods of high demand.
Once these factors are taken into account, the contract rate is negotiated between the shipper and carrier. The rate is then set for the specified contract period, with the terms of the agreement outlining the obligations of both parties, including the volume of shipments, payment terms, and other relevant details.
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