icon07 Feb, 2023
5 Tips to Help Shippers Prepare for Contract Season
Towards the end of 2022, the freight market went a little topsy-turvy. Spot rates dropped below contract rates, leaving a lot of shippers wondering how to effectively manage their freight contracts this year. Here are our top tips to help your company negotiate for the best outcomes this contract season. These tips can shippers using all forms of transportation, from ocean freight to ground transportation.
How Can You Win Freight Contract Season in 2023?
1. Consider Index-Linked Contracts
Contracts are scary when the freight market is unpredictable, even if the prices set in the contract are fairly average. shippers win when the rates are sky-high, and carriers lose out on potential income. When the rates are low, carriers may be earning more than market value while shippers are paying more than market value. This uncertainty might leave both shippers and carriers worried about signing on the dotted line during contract season. This could result in less readily available capacity for the shipper and fewer guaranteed bookings for the carrier.
When the market is unpredictable, index-linked contracts might provide a solution that works for both shippers and carriers. Index-linked contracts are ones where rates follow a popular pricing index. They generally indicate that the shipper will pay at or near market value for contracted loads. Load volumes are set; prices are not.
It’s important to remember that index-linked contracts can be a little more difficult to read and write. They’re simply not as cut and dried as either short or long-term contracts, so it can be helpful to get logistics experts on the case.
2. If Index-Linked Contracts Aren’t an Option, Think About Shorter Terms
We’ve seen it time and again over the past few years: a year is a long time in the freight market and anything can happen. Traditionally, carrier contracts last a year, sometimes even two years. However, it’s okay to break from tradition when the need arises.
Companies can ask carriers if they’re willing to do quarterly contract renegotiations rather than yearly renegotiations. This ensures both parties are getting a fair price across the whole year. The entire contract wouldn’t necessarily need to be rewritten. Dates, rates, and variable surcharges like fuel surcharges would change based on current market conditions and short-term projections, which are far more likely to be accurate than long-term projections.
While this approach will mean that every season is contract season until the market seems steadier and recession is an afterthought, it’s an effective way to hold on to capacity from carriers you value while you ride out the storm.
3. Get a Handle on Your Projected Volume Before Negotiating
Before a company even begins to think about negotiating, it’s important that they nail down their projected volume for the (likely) lifespan of an impending freight contract.
This can be tricky. Sales forecasting is certainly not an exact science under the best circumstances, and with a recession looming, the economic forecasting that drives sales forecasting is on even rockier ground.
Based on your sales projections, you can determine how many shipments you’ll likely need and how many shipments should be contracted to ensure capacity. Because of the economic uncertainty, many companies will likely be playing it safe with their projected truckload counts in contracts this year, scaling back to make sure they’re sending contracted carriers at least the agreed-upon number of loads even if sales take a nosedive.
Understanding your company’s sales projections, the freight market projections over the proposed contracted term, and the larger economic circumstances can go a long way toward negotiating with confidence.
4. Look Over Contracts Carefully
Everyone knows this, right? It’s as true in everyday life as it is in business. You don’t sign contracts that you haven’t fully read, and if you don’t understand something in the contract, make sure to clarify it before signing.
Freight contracts are no different in that sense than a contract for a gym membership. There are some specific things you should look at when dealing with carrier contracts that go beyond rates, though, including:
- Fees
- Surcharges
- Liability for damages
- Insurance responsibilities of both parties
- Load volumes
- The circumstances under which the contract can be terminated
Since fees and surcharges can have such a huge impact on the actual cost of shipping a load, it’s important to have a grasp on them. If you’re not sure you understand what you’re looking at in a freight contract, reach out to an expert. They can help you understand what the true cost of a shipment will be based on the terms outlined.
5. Limit Contracts to Your Best Performing Carriers
When you have a large truckload volume and capacity has been an issue in recent years, it might be tempting to dive into contracts heart first to ensure you can keep your supply chain rolling. However, that’s probably not the best idea, especially in the current market.
Carrier performance reflects on how your customers view you, and customer experience will be even more important for companies to stay afloat as the economy dips. When people and other companies are looking to spend less, providing great service will help keep your company in customers’ good graces.
As such, contracts should be limited to carriers with a track record of great performance. Ideal contract carriers deliver on time, offer fair rates, and are easy to work with.
Bonus tip: You don’t have to tackle contract season alone.
When you rely on contracted carrier volume to get goods to your customer and keep your budget in check, contracts are kind of a necessity, even when market conditions are uncertain. Logistics experts like the team at NEWL can leverage experience and scale to provide the best rates possible, year-round and despite market conditions. Need help getting the best freight rates this contract season and beyond? Contact us.