Contract vs. Spot Rates: What’s the Difference?

Contract and spot rates each have their place in the shipping industry — some businesses may even utilize both options, depending on their specific circumstances. To aid supply chain managers in evaluating which model best fits their needs, we’ve summarized the key differences and applications for each rate type below.

Understanding Contract Rates

A contract rate is when a shipper and a logistics provider agree on a set cost for moving freight over a specific period. Contracts can technically span any length of time, but most last between 3-12 months. The cost is calculated based on the shipper’s estimated freight volume during that period and the provider’s cost per-mile. Roughly 80% of the industry operates on contract rates.

These long-term contracts are good for both the carrier and the shipper, as they keep rates steady and help accurately project costs for budgeting purposes. With this in mind, there are three general types of contract rates pricing: annual bids (once a year), quarterly bids (one every three months), and mini bids (often monthly, but usually no shorter than that.)

Understanding Spot Rates

Spot rates are less common, usually only occurring when a one-time transportation contract is needed. It’s a single rate based on supply and demand and shipment volume. Spot rates fluctuate based on current market conditions and can even change from hour to hour, making costs difficult to project over the long term. Spot rates can shift as much as 50% in a given year as determined by market trends and available capacity.

Businesses in immediate need of a one-time shipment often think of spot rates as an “on-demand” method of transportation.

Choosing Between Spot Rates and Contract Rates

There are a wide range of scenarios which can warrant different rate types. If you’re unsure of which is right for you, here are a few things to consider:

• How consistent will your shipments be?
• How strict is your budget?
• How far ahead can you accurately plan for your upcoming shipments?
• Does your business require more flexibility?
• Is your product or industry impacted by seasonal changes?
• Fuel considerations — contract rates calculate with a fuel surcharge, while spot rates require negotiation.

Generally, the more consistent your shipments, the more value you’ll receive from contract rates. There’s security in agreeing on a locked-in rate and a guarantee of shipping capacity for the full period of a contract. On the flip side, if your business has just a few shipments, inconsistent loads or lanes or simply a one-time need (an emergency), spot rates are the way to go.

Why Shippers and Carriers Both Prefer Contract Rates

Pricing and carrier capacity are often difficult to predict, thanks in large part to steady competition among carriers and shippers for business. When it comes to contract rates, shippers like them because they:

• Are budget friendly and easy to forecast
• Assist with securing capacity
• Build strategic carrier relationships
• Encourage greater accountability from providers

Carriers also generally prefer contract rates because they bring in more predictable revenue and make for more efficient driver scheduling (which keeps drivers happy, too).

How Do Spot Rates Impact Contract Rates?

Carriers looking to set competitive contract rate pricing will often check spot market activity 3-6 months prior to signing a new contract. Since spot rates closely mirror the market’s supply and demand trends, rising spot rates generally lead to higher rates in newly signed contracts. Conversely, if spot rates decrease, contract rates typically remain stable for up to a year before following suit.

Working with First Call Logistics

A third-party logistics provider can help you navigate which rate is best for your specific business. With nearly two decades of logistics experience, industry-leading technology and a nationwide carrier network, the First Call team is primed to optimize your supply chain management and address both your company’s immediate and long-term shipping needs. Contact First Call Logistics today!