Sealing the Deal: The Art of Balanced Shipper-Carrier Contracts

Shippers and carriers share certain goals when they negotiate contracts for over-the-road (OTR) transportation. Both want to manage expenses, operate efficiently, ensure that loads arrive on time and safely, and protect against fraud. However, they tend to approach these goals from differing perspectives.

“Shippers focus on cost efficiency, reliability, and transit times,” says Jen Seran, director of business operations with Stallion Express, an ecommerce shipping service. Shippers need to know the transportation services they’re purchasing can meet their customers’ satisfaction and maintain supply chain fluidity.

“Carriers, on the other hand, focus on fair compensation, consistent freight volume, and manageable scheduling to optimize operations and profitability,” Seran adds.

Finding a balance in which both sides feel their needs are met is essential for a successful relationship. Reaching that balance requires both shippers and carriers to understand how the other side considers the provisions in many OTR contracts.

RATES AND PAYMENT TERMS

Carriers need to make sure the rate they receive for each load covers their expenses, and then some. To accomplish this, carriers must understand their operating costs per mile, so they can set rates that cover their costs and generate enough profit that their business remains financially healthy.

The goal should be competitive, yet sustainable rates. “Pricing stability ensures profitability and operational viability, crucial in a market known for fluctuations,” says Robert Khachatryan, chief executive officer and founder of Freight Right Global Logistics, a provider of international freight forwarding services. With fuel prices prone to volatility, carriers often negotiate adjustable surcharge clauses that can shield their margins from unexpected surges.

When setting their rates, carriers also need to consider extra costs such as tolls, assessorial charges, and whether they’ll need to hire a “lumper” to unload the cargo, notes Lewie Pugh, executive vice president with the Owner Operators Independent Drivers Association (OOIDA). Carriers that fail to account for these expenses may wind up negotiating contracts that leave them operating at a loss, eventually putting their businesses at risk.

On the flip side, rates are an expense for shippers. “Shippers want to ensure their shipping costs don’t eat into product margins,” explains Anar Mammadov, owner, chief executive officer, and technical co-founder of Senpex Technology, a provider of logistics solutions.

Most shippers also want to know the final price will be what’s negotiated up front, without unexpected additional charges.

Some shippers, looking to boost working capital, ask their vendors for longer payment terms—in some cases, up to 90 or 120 days, says Josh Bouk, executive vice president and chief partnership officer with TriumphPay, a payments network for freight brokers, shippers, and carriers in the North American trucking industry. With transportation services, this approach can backfire.

Margins tend to be tight, and providing over-the-road services remains a cash-intensive business—carriers regularly need to buy gas, and maintain trucks with oil changes and new tires. Longer payment terms can wreak havoc on carriers’ cash needs, particularly for smaller carriers.

Shippers who demand long payment periods may cut themselves off from carriers who aren’t able to wait for months to receive payment. “Their options are reduced,” says Rob Jaehnig, a former executive with several trucking companies.

The Market

In addition to knowing their own costs and margins, shippers and carriers need some understanding of the broader over-the-road market. Shippers that understand market rates, global trends, and competition are better able to negotiate effectively.

For instance, freight costs tend to rise during national holidays. “Not researching market rates and trends can lead to unfavorable terms and missed savings,” says Shaun Rheeder, management consultant with TBM Consulting Group, a global operations and supply chain consultancy.

Carriers that understand the market also are better equipped to highlight services that can set them apart, such as advanced tracking or dedicated support.

Delivery Quality and Services

Many shippers, particularly in the business-to-business space, care first about quality service. Price remains critical, but carrier capabilities such as tracking, visibility, specialized equipment, and timely delivery tend to take priority.

In particular, shippers prioritize visibility—of both their driver and cargo. “Shippers are looking for a system with tracking options so they know what is going on with their delivery,” Mammadov says.

When a delivery requires special handling or equipment, shippers need to know the carrier can provide these solutions. If the cargo is valuable, they also want to confirm the carrier has adequate insurance.

Given shippers’ concerns about delivery quality, carriers that highlight their capabilities can more effectively justify their rates. “I encourage carriers to focus on their reliability, their on-time record, and their safety record,” Bouk says.

The Cargo

Only after carriers know the type of freight they are being asked to transport—along with its weight, size, and other attributes, and its need for special capabilities like temperature control—can they intelligently assess whether they have the necessary equipment to properly handle the freight.

They also can better estimate how much fuel they’ll use, how much equipment wear-and-tear to expect, and whether their insurance coverage is adequate. With this information, carriers can prepare an accurate and thorough bid.

To help carriers prepare bids that accurately reflect the services they will provide, shippers also need a solid handle on the goods they’re moving and any special services that might be required.

For example, some shippers are starting to require higher levels of insurance. While policies covering up to $100,000 in claims had been the norm among carriers, more shippers—including many ecommerce companies—now ask for $250,000 policies, says Jaehning.

The Network

Ideally, the carrier’s network of trucks and lanes will match the shipper’s needs, so its trucks are already traveling the same regions as the shipper’s cargo. The fleet should also be able to accommodate any special requirements, such as refrigeration.

“There has to be a match on both sides,” says Milda Davis, vice president of logistics with GP Transco, a logistics services provider.

Few carriers can take on every potential shipment. “We can’t just say we’ll do everything if the shipper isn’t offering consistent loads or if there isn’t a fit with the volume or type of cargo,” she says.

Taking on a lane that’s outside the carrier’s network can be costly, given empty miles, inefficient driver utilization, and possible service issues. “When customers and our networks overlap, we can provide better service, offer more capacity, and operate efficiently and effectively,” Davis adds.

At the same time, if a shipper can bring consistent volume and/or growth, some carriers will consider whether it makes sense to adjust their network and capabilities.

Clear Requirements

Both shippers and carriers benefit when they communicate their requirements at the outset and address them in the contract. Among the provisions to include are service expectations, performance metrics, transit times, and any special handling requirements.

“Contracts that don’t specify what happens if a load is late or if fuel prices rise can trigger problems later on,” Bouk says. Shippers may feel they’re being charged for services they didn’t agree to, while carriers may feel the shippers aren’t being fair. “It’s better to nail down everything in detail,” he adds.

Another risk when requirements are vague is that carriers may under-bid. If they realize after the fact that they can’t meet the requirements, some may default on the bid, or not accept the load. In some cases, when carriers aren’t sure about the requirements, they boost their rate to account for potential unforeseen expenses. Shippers then end up paying more than they would if they clearly stated their needs early on.

Schedules and flexibility

Typically, the more flexibility a shipper can provide when requesting shipment departure and delivery days and times, the better the carrier can price its services. “If a carrier can fit a shipment in its schedule, it gives them more freedom to negotiate prices,” Jaehning says.

Some carriers shy away from forced appointments, or those where they’re required to deliver a shipment to a dock at a precise time. The shipper requesting the delivery appointment may not understand the time required to travel to the appointment, given the regulations that govern driver hours.

Similarly, when carriers take a rigid approach to contract negotiations, they may deter potential shippers and limit their business opportunities.

Instead, flexibility can be incorporated into the contract. For example, the contract may state that rates will adjust based on diesel costs, as listed by a third-party standard. Shippers get a fair rate, while carriers gain protection against cost increases.

A LONG-TERM APPROACH

Taking a strategic, long-term approach can help both carriers and shippers build sustainable, enduring businesses. For carriers, this can mean turning down opportunities that don’t fit—not always an easy choice, as few carriers want to forgo opportunities to make money.

At the same time, a carrier needs to be thoughtful when assessing which shipments to take. The routes need to fit both the carrier’s and shipper’s needs and turn a profit.

To determine which opportunities fit, Davis and her team analyze information from GP Transco’s transportation management system. “It’s a lot of analysis and looking at the numbers,” she says of their method. At the same time, they’ll also consider the overall relationship with the shipper.

For shippers, building strong relationships with carriers that are interested in working together on an ongoing basis often is more effective than focusing solely on cost. “Prioritizing short-term savings over contract adaptability can hinder responsiveness to market changes,” Rheeder says.

COMMUNICATION IS KEY

In addition to understanding each side’s priorities, flexibility and open communication are key to strong shipper-carrier partnerships. “Both shippers and carriers often start negotiations with rigid terms that prevent them from achieving a win-win situation,” Seran says. A flexible mindset and the willingness to compromise on certain things can help avoid this.

A commitment to communication can also create opportunities to address challenges and build partnerships. When problems arise, Jaehnig says, “Don’t get mad. Communicate.”

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How to Handle Fraud

A new and growing challenge for contract negotiation

Transportation fraud is accelerating rapidly—and it is now popping up in contract negotiations. The fraud can take several forms. In one instance, a shipper receives an email that appears to be from its carrier, stating that the carrier has changed bank accounts. Without verifying this information, the shipper sends payment to the new account. Eventually, it becomes clear that the payments are going to criminals, not the carrier.

When shippers inadvertently pay a fraudster, they typically remain responsible for paying the carrier. “The carrier still needs to be made whole and the shipper is still legally on the hook to make that payment,” says Josh Bouk, executive vice president and chief partnership officer with TriumphPay.

It’s critical that shippers take steps to confirm the party that they are paying, he adds.

In another type of fraud, a carrier bids on a shipment load from a load board, believing it’s from a reputable broker. The carrier picks up and delivers the load according to the agreed-upon terms. However, when they try to get paid for their services, they’re unable to reach anyone and discover the individuals behind the bid were only pretending to be reputable and have since disappeared.

“This fraud has exploded since COVID ended and the freight market dropped,” says Lewie Pugh, executive vice president with the Owner Operators Independent Drivers Association.

Carriers can reduce their risk of falling victim to this type of fraud by checking the bill of lading (BOL), which should always list the carrier’s name to confirm who is delivering the load and include shipping details such as delivery times, location, and any restrictions. This information can be compared to the rate confirmation to ensure they match. Additionally, carriers can limit their searches to load boards run by large brokerages or double-check postings on commercial load boards.

Shippers also benefit by confirming that their BOLs are updated and complete. Without this information, “shippers don’t have a clue whose truck their goods are on,” Pugh says.

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