How To Minimize Costly Demurrage and Detention Charges
The pandemic-driven surge in consumer spending has unleashed a series of damaging crises that have nearly paralyzed the supply chain. Persistent port congestion, in combination with shortages of manpower and equipment, are stagnating the circulation of containers and leaving shippers worldwide with fear of greeting their customers with empty store shelves. As importers work tirelessly to replenish their hottest products, many shippers often feel that they need to pay a “ransom” before they can get their containers moved out of terminals and send their merchandise to their DC’s or stores to meet sky-high demand.
In the world of international shipping, supply chain professionals are no strangers to Demurrage and Detention (D&D) charges – additional costs incurred for the usage of containers beyond the contractual free time period. With inflated shipping costs, one of the key questions exasperating supply chain leaders is “What can I do to avoid those surcharges and improve my business profitability?”. In this publication, we first discuss the basics and financial consequences of D&D charges and then delve into the strategies you can deploy to keep these unnecessary charges to the minimum.
DEMURRAGE AND DETENTION IN A NUTSHELL
Demurrage and detention charges are fees assessed by the ocean carriers and terminals to expedite the circulation of containers. Besides compensating carriers for the use of their containers, D&D charges primarily serve the purposes of incentivizing shippers to pick up and return containers more promptly by charging them for the exceeded usage after the allotted free time period. Since these punitive policies can oftentimes lead to financial losses where shippers may end up paying significant large amounts of unnecessary costs, it is crucial to understand how demurrage and detention differ from one another and how they are imposed by ocean carriers and maritime terminals.
Demurrage and detention charges are both billed per container per day and vary across locations, shipping lines, and equipment types. Demurrage charges apply for the usage of containers inside the maritime terminal beyond the contractual free time. For import containers, demurrage starts after the container is discharged from the incoming vessel and the allotted free time expires and ends when the container is gate-out. For export containers, demurrage begins after the container is delivered to the terminal and ends when it is loaded onto the departing vessel.
Similar to demurrage, Detention costs arise for the usage of the containers outside of the terminal or depot after the free time period. For import cargo, the clock starts ticking from full container gate-out and ends upon the return of the empty container. In the phase of export, detention begins from empty container pick-up and ends when the laden container is delivered to the terminal. In most cases, detention charges are incurred for late delivery, extra driver waiting time at terminal or distribution centers, extra time for unloading at warehouses, etc.
During times when yard density reaches capacity, or if there is no available space inside the port for container storage, additional storage fees may arise. To prevent containers from piling up at the container yard (CY) area, some carriers will move containers to a customs-bonded depot within the free time for storage until the cargo owner can pick up their containers. It is possible that storage fees, which are billed to shippers, will be charged by carriers on top of demurrage. Further, some unique circumstances may also trigger additional charges such as a long-stay handling fee and emergency surcharges for containers too long inside the port.
BETTER UNDERSTANDING THE DEMURRAGE AND DETENTION CHARGES ON YOUR FREIGHT BILLS
It can be frustrating to see your containers stranded at terminal and later receive a freight invoice without much explanation of why the additional charges are billed to you. Demurrage and detention charges occur for a variety of reasons and can escalate if not dealt with quickly and carefully. Here are a few reasons that may be driving the increases of your D&D charges:
Port Congestion – Strong volume throughout, unreliable vessel schedules and more planned blank sailings, an increasing number of vessels at anchor or at drift and waiting to berth along with infrastructure limitations are amongst the main reasons contributing to port congestion. When containers start to build up at yards, it can take days before CY space becomes available for drivers to pick up or return containers and D&D charges will therefore increase. In some instances, congestion has become so severe that drivers now often go to the ports with confirmed bookings, only to be turned away because the terminal is unable to accommodate any additional traffic on their assigned day.
Adding to the problem is the Marine Terminal Operators (MTO) procedures which allow for blocked cargo, which occurs after free time for the vessels shippers has expired, and all shippers who have not picked up their laden containers can experience further delays and demurrage charges because a subsequent vessel has berthed and is unloading, effectively blocking pickups from the designated storage area for a period of time which can be hours or days, depending on yard density. With trucking shortages a well-known impediment to the smooth operations of the supply chain, this can result in your appointed trucker missing their pick-up window, and sometimes have the add on effect of your demurrage payments made to date expiring and necessitating further payments – and time – before your container is again available for pick-up.
Labor Shortage – Shortages of truck drivers have long existed pre-pandemic and only worsened when the coronavirus took hold. Trucker availability has substantially tightened as many drivers are unable to accept container delivery orders due to quarantine measures. Additionally, the coronavirus clusters discovered at terminals have also led to the closure of cargo-handling facilities and a shortage of dock workers and crane operators, further increasing lead time and driving up D&D charges.
Chassis Deficit – As the necessary tool for road transportation of containers, chassis can often dwell outside of terminals and get stuck at warehouses or truck terminals for more than a week. Before chassis in use become available for the next delivery, containers will spend more time at terminals than expected, later resulting in additional charges beyond shipper’s anticipation.
Customers Clearance Issues – The duration of customs clearance process also plays a key part in demurrage. Importers may suffer additional charges and delays for misfiled documents or incomplete paperwork before their containers are cleared and exit terminals.
Unforeseen Circumstances – Uncontrollable factors such as bad weather conditions and industrial actions that may impact port productivity also affect the freight fluidity with additional costs.
A CLOSER LOOK AT DEMURRAGE AND DETENTION CHARGES IN MAJOR DESTINATION PORTS
To better present how the costly demurrage and detention can result in financial consequences impacting your profitability, the following graphs provide an overview of the D&D surcharges levied for imported containers at major destination ports. Since D&D charges vary geographically and depend on the shipping lines and the types of equipment, we have used the publicly available data from major container shipping lines* to show how demurrage and detention for 40’ DC containers, after free time, accumulate over the course of 30 days.
* Carriers researched for this study include Maersk, CMA CGM, Hapag-Lloyd, ONE, and ZIM.
For demurrage, which is charged after the imported container is discharged from vessel and then exceeds the allotted free time, the average demurrage cost can rise to $3,145 per container at the most utilized port in North America – Los Angeles / Long Beach. Handling over 40% of imports into the United States, the twin ports in southern California have been suffering from congestion for the past year and it can take weeks, and now sometimes months, before shippers can pick-up their cargo, which can result in demurrage increasing of over $8,000 on the 30th day. As for detention, the policy seems to be relatively consistent throughout North America. At the port of Los Angeles/Long Beach, New York, and Vancouver, the detention can accelerate up to about $2,100 after two weeks before rising to over $5,000 after one month.
To put the D&D numbers into perspective, assuming a Maersk container spends two weeks in the terminal at Los Angeles Port and another two weeks outside before the empty is returned, the D&D surcharges derived from container dwells, after the standard free time (4 days), would be $2,765 for demurrage and $1,840 for detention, for a total of $4,605.
Moving to the trade lanes outside of the US, demurrage and detention levied by carriers at the major European gateways are noticeably more lenient and significantly lower in comparison to North America. On average after two weeks, demurrage and detention charges go up to $997 and $760 relatively at the ports of Rotterdam, Hamburg, and Felixstowe, where free time is on average 5 to 6 days.
(Average demurrage and detention charges for 40’ DC imported containers at Los Angeles, New York, Vancouver, Rotterdam, Hamburg, and Felixstowe.)
BUSINESSES ARE SUFFERING FINANCIALLY BECAUSE OF DEMURRAGE AND DETENTION CHARGES
Demurrage and detention charges can be a nightmare to cargo owners and the impact is pretty self-explanatory – an addition of extra charges in your freight bills. As the daily D&D charges can escalate quickly after the allotted free time, it is now not uncommon to see total amounts in the thousands of dollars per container range, and in some instances, the penalty cost on overtime equipment can equate to more than the cost of the merchandise in the container itself in terms of freight cost. In some cases, rather than pay the extra charges, some shippers have elected to abandon their cargo to reduce the total loss, leaving the carriers the right to sell the merchandise at auction or destroy it.
Although D&D charges are known throughout the shipping industry, the previous frequency and amounts of these charges was a relatively minuscule percentage of total shipping costs until this year. D&D charges were previously routinely paid on behalf of customers by the truckers delivering the containers, but as prices increased to historic levels, many truckers are often refusing to advance funds, passing the inflated D&D costs to shippers or forwarders to be paid before the penalized containers can exit the port.
Besides the financial losses shippers must endure, these surcharges can also affect shippers inbound or final mile planning. Many shippers elect to pay demurrage only until their exact cargo pick-up date for which current charges are invoiced. If the trucker misses the pickup window, the process repeats as new charges are again calculated and assessed, payment arranged, receipt of payment is verified and new transportation is confirmed. Because of the uncertainty of many truckers’ ability to pick up during the new window, extensions can often add or up to one week or longer to the pick-up process which can trigger accelerated or higher fees. When the container is detained too long at the terminal, downstream effects such as changes in chassis availability, DC space utilization, and store delivery will follow and result in the slower turnaround of containers and higher detention charges.
SHIPPERS APPEAL FOR GOVERNMENT INTERVENTION
Following the dramatic increase in D&D charges by an average of 104% across the world’s 20 largest ports, the price hike in demurrage and detention has been brought to the government’s attention and resulted in heated industry debate.
In 2020, the Federal Maritime Commission (FMC) published an Interpretive Rule of Demurrage and Detention, clarifying that demurrage and detention should only be used to incentivize the return empty containers on time. Many carriers believe the reasons for the charges are reasonable as the increased charges are necessary to provide the need incentive to pick up and return the container to the terminal on time, which would seem to agree with FMC’s interpretation. However, while the FMC’s guideline may seem to swing in the favor of carriers, many shippers are questioning the escalated charges that most have never seen the likes of before and are challenging the reasonableness and legitimacy of some of these charges. The FMC established a new audit program to assess the rationale and compliance of the late fees charged by carriers and ports, formally urging top ocean carriers to adopt the best practices on cargo containers.
There may be a ray of hope for shippers as the FMC is now looking into methods to ensure that shippers who have been charged detention and demurrage charges that are unreasonable will have recourse to refunds of these charges.
DEMURRAGE AND DETENTION CHARGES CAN BE MINIMIZED
We now address the question that leaves many supply chain decision-makers flummoxed – “What can I do to avoid demurrage and detention charges and improve my business profitability?” As rigid and inevitable as these surcharges may seem, they are actually preventable and there are ways to keep them to a minimum and improve your margin. We at Century put value in our customers who utilize all areas of the supply chain to minimize cost so as to offer competitive pricing to their customers. With your supply chain well-being and financial planning in mind, we have outlined the best practices for demurrage and detention as well as the strategies we can jointly deploy to navigate through these unexpected surcharges.
- Negotiate terms with carriers and request extra free time
As surcharges can accelerate quickly after the contractual free time elapses, the free time you are granted is of utmost importance. While some may think carriers will always have the upper hand in dictating demurrage and detention, the D&D terms on your contract are not as “fixed” as they seem. Depending on the shipping volume, some businesses have the advantage of negotiating the D&D terms with carriers during the carrier contract negotiation period season. Shippers should always be mindful when the clock for billing starts ticking after a container is discharged from the vessel or exits the terminal.
- Develop a Plan B and be flexible
With heightened market volatility, businesses should develop a contingency plan devised for unexpected circumstances. If you are shipping to/from a particularly congested port, consider rerouting your cargo to a nearby alternate port with a longer dwell time and then leverage transload options. At destination, our strong local network can help move your cargo via truck or rail to your final destination. If you elect to use your own trucking resources, have a back-up plan ready for any last minute cancellations from your providers. Paying for premium trucking service these days is often much cheaper than paying for the additional demurrage charges that will result if you miss the assigned pick-up window.
- Be smart about customs clearance
Pre-clear your cargo whenever possible. Advance customs clearance means you can fast-track the lengthy customs procedures and get your containers on highway more promptly. As customs regulations can be complex and vary across locations, partnering with a licensed broker like Century can expedite the clearance process. Our teams will ensure all the documentation and administrative required for import clearance are prepared and competed by the time your containers arrive in destination ports.
- Leverage supply chain visibility
In many cases, demurrage and detention occur because shippers lack the necessary visibility to anticipate when their containers will reach their port of arrival. Without accurate ETAs, inbound planning can become significantly more challenging and sometimes containers would just sit idle at the port yards waiting to be picked up. To take the guessing out of inbound planning, leverage reliable vessel ETAs for better anticipation of when your containers will be arriving.
- Take advantage of origin value-added services (VAS)
Taking advantage of origin VAS is a game changer in expediting your inbound delivery process and preventing detention and chassis charges derived from overstay at warehouses. The wide range of VAS we provide at origin CFS, such as pick and pack, consolidation, and palletization allow for direct store-loads that bypass transloads or destination DCs, thus accelerating the return of empty containers and minimizing the detention charges. With the increased D&D charges currently being levied at highly congested ports, it can often be considerably cheaper during these times to switch some of these services you might be paying for at destination to origin.
- VMS (Visibility Management System)®
Besides the real-time visibility our proprietary platform VMS® offers, the Domestic Routing List in VMS® allows you to take better control of your inbound containers. You can prioritize receiving, pre-arrange labor at the DC and manage empty return within one module. Our customer specific platform allows a view of all of your inbound containers, along with terminal and container free time, and a variety of other useful tools which can help expedite the delivery process, including managing container and empty return requests, and pre-scheduling labor to unload inbound containers.
OPTIMIZE YOUR SUPPLY CHAIN WITH CENTURY
As the world-wide economy continues to recover from the pandemic, the increased demand has translated into issues such as port congestion and longer lead times that are hurting businesses financially. Without expanded capacity to untangle the supply chain bottlenecks, containers will only remain longer at yard and vessels will wait longer at anchorage to berth. Until the container dwell time at terminals declines, navigating the challenges in demurrage and detention facing shippers worldwide is more imperative than ever. Century is the trusted supply chain partner you can reply on to help you move freight always at the right time, right place, and right cost. Talk to your Account Manager or Century representative to learn more about how we can optimize your supply chain!
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