Contract Rates & Spot Rates in Trucking

Melton Logistics – 01/18/2024

Contract rates and spot rates each have their place in the transportation industry and typically work together to keep rates in check. Typically, a ten percent difference in either spot or contract rates will cause shippers to change to the other, allowing for their own system of checks and balances. Which rate model is best for a shipper depends upon their needs, shipping volumes and many other factors that vary with each shipment and company.

1. What is a Contract Rate in Transportation?

A contract rate is when a shipper and a logistics provider commit to a set price and volume for moving freight over a specific time period. Contracts can span any length of time depending upon the shipper/customer need, but most last between 6-12 months. The cost is calculated based on the shipper’s estimated freight volume during the timeframe and the transportation provider’s cost per mile based on current transportation market conditions. These rate contracts can be good for both the carrier and the shipper. The shipper can understand their costs throughout the duration of the contract allowing them to accurately project their costs, and the carrier will understand their volume allowing them to appropriately plan capacity and equipment expenditures should they need. 

2. What is a Spot Rate in Transportation?

A spot rate is a one-time agreed-upon transportation rate based upon supply and demand with consideration to shipping volume. Spot rates fluctuate based on the current market conditions and can change as frequently as daily. This makes cost planning exceptionally difficult over the long term. Spot prices can shift as much as 50% or more in a given year as determined by market trends and available capacity. 

Truck driving on a highway

3. Choosing Between Spot Rates and Contract Rates

There are a wide range of scenarios that can warrant how a shipper structures their transportation rates. Here are a few things to consider when you are working to determine what is best for your company:

a. How consistent is your freight volume?

b. How strict is your budget?

c. How accurate is your shipping forecast?

d. Does your business require more flexibility?

e. Is your product/business seasonal?

Generally, the more consistent your shipments, the more value you will receive from contract rates. There’s a great deal of security in agreeing upon a rate and shipping capacity for a contractual period. Conversely, if your business has a lower volume, with inconsistency, or simply a one-time need, spot rates are your best solution. Assess your shipping needs thoroughly and decide which one will work best with your business.

4. How Do Spot Rates Impact Contract Rates?

Contract rates are typically the higher of the two options because the carrier is hedging against inflationary factors such as fuel costs, and other fixed costs relative to replacement parts (tires, etc.). However, you’ll be protected from any sharp increases in market price that may occur over a contracted period. Moreover, contract rates are based loosely upon spot rates as a market indicator to determine rate trends, either up or down. Spot rates don’t take these factors into account, rather they are based strictly upon the market conditions at the time of the shipment(s). This could be good or bad depending on current conditions.

Working with Melton Logistics

You can expect that our Account Managers and sales professionals will work to first understand your business and with that understanding, provide our expertise in determining what rate structure works best for your company given both the market as well as other factors including volume, seasonality, fuel costs, and volatility, etc. How can we help your company determine what rate structure is most advantageous for your circumstance?  

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