International shipping prioritises efficiency. Cargo must move swiftly through ports and terminals to keep supply chains running smoothly.
There are several mechanisms that encourage the timely movement of cargo, but demurrage is the one used by shipping carriers. These fees can be a nasty surprise to cargo owners who aren’t familiar with them, so let’s rectify that in this article.
Read on to learn what demurrage is, why it’s charged and how you can minimise its impact on your business.
What is demurrage?
Demurrage is a charge shipping companies impose when cargo stays in a port or terminal longer than the agreed-upon “free time” period specified in a shipping contract.
Free time is a grace period, typically ranging from two to seven days, where cargo can remain at a terminal without incurring extra fees. Demurrage fees start accumulating as soon as this period expires, motivating cargo owners to quickly load or unload and return containers.
Why do they exist?
Demurrage fees serve several essential purposes in the shipping industry:
- Supply chain discipline: These charges incentivize shippers to adhere to the agreed-upon schedules for picking up and returning containers. Without demurrage, some parties may delay unnecessarily, which would create bottlenecks at ports.
- Compensation for carriers: Carriers lose revenue if their containers are stuck at ports instead of being reused for other shipments. Demurrage compensates carriers for this lost time.
- Efficient Utilisation of resources: Ports have limited space, and demurrage fees ensure that cargo is moved efficiently to prevent congestion.
- Operational efficiency: Shipping relies on strict schedules. Delays in one part of the chain can cause ripple effects that disrupt other operations. Demurrage penalties encourage everyone to stick to their timelines.
How much free time do you get?
Free time varies depending on the port, terminal, and shipping contract. Large ports or busy terminals tend to offer fewer free days, whereas smaller ports are more flexible.
You can negotiate free time, though, especially if you are shipping large volumes of cargo. For example, a contract may offer three days of free time at a busy port, but this could be extended to seven days for a shipper who regularly imports significant volumes.
What’s the difference between demurrage and detention
It’s important to spend a second distinguishing between demurrage and detention, as both charges are related but apply in different scenarios:
- Demurrage is the fee incurred when a full container remains at a port or terminal beyond the agreed free time. It’s a penalty for occupying space that could be used for other cargo.
- Detention applies when the container has left the terminal but is returned late to the carrier. It refers to the time between when the consignee collects the container and when it’s returned empty.
What causes demurrage charges?
There are both avoidable and unavoidable reasons why demurrage charges may be incurred.
Avoidable causes:
- Delays in Documentation: Missing or incorrect paperwork can delay customs clearance, causing the container to remain at the terminal for longer than expected.
- Lack of Supply Chain Visibility: Poor communication across the supply chain can result in delays in coordinating the receipt and movement of containers.
- Late Payments: If payments to port authorities or carriers are delayed, this can slow down the release of cargo.
Unavoidable causes:
- Port Congestion: Heavy traffic at ports can delay cargo handling.
- Natural Disasters or Unforeseen Events: Extreme weather, labour strikes, or global events like the Suez Canal blockage can halt operations and delay cargo clearance.
- Customs Inspections: Random customs checks can sometimes lead to unexpected delays.
Who is responsible for demurrage charges?
In most cases, the party in charge of the cargo is responsible for demurrage charges. That could be the shipper, consignee, or importer depending on the responsibilities outlined by your Incoterm and shipping contract. It is essential that all parties involved in the shipment understand their roles in the process and agree on the contract terms to avoid disputes or unanticipated costs.
If a consignee fails to collect the cargo on time, for example, they may be held responsible for demurrage fees. In contrast, if a freight forwarder causes delays by failing to prepare the necessary customs documentation, they may be liable for the charges.
How are demurrage charges calculated?
Demurrage fees are calculated based on several factors:
- Time: Demurrage begins accumulating after the free time expires. The longer the cargo stays at the terminal, the higher the fees.
- Daily Rate: Each port or terminal sets its own daily demurrage rate, which can vary depending on the type of cargo and the terminal’s policies. For example, specialised cargo requiring specific handling may incur higher fees.
- Cargo Type: Different cargo types may have varying demurrage rates based on their storage requirements. For instance, perishable goods that require refrigerated containers may incur higher fees.
- Port Policies: Each port or terminal operates under different policies, meaning demurrage rates and free time allowances can vary significantly from one location to another.
How can shippers avoid demurrage and detention charges?
While demurrage fees can’t always be avoided, there are several strategies shippers can employ to minimise them:
- Plan ahead: Proper planning ensures that loading and unloading activities are completed within the free time period. Having contingency plans in place for unexpected delays, such as bad weather or strikes, can also help avoid penalties.
- Work with local partners: Engaging local freight forwarding agents who are familiar with the port’s procedures can help streamline the process and reduce the risk of demurrage charges.
- Complete documentation early: Delays are often caused by missing or incorrect paperwork. Ensuring that all relevant documents are completed and ready for customs can help avoid unnecessary delays.
- Monitor shipments: Using tracking systems to monitor your cargo’s progress and communicate any potential issues can help prevent delays.
- Negotiate contract terms: If delays are anticipated, shippers can negotiate additional free days in the contract to allow more flexibility.
- Pre-clear customs: If possible, pre-clearing customs can expedite the cargo’s release and avoid unnecessary waiting times.
Reduce your demurrage risk with Pro Carrier
Demurrage is an integral part of international shipping logistics, serving as both a penalty for delays and a mechanism to ensure the efficient use of port resources. But you don’t have to suffer these penalty charges.
At Pro Carrier, we take proactive steps to avoid any delays and the associated fees. That includes completing paperwork two weeks in advance, clearing customs in advance wherever possible, and 24-hour tracking of your shipment to respond to any issues as quickly as possible.
Find out more about our proactive approach and customer service excellence by speaking to an expert today.