Learn about the key differences between contract vs spot rates to optimize your freight shipping strategy. Whether you’re a shipper, carrier, or logistics professional, understanding these pricing markets is essential for making informed decisions and maximizing efficiency.
What is the difference between Contract vs Spot Rates?
Contract rates and spot rates are two common pricing markets in the freight shipping industry. In the truckload industry, shippers commonly utilize a mixture of both methods to complement the other. For example, consistent lanes are contracted with the same provider while the spot market is utilized for one-off or when additional capacity needed.
Spot Rate Market
The spot market is usually referred as truckload carriers bidding on freight. With over 1 million for-hire carriers registered with the FMCSA, the spot market is the place where carriers bid on freight loads.
Pricing of the Freight Spot Market
Pricing is based on the market of pickup, miles to travel, equipment needed, and the destination market. A shipper will either post a load on a load board or reach out to their network of carriers with the details. A carrier will then bid on the load with their best rate. Usually the rate is based on a per mile pricing.
Load Boards: Connecting Shippers, Brokers, and Carriers
Freight load board platforms like DAT or Truckstop offer a marketplace for shipments. A shipper or broker post the load and receive bids from carriers. The platforms make covering loads easier, however there is typically a membership fee for being a part of the platform. Partnering with a 3PL broker help shippers route utilizing load boards by participating on this platform for the shipper.
Carrier Monitoring: A Crucial Practice for the Spot Market
One of the risks of the spot market is entrusting a new carrier with your freight. While a network of carriers can be built up, there may be a time where your contacts do not have a truck in the area and a new carrier must haul your load. Having proper carrier monitoring practices in place is a must for anyone moving spot market loads.
Contract Rate Market
The contract rate market is referred as the market rate for truckload carriers offering consistent transportation to shippers. Rates in the contract market vary from the spot market as carriers offer different pricing for the consistent business. In recent years, the contract market rate is higher than the spot market due to capacity restraints and supply issues due to the COVID pandemic.
Pricing of the Freight Contract Market
While the freight markets are a factor in pricing, the main components of contract pricing are the number of loads, product shipping, equipment required and lane details. A carrier may offer discounts if the contracted lane works well in their operations. Pricing is generally locked in a per mile rate with a fuel surcharge to offset any fluctuations in fuel pricing.
Relationship Building in Contract Market
Contract rates are built through negotiation and relationships with carriers. Major carriers may be easy to find contract pricing with, but the smaller carriers might provide better service. A freight broker offers more options for shippers since the broker has a relationship network with carriers built over time.
Less-than-Truckload: Are LTL Rates Spot or Contract ?
Less-than-Truckload markets varies greatly from the truckload market. While there are hundreds of thousands truckload carriers, the LTL industry is operated by a smaller group of carriers. This section will discuss how the application of the spot and contract market works in this mode of transportation.
Contract pricing is the base method of pricing in less-than-truckload. Carriers will negotiate tariffs and contracts with shippers to generate LTL pricing. While the methodology of how rates calculate, the rates follow a contract method that is negotiated and renewed quarterly or annually in the form of Request for Pricing (RFP).
While the most common method in less-than-truckload is a contract method, there are newer methods consistent with spot market pricing. Volume and Dynamic Pricing are pricing methods that utilize current capacity and carrier needs to provide a competitive rate for shippers. If a carrier needs to fill space, a more competitive rate will be provided on the spot.
Contract vs Spot Rates: What to use?
As with everything in the transportation industry, the answer lies with your specific supply chain. There is no one size fits all answer for this question. However, there is general guidance for the answer.
Contract Rates are usually utilized for reoccurring, consistent shipping volumes. Think of a weekly run where a consistent carrier is needed to deliver freight to your customer. Another example is local deliveries where it may make sense for one specific carrier to deliver the freight. The biggest advantage of this market is having a consistent carrier at a negotiated rate readily available for your shipment.
Spot market rates are generally used when flexibility is required or additional capacity situations. A shipper that utilizes contract rates may need an additional load and can utilize the spot market to help cover the additional load. On the other hand, if the volume for the customer is not consistent, a shipper can utilize a spot rate when needed. The biggest advantage of the spot market is flexibility in finding equipment and capacity.
Partnering with a 3PL Freight Broker
It’s advantageous to work with a 3PL Freight broker as a shipper. For starters, the broker will have contacts in both freight markets, access to industry tools, and expert knowledge in the best market for freight. Working with a freight broker helps a shipper be flexible and utilize the best market for transportation rates.
TLI has successfully partnered with shippers to route freight through spot and contract markets. Our truckload brokerage team is great at negotiating competitive rates through relationships and load boards. While our carrier sales team is able to leverage relationships for contracted rates.