Is a Year-Round Contract Really the Best Way to Save Money?

Every contract is a commitment, but are yearly agreements the best way to maximize savings?

Getting the best possible deal from a logistics partner starts with the contract, the terms of which are never one-size-fits-all. They must be negotiated to fit your unique business needs as they exist today with flexibility for the future. There are several ways for shippers to get their goods delivered, and they all have pros and cons. Making the best decision means weighing the different options and seeing how a year-long contract compares.

This article will:

• Break down a logistics contract

• Discuss spot rates and per-shipment deals

• Examine the pros and cons of using spot rates for all shipments

• Examine the pros and cons of using annual contracts

• Briefly explain how logistics ally helps secure a good contract

• Breaking down a logistics contract

Multiple factors decide which contract model suits a business best. Foremost among these are company type and the nature, volume and frequency of shipments. Rates offered by logistics partners are directly tied to all of these. Take load type as an example: If your company ships freight that is easy (or easy enough) to handle and/or is resilient to transit, this will likely lead to cheaper contract rates.

If the opposite applies to your freight — and loads are fragile, tough to handle, require special shipment measures or particularly high-value — then you can expect contract rates to be higher and potentially include surcharges. This logistics contract template provides a good example of how agreements can look. Understanding how a company’s type and shipping needs impact contracts will help you better choose between per-shipment, monthly and yearly agreements.

Spot rates and per-shipment deals

The service model with the least commitment and highest level of risk is spot rate. Spot rates are A-to-B prices for single shipments as and when required. Compare that level of flexibility with contracts that lay out the set lanes and operative models of a particular carrier.

Spot rate and per-shipment services are notoriously volatile — spot rates were soaring last year, but this year they’re falling continuously. They typically don’t offer set lanes and are highly vulnerable to market conditions and the law of supply and demand.

Since spot rate pricing can vary wildly, good deals may come along, but they are never guaranteed. The odds of consecutive savings from shipment to shipment are low. The absence of a contract means spot rates can easily cost much more long-term.

The pros and cons of using spot rates for all shipments

Spot rates may offer businesses a practical and psychological benefit. These rates may be more manageable to a business than an annual contract with set rates while feeling like less of a locked-down commitment.

Utilizing a spot-rate model does not lock you are the carrier into a long-term rate for a specific lane. However, carriers must earn their keep by meeting agreed on monthly performance standards. This is good for the customer but makes building a deeper relationship with carriers more difficult, which can mean losing significant future savings.

Market volatility factors in again and rates will change with a spot-rate agreement. This potential instability is bad for shipping departments, and also not favorable with carriers as there is no commitment from either party. Uncertain month-to-month expenses also make it harder to budget not only for shipping but also for determining and securing capacity.

The pros and cons of yearly contracts

One advantage of yearly contracts is they save time. Companies can sit down, hammer out terms and rates, and not have to do it again for another 12 months. This takes less effort than revisiting the agreement monthly or quarterly to review if it’s still a good fit.

It’s true that yearly contracts will lock rates in for the term, and a business will know what it’s paying for the next year. With shipping costs taken care of, budgeting in other areas can then be carried out more accurately and effectively. Yearly contracts can also lock in price terms because there’s no wondering how much market elements may alter costs from month to month.

While fixed rates can guard against market volatility if your carrier’s operating costs go up, if their costs go down your business is price-locked and won’t be charged any less. However, having a set agreement should also contain capacity commitments from your carriers.

Why? A yearly contract shows commitment, and a multi-year contract shows even more. Again, this can cost significantly more from the outset, but it creates a lot of potential for savings down the road by cementing a good carrier relationship. This can be enough for carriers to offer more favorable rates over time. However, it is strongly suggested that pricing be not locked in for more than one year, as the marketplace does change; just look at what happened in 2018 compared to 2019.

A logistics ally helps secure a good contract

Signing an annual contract may suit one company yet be an expensive trap for another, but pound for pound they offer the best opportunity for long-term savings, managing your shipping spend, and securing capacity.

At Resource Logistics Group, we provide ongoing contract and pricing management for our customers. We ensure all language and pricing is always up to date, and we’re there to assist in annual pricing negotiations with your logistics partners. By providing logistics analytics and benchmarking your logistics spend and contracts by mode, we give you the data you need to negotiate more effectively with current or future carriers.

Resource Logistics Group provides transportation and logistics advice combined with professional services and state-of-the-art technology. From contract negotiations to easing back office burdens, we’re your ally in excellence. Connect with us on our contact page for a free benchmarking analysis.