Rates in contracts are an ethereal being; it is up to the parties to shape and put legal meaning to the terminology for that specific contract.
Is it tariff-based, meaning that aspects of your rates are public knowledge and are subject to change? Is it subject to a Bunker Adjustment Factor (BAF), meaning that a % of your rate is subject to fuel fluctuations? Does it include a flat BAF? Immune to a General Rate Increase (GRI)? Subject to equipment surcharges? Port congestion fees? Or is the rate the carrier or broker provided considered an “All-in” meaning that the rate, will hold throughout the year?
A straw poll (courtesy of LinkedIn) shows that a single consensus does not exist on what a rate entails:
Rates - How are we quoting them / receiving them these days?
- Total rate no surprises (i.e., no surcharges / GRI’s applicable)
- Freight + Freight rate plus anything extra that gets thrown on, like asking for everything on a pizza (it’s a mystery waiting to be delivered!)
- Freight including BAF (because oil seems to be the only steady thing in shipping) + any mystery charges that are subject to change
- User’s choice anything that doesn’t fall into one of the above categories
There are three key timepoints regarding rates and contracting life cycle:
Timepoint 1:
Defining the rate during the negotiation period
Is your rate exclusive of GRI’s, surcharges, government imposts (Verified Gross Mass (VGM) weighing charge anyone?), a cap, and a negative ratchet on BAF (capitalize on those low oil prices)?
Is your rate exclusive of GRI’s, surcharges, government imposts? Does your rate have a cap for those charges? What about your BAF? Did the carrier impose a floor for your BAF which only allows it to go up in price?
How you agree to define these rates will influence how your processes and procedures handle future rate adjustment notices.
Timepoint 2:
Being advised of a GRI, surcharge, and BAF from your local carrier representative
Whether you receive these advisories directly in your home office or via your nominated Port Agent these advisories will happen dozens of times throughout your contract life and in the form of multiple advisories (global update, local charges, etc.).
Now, this is where the theory of law and contract intersect for better or worse with policies, procedures (or lack thereof), and the current human condition during the worst and longest peak season anyone has seen for a long time.
Alison – What on earth do you mean?
A tiny clause usually lives in standard contracts captioned “Waiver” and “Variation.”
Example:
“Waiver” means the failure to enforce any of the terms or conditions of “this Agreement shall not constitute a waiver of any such terms or conditions or any other terms or conditions”.
“Variation” means no agent of the carrier shall have the power to waive or vary any terms and conditions unless such waiver or variation is in writing and is specifically authorized or ratified in writing by the carrier.
Whilst you may not be waiving your rights of a GRI exclusion on your rate, persistent conduct may enable the other party, i.e., the carrier, to mount an argument that you waived a particular term of your negotiated contract. This term being excluding/accepting a GRI, surcharge, etc.
This is where your policies and processes kick in.
If a carrier; with whom you have a negotiated contract
Timepoint 3:
Manually auditing payments against the contract can take a considerable amount of time after the conclusion of the contract
If following best practices, negotiated contracts will have a time limit for rectifying discrepancies, either invoice over or under billings.
With a Post-Audit process, when you discover that you are being invoiced at a higher rate than what you had negotiated, it can become difficult to recover the funds depending on when the discovery occurs. Additionally, if you agreed to the GRI, surcharge, etc., and the rate is filed with the Federal Maritime Commission (FMC), there would be a strong argument in favor of the carrier or broker that you agreed to the increased costs on that particular shipment.
You, the Beneficial Cargo Owner (BCO), are responsible for holding the other party (the carrier) to the agreed contract and vice versa for the carrier. So does a Post-Audit process actually fix the issues with the carrier creating the invoice, or does it just help you recoup your funds?
What is Rubber-Stamping really (REALLY) costing your business?
When talking to Jarrett Crosby and Phil Marlowe of Acuitive Solutions about what the cost of Rubber Stamping is doing to bottom lines, they provided some profound metrics to showcase what that cost equates to.
With most new clients, we typically see invoice discrepancies at a steady 10-15% range which truly represents a process consumed with manual processes.
Once the client is fully up and running, that error range drops significantly down to 1-2% as our tolerances are set to ten cents. In an environment where we are looking to save 1-3% or conversely contain costs, overpaying for services is something we should all be aware of.
Quick Fixes
- Create and establish Invoice Discipline by creating a robust process for evaluating carrier Accessorials or additional charges.
- Digitize and store your contracts in a central repository to allow your team quick access.
- Establish a process for modifying contracted rates.
- Establish a Pre-Audit process that regularly audits carrier invoices against contracted rates, BAF and surcharges, etc.
- Seek real buy-in/feedback from front-line staff who deal with these issues. The easier it is for your staff to implement these new processes into their day-to-day activities, the better internal compliance you will have.
- Train your staff on shipping basics, so everyone is starting from the same foundational knowledge base. This industry is too crafty for everyone not to be privy to how “Ocean Shipping Works.”