Demurrage vs Detention: What’s the Difference? + How To Avoid ThemContainer shipping operations
In an ideal world, the vessel carrying your container reaches the port on time, your container breezes through customs at the port of discharge, gets trucked out of the container yard to your factory and the empty container gets returned – all within a short period of time.
But shipping operations don’t always run smoothly. A study showed that 1 in every 3 vessels arrives late at the port. That’s not the end of it. A container could get held up at customs. Truckers may be on strike and refuse to pick up your containers. A bad storm could keep you from loading cargo…. Every time this happens, you stand the risk of demurrage and detention charges.
Demurrage and detention charges are one of the biggest challenges faced by logistics managers. Every extra day your container sits in the port yard or your own container yard before it is unloaded will cost you. There have been occasions where the demurrage and detention charges accrued were 20 times the value of the container itself!
Demurrage and detention charges can vary from $132 in Busan, South Korea to $2500 in Long Beach Port. What’s worse, the rates are constantly increasing. A recent report showed that these charges have more than doubled between 2020 and 2021.
Every shipper wants to minimize these charges. For that, it is important to first understand the difference between demurrage and detention charges. Here’s what you need to know.
What’s the difference between demurrage and detention charges?
Demurrage and detention charges are both levied by shipping companies. Typically, when you need to ship a consignment, you would need to rent a container from a shipping company. The rental period covers the time spent in transit and a certain number of days at the port. Demurrage and detention charges refer to the penalties related to using the container for longer than the planned period. While shippers look at these charges as unreasonable, shipping lines justify them as it ensures the efficient use of containers.
Demurrage charges are the penalties applicable if your container sits at the port for longer than the free time agreed upon. This applies to containers that have reached the origin port and cannot be loaded onto the ships as well as containers that have been unloaded at the destination port but not collected from the container terminal.
For example, let’s say your container reaches the port and is unloaded from the ship but traffic congestion and a closed highway keep your trucks from reaching the port. In such cases, you will be charged demurrage until your trucks reach the terminal and take the containers out.
Detention charges are incurred if you keep the container outside the terminal for longer than the number of free days provided. They are usually incurred at the port of discharge when you take the container out of the container terminal but are unable to empty and return it on time.
Let’s say your trucks reached the terminal in time and your containers were brought to your distribution center. However, you were unable to unload the containers because of a worker strike. In such events, you will be charged detention fees for the number of extra days you keep the container.
What you need to know about demurrage charges
Demurrage charges are applicable when importing as well as exporting cargo. In the case of imports, demurrage time starts when the container is unloaded from the vessel until it leaves the terminal. On the other hand, demurrage time for exports starts from the time a container enters the terminal until it is loaded onto a vessel. In both cases, the first few days are considered free days. Here are a few more things you need to know about demurrage charges.
Demurrage charges are not fixed
Like shipping fees, there is no fixed demurrage charge. This is defined by shipping lines as a per day per TEU rate beyond the allotted free time. In some instances, the rate may increase with time. For example, the demurrage charges may be $100 per day per TEU for the first 3 days and $150 per day per TEU for days 3 to 6.
The number of free days is negotiable
A packed container can be kept in the container yard for a certain number of days without incurring any demurrage charges. This is usually about 4-5 days. Certain types of containers such as open-top containers may have fewer free days.
Demurrage charges are levied to offset the losses of not being able to use the container for other shipments. Depending on your relationship with the carrier, their schedule and other factors, you may be able to negotiate a few more free days.
Improper customs documentation is the most common cause for demurrage charges
Of all the causes for demurrage charges, improper customs documentation is the most common. Customs is country-specific and hence, it’s easy to miss out on a document or not have the relevant certifications. This allows the customs department to hold your container until you can provide the appropriate paperwork. The longer you take to get your documentation in order, the higher the demurrage charges payable.
How to avoid demurrage charges
Demurrage charges are usually driven by one of three factors, improper documentation, miscommunication and unforeseen circumstances. Unforeseen circumstances like storms, terminal congestion, labor strikes, etc. are uncontrollable, but you can work on avoiding demurrage charges caused by documentation and communication issues. Here are a few tips:
When negotiating terms with a shipper, make sure you talk about demurrage and detention charges. Clarify rates and the number of free days your container can stay at the port. You should also clarify what happens in exceptional cases where containers cannot be picked up because of circumstances beyond your control.
Get real-time visibility over container movement
Real-time, end-to-end visibility is critical to avoiding and minimizing demurrage charges. Using a platform like BuyCo keeps you alerted to container movement in and out of ports so that you can plan container pick-ups. These proactive measures go a long way towards reducing the risk of paying demurrage charges.
Alerts can also be customized to each container in accordance with the company KPIs and demurrage allowances. This is important given that demurrage per day charges increase with time. By prioritizing the movement of containers that have been waiting for longer, you can control the demurrage charges.
Pay attention to local customs
Given that improper customs declarations are the most common reason for demurrage charges, paying attention to local customs and port regulations is a must. Again a collaborative platform like BuyCo can help.
Once you list out the documents required, BuyCo offers a centralized platform to request and share documents amongst all stakeholders. This minimizes email clutter and ensures that everyone has access to up-to-date information.
What you need to know about detention charges
As with Demurrage costs, detention charges can be accrued by importers and exporters. Understanding how these charges are calculated can help you strategize steps to avoid them.
Truckers can also charge detention fees
Detention charges are levied not only by shippers but also by truckers. Shippers charge detention when their containers are not returned on time. For truckload and less-than-truckload shipments, detention charges may be applicable if the truck has to wait at the customer facility while the container is loaded or unloaded.
When trucks are waiting at a customer facility, they may miss their next load and the income from it. They also run the risk of losing driving hours and potential revenue. Hence, driver detention charges are billed to compensate for these losses.
Demurrage and detention charges can be incurred simultaneously
Detention by shippers is usually assumed to start from the time the container leaves the terminal. However, some steamship lines may charge detention fees for the use of equipment even if your cargo has not left the port. Thus, you may accrue demurrage and detention charges simultaneously for delays in picking up your container and returning the empty container.
How to avoid detention charges
To avoid detention charges, your shipping logistics must be well-planned. It is essential to be aware of the free days permitted and have open communication channels with all your logistics partners. Here are two key points to address:
Identify blind spots in your supply chain
One of the reasons for accruing detention charges is poor planning. If you don’t time a cargo pick-up correctly, the truck may have to wait while your cargo is packed. Similarly, let’s say the vessel carrying your container reaches the port a few days late and the space you allotted for the cargo in your warehouse has been taken up by something else. Without sufficient warehousing space, you may be unable to empty the container and hence risk detention charges.
A platform like BuyCo gives you visibility over container movement and control over shipping operations to identify such blind spots. BuyCo uses historic and real-time data to arrive at accurate, reliable ETAs. You can use this information to schedule container pick-ups and warehouse space accordingly. In turn, you can avoid detention charges.
Have a Plan B
As the old saying goes, you must always be prepared for the worst. Always have a backup in place. Assess alternative trucking services and their rates. If you don’t have space in your factory/ warehouse to unload cargo, look for terminals nearby where your cargo can be rerouted. The cost of renting additional warehousing space may be much lower than the demurrage and detention charges.
To Sum it up
Supply chain visibility and control are key to managing shipping operations and minimizing penalties such as demurrage and detention charges. On average, BuyCo drops demurrage and detention charges by 15%. It’s not a small amount.
BuyCo’s advanced shipping platform streamlines and organizes all stages of the shipment process. From accessing rates by multiple shippers and comparing them to managing documents and tracking containers, BuyCo offers complete visibility and control over every stage of your shipping operation.
Learn more about BuyCo and how you can control your costs.