If you work in the logistics industry, you most definitely deal with demurrage charges on a regular basis. And even those outside the industry are becoming more familiar with this term due to its increasing presence in news headlines and social media discussions. But what is demurrage and why is it so important?
In this blog, we will answer the question, “What is demurrage?” and examine how demurrage charges are calculated. We’ll also discuss how to avoid them in order to save time and money.
What is Demurrage?
First, let’s start with the basics. Demurrage refers to the fees imposed on cargo owners when their containers remain at the port beyond the allotted free time. This charge compensates shipping lines for the use of their equipment and space.
Exporters face demurrage charges when their cargo remains at the port for longer than the agreed-upon free time. This scenario can arise due to delays in documentation, customs clearance, or logistical issues.
Importers incur demurrage charges when they fail to pick up their cargo within the free period. Delays in payment, customs issues, or transportation bottlenecks often lead to these charges.
What Causes Demurrage?
Ask any logistics specialist and they will tell you- there are many reasons why demurrage and detention charges are incurred. Here are some of the most common reasons why these detention fees happen:
Port Congestion
One of the leading causes of demurrage is port congestion. Remember 2020? The buying boom and supply chain crisis led to an unprecedented backlog of ships waiting to dock at ports around the world.
When a port is congested, it means there are too many containers and ships trying to use the same space. This leads to delays in unloading or loading cargo, resulting in longer stays at the port and ultimately, demurrage charges.
Customs Clearance Delays
Another big issue that leads to detention and demurrage fees is issues with Customs paperwork or inspections. In some cases, there may be missing or incorrect documents, which can hold up the entire process and result in longer stays at the port.
In other cases, customs officials may need to inspect cargo for various reasons such as security concerns or potential smuggling. These inspections can also cause delays and incur additional charges.
Logistical Delays
Logistical delays can also play a role in detention and demurrage fees. This can include issues with transportation, such as trucking or rail delays, which can cause cargo to arrive at the port later than expected. Additionally, there may be issues with scheduling and coordinating pick-up or delivery of containers at the port, causing further delays.
Weather Conditions
Weather conditions can also impact detention and demurrage fees. Inclement weather, such as hurricanes or heavy snowfall, can cause disruptions in transportation and port operations. This could result in delays in cargo arrival and departure, leading to additional fees.
Labor Disputes
Another factor that can contribute to detention and demurrage fees is labor disputes. These conflicts between workers and management at the port can lead to work stoppages or slowdowns, causing delays in cargo processing. As a result, containers may sit at the port for longer periods of time, resulting in additional charges.
Operational Inefficiencies
Delays within the shipper or receiver facilities can also contribute to detention and demurrage fees. Inefficient processes, lack of space, or equipment malfunctions can cause delays in loading or unloading cargo. This can result in containers staying at the facility for longer than the allotted free time, leading to additional fees.
Equipment Shortage
There is a constant need for trucks, chassis, and other equipment to transport containers from ports to their final destination. When there is a shortage of these resources, it can cause delays in cargo pick-up or delivery. This can result in containers remaining at the port for longer periods of time, leading to detention and demurrage fees.
How Much is Demurrage?
The average cost of demurrage is between $75 and $300 per container per day, but the rate can vary depending on the carrier, terminal, and contract. The fee increases the longer the container is at the terminal.
For instance, let’s say that a container is set to be picked up at the port and delivered to its destination within 3 days. However, due to an equipment shortage, the container remains at the terminal for an additional 2 days before it can be transported. This would result in an extra $150 to $600 in demurrage fees.
If the same container stays at the terminal for a full week, the demurrage fees could potentially add up to $2,100 or more. You can see that this can significantly impact a company’s bottom line, especially if multiple containers are affected.
What is Laytime and How Long Does It Last?
Laytime (also called “free time”) is a term used in the shipping industry to refer to the amount of time a vessel or cargo can remain at a port before additional charges, such as demurrage fees, are incurred. It is essentially the agreed-upon amount of time that a shipper has to load or unload their cargo at the port.
The length of laytime varies depending on several factors, including the type of cargo and terms negotiated between the shipping company and the customer. In general, laytime can range from a few hours to several days.
How to Avoid Demurrage Charges
Here comes the part that you really want to know – how to avoid demurrage charges. Avoiding demurrage charges requires meticulous planning and coordination. Here are some strategies:
Read Shipping Contract Carefully and Negotiate Terms
Thoroughly reviewing and negotiating your shipping contract can help ensure favorable terms regarding laytime and free time for both sides. Take the time to understand all of the terms and conditions, including laytime limits, demurrage charges, and free time allowances. Negotiating these terms before signing the contract can save you from potential costly charges in the future.
Pre-Clear Customs
Ensure that all customs documentation is prepared and submitted well in advance to avoid delays. Delays in customs clearance can result in extended laytime and potential demurrage charges. It is crucial to work closely with your customs broker or freight forwarder to ensure all necessary documents are accurately completed and submitted on time.
Have an Alternative Land Courier
Having a backup plan for inland transportation can mitigate delays if your primary courier faces issues. Look for reputable and reliable alternative land couriers in case of any unforeseen circumstances. This can save you from potential delays and additional costs. Having a good relationship with multiple couriers can also provide more flexibility and options in case of any issues with your primary carrier.
Share Cargo and Delivery Instructions with All Relevant Parties
Clear communication with all parties involved in the shipping process can prevent misunderstandings and delays. Make sure to provide accurate and detailed cargo and delivery instructions to your inland courier, warehouse, customs agent, and any other relevant parties. This will make certain that everyone is on the same page and knows what is expected of them.
Use Laydown Areas
Utilizing designated laydown areas can expedite the loading and unloading process, reducing the risk of demurrage charges. Laydown areas are designated spaces where containers can be temporarily stored before being loaded onto trucks or ships. This allows for more efficient use of space and helps to prevent congestion at ports or warehouses.
Use Shipper-Owned Containers
If you are a shipper, using your own containers can also help streamline the shipping process. This eliminates the need to rent or borrow containers from carriers, which can often lead to delays and additional costs. Additionally, using shipper-owned containers allows you to have more control over the condition of the container, ensuring that your cargo is safe and secure during transport.
Request Special Permissions for Certain Cargo
For specific types of cargo, requesting special permissions can streamline the handling process and avoid delays. For example, if you are shipping hazardous materials or oversized cargo, obtaining the necessary approvals and permits ahead of time can prevent unexpected delays and ensure that your shipment arrives on time.
Use Software
Implementing logistics management software can enhance visibility and coordination, helping to avoid potential delays. With automatic tracking and real-time updates, you can stay informed about the status of your shipment and be proactive in addressing any issues that may arise.
Port call software like Base can also reduce manual entry and eliminate errors, making sure your shipment isn’t delayed due to billing or documentation errors. Base also centralizes all your vendors, which gives you a bird’s-eye view of all vendor spending and activities. This means you can easily compare rates and choose the most efficient and cost-effective option for your shipment from the beginning.
The Role of Statement of Facts (SOFs) in Demurrage
To avoid demurrage charges, it’s important to have a thorough understanding of the SOFs (Statement of Facts) provided by the port.
These documents include key information such as the vessel’s arrival (referred to as “Notice of Readiness Tendered” or “NOR Tendered”) and departure times, the quantity of cargo loaded or discharged, and any delays experienced during cargo operations. Essentially, SOFs serve as a comprehensive log of events, meticulously prepared by port agents, surveyors, terminals, or even the shipowner.
SOFs play a vital role in the demurrage process by providing an accurate and detailed account of port operations. This information is essential for calculating demurrage charges and resolving any disputes that may arise. By ensuring that SOFs are meticulously prepared and accurately reflect all events, stakeholders can better manage and minimize demurrage charges.
Calculating Laytime
Like we mentioned above, laytime refers to the time that a vessel is allowed to stay at the port for loading or unloading. Demurrage charges are imposed when this allotted laytime is exceeded.
Using the detailed events captured from Statements of Facts (SOFs), demurrage analysts and managers can calculate the actual laytime used during the port call. This calculation is particularly important when multiple charterers have cargo on a single ship, as it determines the portion of laytime allocated to each company’s cargo operations.
The calculation of laytime is documented in a laytime statement and involves several key steps:
- Understanding Relevant Clauses in the Charterparty: A thorough review of the charterparty agreement is essential to understand the terms and conditions related to laytime and demurrage.
- Obtaining the SOF from the Vessel’s Agent: The SOF provides a detailed log of all events during the port call, including arrival and departure times, cargo operations, and any delays.
- Determining the Duration of Laytime Allowed: Based on the charterparty, establish the total laytime permitted for the cargo operations.
- Ascertaining the Time of Commencement of Laytime: Identify the exact time when laytime begins, which is typically when the Notice of Readiness (NOR) is tendered.
- Allowing for Interruptions to Laytime as per the Charterparty: Account for any interruptions or pauses in laytime, such as weather delays or port congestion, as specified in the charterparty.
- Ascertaining the Time of Expiry of Laytime: Determine when the laytime period ends, based on the completion of loading or discharge operations.
- Calculating Dispatch or Demurrage Payable: Finally, calculate whether dispatch (a rebate to the charterer for using less laytime) is payable or if demurrage (a penalty for exceeding laytime) is due to the owner.
The laytime can also depend on the terms outlined in the charter party and any agreed-upon conditions. These may include factors such as weather, port congestion, and any other interruptions that can delay the loading or discharge process. It is important for both parties to carefully review and understand these conditions in order to accurately calculate laytime.
Receiving a Demurrage Claim
In the event that laytime is exceeded and demurrage charges are incurred, the carrier will typically issue a demurrage claim to the charterer. This claim will outline the amount of demurrage owed and provide supporting documentation such as time logs and port documents. To support the claim, the following documents are generally required:
- Invoice
- Time Sheet
- Notice of Readiness (NOR)
- Statements of Facts (SOFs)
Additional documentation may be specified in the charterparty or contract. Under the law, there is a 6-year limitation period for demurrage claims. However, riders to the charterparty typically shorten this period, often to a maximum of 60 days. For example, a common clause might state:
Any demurrage claimed under this charter party must be received by charterers in writing with all supporting documents no later than 60 days after completion of discharge. Supporting documents shall include the owner’s signed invoice, notices, and statements of facts from loading and discharging ports, duly signed by shippers/receivers. Any demurrage claim received later than 60 days is considered null and void, and it shall be deemed that the owners have waived all their rights concerning such demurrage claim.
Meeting the deadline is critical. Missing it by even one day will result in the claim being time-barred. Additionally, the claim is likely to fail if any required documents are missing or not submitted on time.
If the demurrage claim is not paid voluntarily, it may be referred to an appropriate arbitral forum according to the arbitration clause of the charter party or commercial contract.
Final Thoughts on Demurrage and Detention Fees
Demurrage and detention charges are significant considerations in the logistics industry, impacting both costs and operational efficiency. Understanding the causes and consequences of these charges is crucial for businesses seeking to avoid them.
To avoid demurrage charges, you should carefully review shipping contracts, pre-clear customs, have alternative land couriers, share cargo and delivery instructions with all relevant parties, utilize laydown areas, use shipper-owned containers, request special permissions for certain cargo, and implement logistics management software like Base. Of course, check out our other blog if you want to learn more about port charges in general.
If you have any questions about Base and how it can help you avoid demurrage and detention fees, please don’t hesitate to reach out to our team. We are dedicated to helping businesses navigate the complex world of logistics and find cost-effective solutions!
Frequently Asked Questions
What is the difference between demurrage fees and port storage charges?
Demurrage fees and port storage charges are both costs incurred by shipping delays, but they apply to different parts of the process. Demurrage charges are levied by the shipping line when a container remains at the port beyond the allotted free time for loading or unloading, compensating for the use of the container and space. Port storage charges, on the other hand, are imposed by the port authority when cargo occupies space at the port beyond the specified laytime, covering the cost of occupying land or storage facilities.
Who pays for demurrage charges?
The responsibility for paying demurrage charges generally falls on the cargo owner or the importer/exporter, depending on the terms agreed upon in the shipping contract. These charges are enforced to ensure a swift turnover of containers and to incentivize the timely clearance and retrieval of cargo, thus minimizing delays and congestion at the port.
How to calculate demurrage charges?
To calculate demurrage charges, you first need to understand the terms specified in your shipping contract, which includes the free time allowed and the daily rate post-free time. Once the free time expires, demurrage charges accumulate for each day the container remains at the port. The calculation involves multiplying the number of days beyond the free period by the agreed daily rate. For instance, if the daily demurrage rate is $100 and the container is overdue by 5 days, the total demurrage charge would be $500.
What are detention charges?
Detention charges, often confused with demurrage, apply to the usage of the container outside the port premises. These charges are imposed when a container is not returned to the shipping line within the agreed timeframe after it has been cleared from the port. Detention fees compensate the shipping line for the extended use of its container, impacting availability for other shipments.
Just like demurrage, detention fees are designed to incentivize the timely return of containers, helping manage the overall flow and availability of equipment for shipping lines. This practice helps ensure that logistical operations adhere to legal driving hours and maintain efficiency in cargo movement.
