Per Diem & Demurrage Fees Are Avoidable
While per diem and demurrage rates can look like insignificant daily charges, they can quickly accrue to huge expenses. For example, a single container held up for only five extra days at a rate of $150 per day equals $750. Now multiply that by dozens or hundreds of containers, and the figures are mind-boggling.
The latest report found that U.S. importers paid over $1.5 billion in demurrage and per diem fees in a single year. For small- and mid-size businesses, those fees can eat into profit margins, disrupt cash flow, and create tensions with customers and partners. Understanding how those fees operate and how to circumvent them can be a godsend for operating efficiency and cost management.
What Is Per Diem and Demurrage Fee?
To proceed with the planning on how to reduce these fees, there is a need first to understand what per diem and demurrage fees are.
Per diem is the fees that shipping companies or railroads incur daily when a container, chassis, or other equipment is held after free time has expired. For example, if a shipper is given seven free days but holds a container for ten days, they are charged per diem for the additional three days. They are charged anywhere from $50 to $200 per day, depending upon the carrier and equipment.
Demurrage fees are charges imposed by terminals or ports for failure to pick up or return the shipment within the prescribed time. Suppose the cargo is at the port for five days while the free period is three days. The demurrage fee will be incurred by the shipper for the extra two days. Demurrage fees commonly vary between $75 and $300 per day, depending on the type of cargo and the port.
Both fees are intended to reduce the effective movement of equipment and goods, but with poor management, they have the potential to create a significant cost burden.
Who Has To Pay Demurrage Fees?
Demurrage is generally charged to the initiating party of shipment, normally the consignee or importer. Inability to pick up cargo within the free time offered by the terminal or port leaves the consignee with charges. Third-party logistics providers, freight forwarders, in extraordinary situations, may transact with carriers at terms, but once again, the importer shall bear the burden unless agreed in the transportation contract specifically.
How to Calculate Demurrage and How Much Is It?
Demurrage fees are calculated based on the number of days the cargo remains at the port beyond the allowed free time. The formula is:
(Total Days at Port – Free Time) × Daily Demurrage Rate = Total Demurrage Cost
For example, if a container stays at the port for six days and the free time is three days, the demurrage fee is calculated as follows:
(6 days – 3 free days) × $150 per day = $450
The exact cost varies by port, carrier, and cargo type, with rates typically ranging from $75 to $300 per day. High-demand ports or specialized goods may incur higher fees.
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Common Mistakes That Result in Fees
Even logistics professionals get caught up in expensive traps. Discovering and fixing the following most frequent mistakes can easily eliminate excessive charges.
One of the biggest myths is assuming free time is standard. In reality, free time allowances can differ greatly among carriers, ports, and commodity types. While some carriers grant seven days free time and others provide ten, unless each shipment is specifically checked, businesses may unknowingly exceed their allowable time, leading them to have to pay exorbitant charges.
Underestimation of port bottlenecks is another frequent mistake. Major ports such as Los Angeles and Rotterdam often get congested, particularly during peak seasons. In not accounting for such potential clogs, there is the danger of spurious demurrage fees, which could have been avoided with efficient planning and scheduling.
Shortages of equipment play a major role in the accumulation of fees, as well. Lack of available trucks or chassis can delay pickup and return, even if the freight itself is ready. Prebooking required equipment well ahead of time can prevent companies from paying unnecessary per diem fees.
Also, ignoring external factors such as weather and public holidays can disrupt shipping schedules. A snowstorm in Chicago or a public holiday in China can bring unexpected delays, leading to additional demurrage or per diem fees. Planning for adjustments for these potential disruptions is important.
So…
Per diem and demurrage costs shouldn’t be a cost of doing business. Simply, you’ll need proper planning of logistics operations, documentation simplification, and use of technology. That will enable you to significantly reduce these costs. Regular review of shipping operations, identifying common chokepoints, and taking preemptive actions can go a long way to eliminate wasteful expenses.
Why Polo 4PL?
Just to stop overpaying! At Polo 4PL, we’ll help you cut costs, avoid per diem & demurrage fees, and streamline your supply chain with expert planning, real-time tracking, and tailored solutions. Move smarter, not costlier.
Focus on growth, we’ll handle the logistics.