In the world of international shipping, time is of the essence. Every delay can translate to significant costs, and that's where the terms demurrage and detention come into play. But what exactly do these terms mean, and why are they crucial for both importers and exporters?
When goods are shipped, they don't just magically arrive at their destination and disappear. The containers used to transport the goods need to be returned within a certain timeframe. If delays occur, they can result in additional charges, which is where demurrage and detention come in. But what is the difference between demurrage and detention, and how do they impact the supply chain?
Both detention and demurrage refer to charges imposed for the use of shipping containers or other equipment.
These charges are imposed when containers are used beyond the allotted free time provided by the carrier/ terminal operator.
However, the difference between the two charges depends on the location of the container at the time of delay.
What are Detention and Demurrage Charges?
The difference between detention charges and demurrage charges lies in the very definition:
What are Detention charges in Shipping?
Detention charges are incurred when a shipping container or equipment is retained by the consignee or the consignee's agent for longer than the allowed free time.
The purpose of the free time is to allow the consignee to unload the container or equipment and return it to the carrier within a specified timeframe.
What are Demurrage charges in Shipping?
Demurrage pertains to charges imposed when a shipping container or equipment is retained by the shipper or the shipper's agent at the port/ terminal beyond the allocated free time.
Like detention, demurrage charges are levied to encourage the timely return of containers and equipment to the carrier after unloading.
Both detention and demurrage charges are intended to incentivize the efficient use of shipping containers and equipment to ensure smooth flow of cargo.
The specific terms and conditions regarding detention and demurrage, including the length of the free time and the applicable charges, are typically outlined in the contracts between the parties involved (e.g., shippers, consignor and consignees, carriers, and terminal operators) or in the standard terms and conditions of the carrier operator.
What are Free Days for Demurrage Charges?
To facilitate container turnover, shippers must return carrier-owned containers (COCs) within a specified timeframe known as "free days." These free days indicate the number of days during which shippers can utilize the container without incurring any charges.
In traditional shipping practices, the typical range for free days is between 3 to 5 days after the container has been unloaded from the vessel.
If shippers fail to return the containers within the designated free days, shipping lines can impose late fees.
How are Detention and Demurrage Charges Calculated?
The calculation of detention and demurrage charges can vary depending on the specific terms and conditions set by the carrier operator.
This is how these charges are generally calculated:
Detention Charges
1. Time Calculation: The detention period usually begins after the container or equipment is made available for pick-up or delivery. Once the free time expires, detention charges start accruing.
2. Daily Rate: The carrier sets a daily detention rate for each container or equipment type. This rate can vary based on factors such as container size, equipment type, and the policies of the carrier.
The daily rate is multiplied by the number of days beyond the free time to calculate the detention charges. Detention charges may be a slightly lower rate than demurrage, around $50 to $100 per container.
Demurrage Charges
1. Port/terminal Free Time: The demurrage charges are applied when containers or equipment are not returned within the specified free time allotted by the port.
This free time is typically shorter than the total transit time from the vessel's arrival to its departure.
2. Daily Rate: Demurrage charges are calculated using a daily rate set by the carrier for each container/ equipment type.
The daily rate is multiplied by the number of days beyond the free time. Demurrage charges may range between $50 to $250 per container.
Who Pays Demurrage Charges?
The owner of containers, which is often the shipper, is responsible for paying demurrage.
These charges are often imposed by the authority that owns the land or space where containers are stored, typically the port.
Reasons for Demurrage Charges
The specific reasons and circumstances for demurrage charges can vary depending on the terms and conditions set by the carrier.
It can also depend on the individual contractual agreements between the parties involved.
Some common reasons are:
- Container storage beyond allotted free time.
- Delays in providing or completing necessary documentation.
- Inefficient cargo handling practices.
- Delays due to release of cargo at destination.
- Shortages of available containers or equipment.
- Damaged or overweight containers.
- Delays due to customs clearance or cargo inspection.
- Delays due to the receiver being unreachable.
How to Reduce Demurrage Charges?
To reduce demurrage charges, try implementing the following measures:
Plan and coordinate logistics operations with all parties (carrier, vendor, third-party provider) in advance to ensure smooth cargo flow.
Ensure all required shipping documentation, including customs paperwork, is prepared accurately and submitted promptly.
Have a backup plan for the carrier’s driver in case of port congestion.
Large shippers can also ask for extended free time at certain ports (prominent shipper status starts at a volume of 800 containers a year).
Consider hiring a customs agent or a freight broker to avoid documentation-related issues.
Manage and track every shipment/cargo as it moves through facilities.
Example of Demurrage Charges
Let's consider a consignee who received a shipping container at a port in the United States.
The consignee is given a free time of five days to unload the container, complete the necessary customs procedures, and return the container to the carrier for onward transportation.
If the consignee exceeds the five-day free time and retains the container for an additional seven days, demurrage charges will be applied for the extra days.
Suppose the demurrage rate set by the port is $100 per day for the specific container size being used. In this case, the demurrage charges would be calculated as follows:
7 days (extra days beyond the free time) x $100 (daily demurrage rate) = $700 in demurrage charges.
Therefore, the consignee would be responsible for paying $700 as demurrage charges for holding the container for seven additional days.
Reasons for Detention Charges
Detention charges are imposed for various reasons, some of which are:
- Container storage beyond allotted free time.
- Delays in arranging transportation services.
- Failure to return equipment within the specified free time.
- Delays due to incorrect or late submissions of documentation
- Miscommunication happens between the supplier, the trucker and the logistics partner.
Example of Detention Charges
Let’s assume that a consignee receives a shipping container at their facility. The carrier provides a free time of seven days for unloading the container and returning it to the carrier.
The consignee exceeds the seven-day free time and retains the container for an additional ten days due to miscommunication with the trucker and the logistics partner.
In this case, detention charges will be applied for the extra days.
The detention rate set by the carrier at this port is $75 per day for the specific container size being used. The charges then would be calculated as follows:
10 days (extra detention days) x $75 (daily detention rate) = $750 in detention charges.
The consignee is responsible for paying $750 as detention charges for holding the container for ten additional days.
How to Avoid Paying Detention Charges?
To avoid paying detention charges in the United States, here are some strategies you can consider:
Use proper packaging - palletize and shrink-wrap your freight.
Maintain open and clear communication with carriers, terminal operators, and other relevant parties.
Coordinate with suppliers, carriers, and other stakeholders involved in the transportation process to minimize delays.
Track the container's progress, plan for unloading, customs clearance, and return within the specified timeframe to avoid exceeding the free time limit.
Keep accurate records of container movements, pickup and delivery dates, and any relevant communications.
What are Demurrage Charges vs Detention Charges vs Per Diem Charges?
Demurrage, detention and per diem are terms used to describe different types of charges related to the use of shipping containers or equipment.
Demurrage charges are fees imposed on customers when they exceed the allotted free time for using equipment within a terminal.
Detention charges occur when customers exceed the free time for using equipment, typically outside the terminal.
Whereas per diem charges, often used interchangeably with detention, is a fixed-rate detention fee charged per container per day until the equipment is returned to the port.
These terms differentiate between charges incurred inside the terminal (demurrage) and outside the terminal (detention), but per diem essentially refers to the same concept as detention charges.
