Demurrage

What is Demurrage?

Demurrage

To understand demurrage, it is first important to understand the background and rationale for it. The world of shipping works on the basis of strict rules and resultant penalties for failure to abide by such defined parameters.

What is demurrage?

Demurrage is a fine or charge that is levied by a courier or freight provider if they do not take their goods away from a port or terminal within a predefined amount of time. Often importers may store goods or containers for a number of ‘free’ days, after which charges are applied.

As most ports and terminals are hubs of activity moving high volumes of goods every day, stagnant containers taking up space can affect the efficiency of their operations. Demurrage charges, which can be thought of as a storage fee, are a way of incentivizing shippers to move their goods out as quickly as possible (if importing) or to avoid bringing them to the port too early (if exporting). 

Demurrage is often confused with another term, detention. Detention is a charge that can be levied by a shipping transport provider for not returning an empty container to a port or container yard after an agreed time. These generally only come into play on carrier-owned containers (COC) and can be thought of as a little bit like a late fee at the library if you forgot to return a borrowed book on time.

 


Detention versus Demurrage

The following visuals help to demonstrate where detention and demurrage come into play.

When exporting, demurrage is relevant for the time between a container first arriving at the port and when it is loaded on board a vessel. When importing, it becomes relevant from the time a container is discharged from the vessel to the time when that container leaves the port.

Detention, on the exporting end, is relevant between the time when an empty container is first collected from the shipper and when the filled container is brought to the port. When importing, detention is relevant between the time when the full container is moved outside of the port and the time that the emptied container is returned to the carrier.

It is important to note that detention and demurrage are only ‘relevant’ between these respective events, they are not necessarily charged. This is because carriers include a certain amount of ‘free time’ within their shipping contracts. It is only after these free days are exceeded that detention and demurrage will be chargeable.

This diagram depicts demurrage and detention from the exporting side of the shipment.

 

This diagram depicts the charges on the importing end.

We’ve put together an in-depth guide on the difference between detention and demurrage here.

How to calculate demurrage 

The exact demurrage charges will vary depending on many factors such as the port being used and the exact terms negotiated into a shipping contract. In general, however, calculating the cost can be done with a few key variables. Most notably are the number of free days and the cost per container per day thereafter. On some contracts, the cost per day may begin to increase each day after a certain amount of time.

To calculate the cost of demurrage on a particular shipment, check out this demurrage and detention calculator. Simply enter the details of your shipment, the estimated discharge date, and the estimated truck gate-out day, and the calculator will let you know what your charges should be.

An Example of Demurrage Charges 

To gain a deeper understanding of the cost of demurrage, let’s look at an example. Suppose that you negotiated the following demurrage terms on your contract: 3 free days, the following 7 days at $75/container/day, and then $300/container/day thereafter.

The following table shows how these charges would be applied to a shipment that is left uncollected for 4 days and how quickly the charges can add up, especially for those with multiple containers.

How to reduce detention and demurrage fees?

Detention and demurrage charges can add up fast and seriously cut into the bottom line. Here are 5 steps you can follow to reduce the risk of encountering these charges.

1. Prepare in Advance

You might remember teachers telling you that cramming the night before for a big test just isn’t going to cut it. The same is true for shipping. If you leave it all to the last minute, you are opening yourself up to a whole host of potential delays, problems, and extra fees. 

2. Contingency Plan

You planned ahead and had a trucking company lined up to collect your containers from the port and deliver them to your warehouse. Great! Well until the trucking company calls you up the morning of and lets you know that the driver called in sick today and that they won’t be able to get another driver to grab your things for two more weeks. In situations like this, you’ll wish you had a contingency plan in place.

3. Educate Yourself

Is there a severe weather system on the horizon that could delay your shipment? Do you know what the standard operating procedure is for this particular country or port of entry? What is the standard number of demurrage-free days? If you don’t know the answers to these questions, you won’t be in any position to negotiate fair terms, which leads us to…

4. Negotiate like a Ninja

Demurrage and detention fees are determined in your individual contract. With the right conditions and the right amount of negotiating clout, you might be able to get yourself a few extra free days and save some serious cash.

5. Consider using SOCs rather than COCs

Using carrier-owned containers (COC) is a convenient way to transport shipments of goods around the world. However, they open you up to the possibility of extra charges if the exact terms are not carried out. Shipper-owned containers (SOC), while requiring an initial investment in the container itself, can reduce long-term additional charges and make budgeting easier. You don’t have to worry about paying late fees when you just buy the book.

Demurrage free time

It is important to know what the free time or available time (prior to demurrage charges) is possible for different cargo types. As an example, different charges will apply for dry cargo or reefer cargo.

Demurrage Charges – When does import demurrage finish?

This very much depends on the arrangements for haulage. As an example, carrier haulage will end on the day of delivery and not when the container is removed from the terminal. The opposite is true for merchant haulage; as it is the day that the container is removed from the terminal. Both of the above days are billable.

Where do we see demurrage?

We most often see demurrage where a charterer pays the shipowner for extra or unforeseen use of the vessel. The main reason for demurrage is to have a type of liquidated damages which amounts to a penalty payment when specified terms are breached under the charter party agreement (overarching contract between parties).

What is Laytime?

We see the word laytime used a lot in the shipping market and it means the amount of time that is permitted in a voyage charter for any loading and unloading of cargo. In the event that the time exceeds the allotted laytime, demurrage is incurred. The concept of laydays has the aim of setting out when a vessel is required to present itself to the charterer and the timing requirements.

Is demurrage the same as despatch?

Despatch is the complete opposite to demurrage. It is the fees which are paid by the owner of a vessel to the charterer. The costs are specified in the voyage charter and these costs are payable when the ship is loaded or unloaded in a time which is less than permitted in the charter party. 

A simple way to think of it is demurrage is a penalty charge for exceeding allotted time, despatch is payment received for using less time than allotted. 

Why is demurrage important?

In short, vessel chartering is fundamental to the shipping market. This is the time that a charterer holds a vessel in possession after the point that they are permitted to load or unload cargo; being known as the laytime. The charterer pays penalty (demurrage) charges for any extra period.

Wharfage

According to Flexport, wharfage is defined as the fee charged by ocean carriers to cover the port authority’s cost of using a wharf to unload cargo from a vessel. Often, the wharfage charge is based on the vessel tonnage that is distributed among the customers who have their cargo in the vessel.

The charge is determined by the port authorities to cover their costs of providing facilities and services and is then allocated along to carriers and ultimately shippers.

As you can see, wharfage is not quite the same as demurrage. Wharfage is the general fee for using many of the port’s facilities while demurrage is a more specific fee for leaving containers in the port area for a longer period of time.

Testimonials

An example of this is when a charter agreement specifies that the time for loading is a 24 hour specific time slot. However, due to the ship being understaffed and loading being delayed by weather and other unforeseen events it means that the loading takes 40 hours. This would mean that the shipper is liable to pay penalty costs in relation to the shipment.

– John B, Metals Trader.

Metals Distributor

We were new to the import and export trade; especially trade finance. However, we had substantial orders and were importing machinery to Vietnam from Turkey. Trade Finance Global along with their partners helped us to understand when goods could be financed; what purchase orders were viable, the delivery mechanisms along with any demurrage penalties or other potential unforeseen costs.


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About the Author

Trade Finance Global (TFG) assists companies with raising debt finance. While we can access many traditional forms of finance, we specialise in alternative finance and complex funding solutions related to international trade. We help companies to raise finance in ways that is sometimes out of reach for mainstream lenders.

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