Demurrage is a charge that is incurred when cargo owners, shippers, or consignees do not adhere to the rules around ‘free time’ that are set out in the charter agreement.
Free time is the term used in shipping contracts to describe the grace period for loading or unloading cargo at a port, terminal, or designated location without extra fees (usually two to seven days). If it takes longer than the specified free time to move the cargo, demurrage fees will start to accrue, either on an hourly or daily basis.
This article looks at what a demurrage charge is, how it is calculated, and who is responsible for paying it.
What does demurrage mean?
A common concept in international shipping, demurrage is a fee that must be paid when cargo remains at a port or terminal for longer than the agreed free time period specified in a shipping contract. Shipping companies need to move goods efficiently and at speed. These charges are therefore aimed at encouraging the prompt loading and unloading of cargo and the quick return of containers in order to keep goods flowing through ports smoothly.
It is important to note there is a difference between demurrage and detention charges: demurrage is a penalty for leaving containers full of cargo sitting in port, whereas detention fees are charged for returning empty containers late.
What is a demurrage charge?
A demurrage charge will differ according to the terms and conditions of individual shipping contracts or a shipment’s Bill of Lading. These charges are usually incurred as the result of:
- A delay in picking up cargo from the port/terminal causing it to be there beyond the permitted free time.
- Cargo being unavailable for transportation as it failed to clear customs, or there is missing documentation.
- Port/terminal congestion or other unforeseen circumstances (e.g. strikes) that are beyond the shipper’s control.
Who is responsible for demurrage charges?
While the party responsible for demurrage charges can vary, it is usually whoever is responsible for the cargo (i.e. the importer or exporter). The terms and conditions of a shipping contract will specify who is responsible for the demurrage charges for a particular cargo. It is important for all parties involved to understand and agree upon the terms in the contract to avoid disputes and/or unexpected costs.
Typically, if the cargo is not collected or delivered within the agreed time frame (i.e. the grace period), the party that owns the cargo will have to pay the demurrage charges. However, a contract could state that another party is responsible in certain circumstances, for example the freight forwarding company must pay the charges if they are responsible for causing the delay by not having prepared the customs documentation correctly.
How is demurrage calculated?
Demurrage is calculated using the rates set out in the contract between the shipper and carrier/terminal operator. Demurrage is typically calculated based on:
- Time - demurrage charges will start accruing once free time expires. The total cost will depend on the number of extra hours or days your cargo occupies the port beyond the allotted time.
- Rate - the contract will state the daily or hourly demurrage rates. These vary depending on the port, type of cargo, and other specific terms.
- Cargo type - the demurrage rate can vary according to the type of cargo. For example, cargoes that need special handling or specific storage conditions are likely to incur higher demurrage charges.
- Port policies - each port or terminal can set its own policies regarding free time, demurrage rates etc. so final demurrage calculations have to take this into account.
There can also be custom demurrage terms which are different to the standard terms and tailored to the specific needs of one or more of the parties involved. These can also affect how demurrage is calculated.
Things to consider to avoid demurrage and detention charges
If you are a company wondering how to avoid demurrage and detention charges, you could consider the following:
- Plan - effective planning ensures you complete any loading or unloading within the allocated free time period. It’s also good practice to have contingency plans in place to cope with delays caused by unforeseen circumstances such as bad weather or strikes.
- Work with local partners - using local freight forwarding agents who are familiar with the procedures at the specific port you’re using helps things run smoothly and ensures you avoid unexpected demurrage and detention charges.
- Communicate - regular and effective communication between all involved parties (e.g. customs authorities, ) is key so that everyone understands their responsibilities and is aware of any schedules and deadlines.
- Documentation - be sure to have all relevant documentation completed accurately and available to hand. Delays can occur if the necessary paperwork is not in order.
- Prioritise customs - ensure you understand all relevant requirements and processes for customs clearance and that your customs documentation is readily available in order to avoid demurrage and detention charges.
- Use monitoring systems - keep track of your cargo’s status and get alerted to any potential delays.
- Negotiate - you may be able to negotiate more favourable contract terms such as more demurrage-free days, or request an extension of the free time if you anticipate a delay.
- Be flexible - choose flexible shipping schedules that are in line with your operational capabilities to avoid overbooking or trying to move cargo too quickly.
- Efficient handling and container returns - optimising loading and unloading processes can minimise turnaround time and help avoid demurrage charges. Similarly, the prompt return of empty containers will help to avoid detention charges.
- Review contracts - different ports and carriers have different demurrage and detention charges, rules, and terms and conditions so it’s crucial to understand the specific details of the contract for each individual shipment.
- Use laydown areas - you can avoid demurrage charges by using off-site laydown areas where possible.
Demurrage and detention charges can end up being a significant cost for those involved in international shipping. The above factors are therefore really important to help manage and minimise these expenses.