When shipping goods across oceans, various factors can cause delays or mismatches.
From the moment you book a shipment until it’s time to transfer it to the dock, different production bottlenecks, inventory discrepancies, or breakdowns in upstream communications force shippers to hand over less cargo than initially planned.
The result? Unused cargo space that still needs to be paid for. In other words, dead freight costs.
What Is Dead Freight – Meaning
Dead freight in shipping is a logistics term that describes the charge a shipper pays to the carrier or shipping line when they do not use the entire cargo space they have booked or when the shipment never arrives for loading. Dead freight penalties apply in agreements charged per quantity carried.
The purpose of dead freight fees is to compensate the transportation provider for the allocated freight space they expected to fill on a ship or aircraft, and the revenue they lost.
However, in lump-sum freight agreements, where the shipper is charged up to a stated limit irrespective of cargo quantity, dead freight fees are not applicable.
What Is Lump Sum Freight?
Lump-sum freight is a contractual term whereby the shipper is not obliged to provide a full cargo. Instead, they pay a fixed amount regardless of the loaded quantity. This arrangement allows the charterer the flexibility to load as little or as much cargo as they require, up to a pre-defined quantity, eliminating the issue of dead freight penalties.
But in cases where freight rates are based on agreed-upon quantities, if the entire amount fails to load, the vessel ends up traveling with unutilized capacity. This creates dead space that should be compensated.
Why Does Dead Space Occur?
Dead space, leading to dead freight charges, can happen for various reasons that fall on the shipper:
- Failure to load the full agreed quantity, due to non-conforming cargo, for instance.
- Non-contractual booking cancellations or no-shows by the shipper.
- The cargo provided is less than the agreed-upon minimum or capacity.
- Cargo that cannot be loaded, due to miscalculated weights or anything else.
- Poorly palletized cargo that cannot be safely stacked.
- Deficient cargo planning that may, for example, result in insufficient loading equipment at the terminal.
- Unexpected events, such as production issues or last-minute cargo damage.
In situations like these, shipping lines will typically request reimbursement.
Who Pays Dead Freight?
When dead freight occurs under a shipping agreement, the customer (shipper or charterer) who reserved the space is responsible for compensating the shipping line or carrier for lost revenue and costs incurred by making that space available.
Shipowner’s Right To Dead Freight
The shipowner’s right to dead freight charges is typically established by specific dead freight clauses in the charter party agreement. This right stems from the charterer’s fundamental obligation to provide cargo for loading.
On the flip side, if a carrier fails to provide the agreed-upon capacity for a shipment, and depending on the cause and the freight contract, the shipper may also have the right to claim compensation for lost revenue or cargo damage resulting from delays.
What Is The Rate Of Dead Freight?
The rate at which dead freight is calculated can vary depending on the charter party – i.e., contract agreement.
Liquidated Damage Charges
Some standard forms, like ASBATANKVOY (a standard charter party used in the tanker sector) or ASBAGASVO (a dedicated gas voyage charter party), explicitly provide a specific rate for dead freight.
In such cases, the dead freight claim is considered liquidated damages. It is thus payable at this fixed rate, regardless of any savings or expenses. In other words, without taking into consideration whether the shipowner ends up spending less money or loses profit because less cargo was loaded.
Unliquidated Damage Charges
Other standard charter party forms, like GENCON (a general purpose agreement for the services of a ship in exchange for freight), do not specify a dead freight rate.
Here, the claim is unliquidated and is typically calculated based on the freight that would have been earned on the short-loaded cargo, minus any extra expenses the owner would have incurred in carrying that cargo.
How Is Dead Freight Calculated?
To calculate dead freight, you need to determine the difference between the agreed-upon quantity or space and the quantity or space actually utilized. Then, you’ll have to multiply this difference by the agreed freight rate.
Note that if the charter party specifies the cargo quantity as a range (e.g., 40,000 MT – 45,000 MT at charterer’s option), dead freight calculation is based on the minimum quantity contractually required.
Dead Freight Calculation Formula
Dead Freight Costs = Unused Cargo Capacity x Freight Rate Per Unit
How To Avoid Dead Freight Charges
As a shipper, you’ll need to implement strategies to minimize or avoid dead space in shipping and subsequent charges. Here are some things you can do:
- Consolidate shipments with others to maximize space utilization.
- Optimize your shipment palletizing and packing to avoid stacking and safety issues.
- Book a Full Container Load (FCL) shipment if the volume allows.
- Work with an expert freight forwarder who can better accommodate smaller shipments and favorable shipping terms regarding possible volume changes.
- Ensure accurate cargo volume estimation through proper planning and forecasting.
- Establish contingency plans for unforeseen delays or changes.
Today’s technology can help you accurately forecast cargo volumes and demand. But the human factor is also crucial. That’s why you’ll need to maintain clear communication with freight partners about volumes and timelines, and be ready to negotiate if things don’t go as planned.
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