One of the most common costs that occur is the detention and demurrage surcharge. It is applicable to everyone privy to the arrangement of transportation in one form or another.
The cost of transportation comes in many shapes and forms. It does not stop with just paying the freight charges and the transportation to and from the port to the final destination.
There are many hidden costs that are so intertwined with logistics operations, that we sometimes overlook and therefore underestimate the implications of those costs.
And yes, many shippers and consignees understand the general gist of detention and demurrage cost. If not, there are many online resources that define detention and demurrage well.
It is not our purpose to breakdown the details of detention and demurrage, but to clarify the different charges and circumstances detention and demurrage occur. Additionally, we also like to draw a clear line between the difference between the detention and demurrage the shippers/consignee are responsible for and the detention and demurrage the shipowner/ship-charterer is responsible for.
Hopefully, with some understanding, you will not be caught off-guard with an unexpected detention and demurrage charges and plan accordingly.
What is Detention, Demurrage and Free Time
Container Demurrage – occurs when, for whatever reason, the cargo is staged at the port over an extended period of time, and was not either taken out of the port terminal or loaded onto the vessel.
Container Detention – Well, not imprisonment. This cost occurs when a container is not in the premise of a terminal or a depot, and the container equipment owner charges a detention fee based on a tariff rate for how many days the container is outside the “control” of the container equipment owner.
Shipping Detention – A claim of detention will arise where a vessel is delayed by the charterer, or any of it’s appointed third party providers, by any means
Shipping Demurrage – In a voyage charter, demurrage is specifically relating to a form of damage claim that shipowners charge to the charterers for damages caused by delay over the agreed laytime.
With that being said, a demurrage charge one of the many forms of penalty charge imposed by shipowners resulting from ship detention.
Lay Time – Laytime is a period of time agreed by the shipowner and charterer where the vessel is made available for cargo unloading/loading.
Free Time – Similar to Lay Time, only that it applies to container shipping where the liners provide a set time stipulated in the contract for shippers or consignee to load/unload the containerized goods.
|Exporter||Charged when container gated out of container depot but yet to gate into the port terminal||Charged when container gated in the terminal but yet to load onto the vessel.|
|Importer||Charged when container gated out of port terminal but yet to gate into the container depot||Charged when the container is staged at the port yard but yet to gate out of the port terminal|
|Shipowner/Ship Charterer||A fee for violating the contracted laytime by any obstacles within the ship charterer’s control||A form of detention fee charged to ship charterer when cargo loading/discharging has exceeded laytime|
Shipper Role – Containerised Cargo
We know that the shipper extends to the export aspect of the logistics chain. The responsibility of the shipper is to collect the container from the allotted container depot, load or stuff the container with goods, prepare the necessary export documents, and “gate-in” the container to the port terminal.
Now the process laid out above requires time, so the liner or container carrier draws out a period of “Free Time” in which all the operations above are taken care of.
For any given reason that the container fails to reach the port terminal within the Free Time, the shipper will be liable for detention charges. One example of such incidence occurring is where the shipper took too long to load the cargo into the container.
For any given reason that the once the container “gates-in” the port terminal, and is not loaded to the vessel within the Free Time, the shipper will be liable for demurrage charges. One example of such incidence occurring is where the shipper did not complete the required documentation for customs to clear the cargo for export.
To elaborate further, detention and demurrage charges are used to recover the cost incurred from the potential revenue loss. The container owner may have a shortage of containers and therefore rejected other export bookings due to that.
Consignee Role – Containerised Cargo
From an importer’s perspective, the responsibility of the consignee is to pay the freight and terminal charges, prepare the documentation necessary for import customs clearance, arrange for transportation from the port terminal to the final destination, unload the cargo, and finally deliver the emptied container to an appointed container depot.
Once again, the concept is similar, these processes take time, and shipping liners provide a period of Free Time, for the consignee to make the necessary arrangements.
When the container is left at the port terminal yard for a period of time exceeding the Free Time, the ocean liner will charge a demurrage fee.
Conversely, when the container has been hauled out of the port terminal yard, but not delivered back to the appointed container depot within the Free Time, the ocean liner will then charge a detention fee.
Detention and demurrage charges in this respect are similar regardless of whether you are an importer or an exporter. So long as if the container is out of port terminal too long, there will be potential detention fee, if a container is in the port terminal too long, there will be a potential demurrage fee.
Shipowner Role – Bulk Cargo
In the logistics of bulk cargos, where the ship is chartered specifically for one voyage, the main contract is between 2 parties, which are the shipowner and the ship charterer.
The implication of that is the cost of delay is not spread out to thousands of cargo owners such as in the case of containerized cargo carriage, and the efficiency and economy of cargo loading/unloading are not averaged to multiple cargo owners. Hence, the cost of delay is not only more profound but more isolated to either one or two parties only.
The shipowner’s primary motive is profit, the more economical the process of loading or discharging is, the more profitable the voyage is to the shipowner.
The shipowner is responsible for: –
- Ready the vessel completely for the operation of loading or discharging of goods;
- Obtain the necessary documents and permits to berth at the port of destination;
- Provide sufficient equipment for the charter to perform cargo loading or discharging; and
- Give the charterer complete control of every part of the ship to facilitate cargo loading or discharging.
If the voyage is completed within an agreed time frame, and all of the above are provided for the ship charterer, there will be no dispute of detention or demurrage charges as the shipping delay from detention can be conclusively be caused by obstacles created by the charterer and only the charterer.
Ship Charterer Role – Bulk Cargo
The ship charterers are, of course, also concerned with profit and need to keep the cost of transportation as low as possible.
Therefore, it is in the charterer’s interest to negotiate for laytime that is sufficient to undergo loading and discharging. It is also in the charterer’s interest to nominate reputable shipowners that have proper seaworthy vessels and competent seafarers.
Since the contracting party of a voyage is between the shipowner and the ship charterer only, the ship charterer is also liable for any third-party logistics service providers it nominates.
From the truck driver, customs clearance agent, freight forwarder, port operator, down to the actual consignee’s loading bay may be the root cause of delay if any one of those parties is operating sub-optimally.
Therefore, a sensible ship charterer will weigh in all the variables at play and make an informed decision on whether to agree to the voyage contract.
Implication of Incoterm
Incoterms are a set of rules and regulations that stipulates where the risk of transportation is transferred from the seller to the buyer. Like a 4×400 relay race, the “risk baton” is transferred at a specific point of transportation to the buyer for them to carry on.
This essentially also means that since all the arrangements of transportation while the “risk baton” is on the shipper/consignee hand, the baton holder has privy over the logistic service provider and the terms of transportation of that underlying cargo.
With that being said, the cost of detention and demurrage solely lies on the entity undertaking the risk of transportation.
For example, for a Delivery Duty Unpaid (DDU) shipment, the exporter is responsible for transporting the goods across borders to the importer’s doorstep. If there are any delays caused by hiccups along with the transport link, the exporter has to bear the cost of detention and demurrage involved.
The stark contrast of DDU shipments is Ex-Work (EXW) shipments, in which case the exporter is only responsible of making the goods available for transportation at the exporter’s location, and the importer picks up the duty of arranging the transportation of said goods.
You’ve guessed it! If there are any detention or demurrage charges incurred, the importer is liable for the charges.
Calculation of Detention and Demurrage
There are only two variables in the calculation of detentions and demurrages, which are the amount of Free Time allotted by the carrier and the total amount of time the shipper/consignee used to perform the load/discharge the cargo and return the container to the carrier/container owner.
From therein, it is just a simple subtraction.
Here is a container import example: –
|Vessel berth at the port||31st January (Friday)|
|Container staged at the port yard||1st February (Saturday)|
|Container Gate-out of port||4th February (Tuesday)|
|Container Returned to Depot||6th February (Friday)|
|Demurrage Free Time||3 days|
|Demurrage Free Time||3 days|
|Demurrage Tariff||4th to 6th day – USD 245 per container|
7th to 9thday – USD 290 per container
|Detention Tariff||4th to 6th day – USD 245 per container|
7th to 9th day – USD 290 per container
To calculate the demurrage charges, we take the day the container is staged at port yard minus the day the container gated-out of the port. For this example, from 1st February to 4th February including the first-day calculation is 4 days. According to the tariff, the shipping carrier is entitled to a USD 245 demurrage fee.
To calculate the detention charges, we take the difference between the time the container gate-out of port (4th February) to the time the container is returned to the depot (7th February). Including the first day to calculation, the total time the container out of the “control” of the liner is 3 days, there is no detention charges according to the tariff because it did not exceed the allotted Free Time.
In most cases, the specific time at which the container is either staged at the port yard, gated out from terminal or returned to the depot is not considered
It could be the case that the container is staged at the port yard at 11:59 pm as clocked by the port terminal, in which case you are left with 1 minute of 1 Free Time allotted. Tough luck.
Certain carriers also practice merging the detention and demurrage charges together, to which it would sometimes be called “Combined Free Day”. This is more desirable as there is less cut off time to meet and therefore more leeway.
For example, the combined Free Detention and Demurrage (3+3) time amounts to 6 days free time for the shipper/consignee, hence they need to make sure that the container, once staged at the port yard, is returned to the depot in 6 days.
- Laytime and Demurrage (6th Edition), John Schofield