What is Demurrage and Detention in Shipping?

12 January 2021 By Hari Menon

What is Demurrage Charges?

When importing goods, demurrage is the cost to the consignee for the delay in the pick-up of such goods from the port after unloading from the vessel. The demurrage charges vary from carrier to carrier, between ports, and the type of equipment that is used i.e., dry container, refrigerated container, etc. In export, instances of a container being delivered to the ocean carrier but remaining in port for an extended period due to various reasons cannot be ruled out. These containers may even miss the sailing. In such cases also, demurrage may apply. Demurrage charges are fixed per container, per day.

Demurrage is the recovery of costs incurred for delay of the container within the port, charged by the shipping company or the party that has leased the container.

Container leasing is a booming 5.5 billion Dollar industry that leases cargo containers to their customers and manages a fleet of containers for them.

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What are Detention Charges?

Once a container that is discharged from the vessel is taken from the port to the customer’s premises and offloaded, the empty container (also referred to as empties) has to be returned to the port from where it has been picked up or to the empty container depot. If the consignee (customer) delays in returning the empty container as agreed, after a certain number of days, the carrier will start charging the consignee. These are called detention charges. Like demurrage, it is also charged per container, per day.

When an empty container is taken to the consignee’s yard for stuffing (loading of cargo for export), the loading has to be completed on time and the loaded container returned to port. Besides missing the sailing, inordinate delays will result in detention charges being applied by the ocean carrier. Ports, as well as ocean carriers, have various price mechanisms that are put in place for their successful daily operations and to cover their costs.

Demurrage can also be viewed as one such price mechanism to prevent congestion at ports by encouraging customers to move their containers within a specified time limit. Detention, on the other hand, deters customers from keeping equipment with them for periods longer than the prescribed limit. Delays in returning empty containers prevent the owner of the equipment from leasing it out to other customers.

Demurrage and Detention Charges Free Days

Demurrage and detention charges are different between ports and carriers. Generally, free days are allowed as follows:

  • For a 20 or 40 feet dry container demurrage usually kicks in from day 6. In other words, the free time during which it is allowed to remain inside the port after discharge is 5 days here.

  • More the number of days a container remains in port, the more demurrage that has to be paid to the carrier. 6-10 days will be charged at a rate per day/per container, 11-15 days at a higher rate, and from day 16 onward it is usually the maximum rate per day/container.

  • Demurrage charges for refrigerated or reefer containers are more than dry containers. The first 3 days are free. The rates then go up in slabs from 4-8 days, 9-13 days, and 14 days onward – with the maximum rate.

  • Detention charges also start mostly after the free days as in demurrage.

  • Demurrage and detention charges, if not planned and handled correctly, can add up to the cost of clearing goods for the consignee.

Combined Demurrage and Detention or Merged D&D

Another common method of charging the customer for not picking up the discharged cargo or returning the destuffed containers on time is through the combined demurrage and detention charges. Also referred to as merged D&D, it gives a flat number of days to clear the container after discharge from the vessel and return the empty container to the port or container depot, as agreed. In this case, demurrage and detention charges are not calculated separately. To cite an example, if the consignee gets 12 days merged D&D, he has to clear the goods, take them to his warehouse, offload the cargo, and return the empty to the carrier within 12 days.

Do Demurrage and Detention Apply to Less-than-Container Loads (LCL)?

An LCL shipment usually comes as consolidation with other cargo belonging to other customers. Since the full container is not used by a single customer, demurrage or detention does not apply to the FCL (Full Container Load). However, the carrier may charge the customer for the space occupied by his cargo in the container freight station (CFS) beyond a certain number of days without clearing. A CFS is a yard or warehouse within the port where such LCL cargo is consolidated (prior to export from various consignors) with other export cargo or deconsolidated (after the discharge of container from the vessel) for distribution to the various consignees. Cargo consolidators or groupage operators have their own or leased warehouses and with an efficient clearance team, they are able to avoid such charges.

Time Study and Turnaround Timee3

How does time study and turnaround time relate to ocean vessels, containers, and trucks that transport the cargo? What is time study and turnaround time and how does it help to control demurrage and detention charges?

Time study is the observation of the different components of a job process, recording of the time taken of each, and the detailed analysis of each of these components. Turnaround time is the commonly used term for the time taken between arrival and departure of equipment. In its simplest meaning, it is the time taken to complete a task. When an organization has abnormally high demurrage and detention charges, time study and analysis of turnaround time helps to understand the reasons behind delays in taking delivery of container loads and returning of the empties. The Average Turnaround Time or ATT of a process is a valuable measure in the hands of a logistician who can plan or look at ways of reducing it and thereby prevent or reduce charges that are incurred as a result of delays.

Increased turnaround time can result in increased demurrage and detention charges.

  • For a truck, turnaround time is the time from gate-in (the time recorded when the truck enters the port terminal or warehouse) to gate-out (the time is shown when the truck exits the port terminal or warehouse). This time would therefore include the time taken for loading or unloading of cargo, customs inspection, and documentation of the cargo.

  • For an ocean vessel, this is the time taken between its entry into the port and departure. This time taken includes discharge or intake of cargo, customs inspection and documentation, bunkering, and routine maintenance of the ship if any.

  • For the container load, it is the time taken when it exits the port and when it is returned to the port or container depot after destuffing. Whether the container has to be returned to the port or the designated container depot is decided by the ocean carrier and informed to the customer in advance.

In all these cases a shorter turnaround time is always desirable. Shorter turnaround time means lesser costs associated with storage, be it the cargo or the empty equipment. In a busy environment, a high turnaround time from one party can cause a chain reaction leading to congestion at the port or warehouse or even traffic build-up. Delays invariably lead to demurrage or detention charges to the customer.

Key Performance Indicators and Root Cause Analysis

Charges incurred on account of demurrage and detention eat into an organization’s overall profit. Key Performance Indicators (KPI) and Root Cause Analysis (RCA) are useful tools to monitor and control such charges. KPI are measures that indicate the performance of various activities within an organization. These are measurable values used to compare past and present performance. Root Cause Analysis (RCA) is another tool that helps to find out the key reasons causing specific problems within an organization and ways to avoid them. While KPI helps to compare and understand trends, the RCA helps to understand the cause of problems and ways to remedy them. KPI related to demurrage and detention charges help to understand the trend of these within an organization or department. Negative trends can be arrested to a great extent through the study of its RCA and taking preventive measures.

Can demurrage and detention charges be reduced or avoided?

The answer to this is, yes. Proper planning of equipment, labour, transport, and administrative functions go a long way in reducing or even avoiding these charges. Demurrage and detention charges are avoidable though they may be unavoidable in certain circumstances. Container turnaround time is critical if businesses are to avoid or reduce these charges.

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Customs clearance, for example, may take time and delays can result in the customer having to pay demurrage. Companies can plan by factoring in the time taken on account of clearance delays. Planning is equally important in avoiding detention charges. Ensure that storage space to receive the cargo, labour, and equipment are ready before the container reaches the consignee’s warehouse or yard. Having an effective communication network with contacts at the port, clearing agents, etc. is also crucial. Though not common, consignees can try and negotiate demurrage with the ocean carrier. Depending on the regularity and volume of the business involved, it is possible that the ocean carrier may allow the customer more number of free days for the cargo at the port.

Global Demurrage and Detention Charges

As far as demurrage and detention charges are concerned, the US ports are reportedly the most expensive. Demurrage rates in the US ports vary between USD 165 – USD 275 for a 20 feet container (TEU). European ports charge much less followed by ports of the Middle East, Asia, and China. Demurrage and detention charges are not the only charges that are incurred by the consignee on the container. When the port storage area or the container yard (CY) is used for storing goods temporarily, there is a charge associated with that from the port. This is known as the port storage charge. Storage charge is calculated from the time the goods enter the storage area till it exits the area. Port dues cover the operational and maintenance costs of ports. These costs are passed on to ocean carriers and even boats that make use of the port facilities. Though there are several fees charged by ports to its users the main fees are the tonnage dues, cargo dues, and port dues.

Tonnage dues are charged in relation to the weight of the carrier or vessel. Each ship is bound to carry a tonnage certificate issued by the relevant authority. This certificate shows the gross tonnage and the net tonnage of the vessel in accordance with the ICTM or International Convention of Tonnage for Measurement of Ships (1969). The International Convention of Tonnage for Measurement of Ships (1969) was concluded in London in 1969. The convention was held under the patronage of the International Maritime Organization (IMO) in which the participating countries decided to establish rules and principles, especially in relation to the tonnage of ships that are used in international voyages.

These rules and principles could be applied uniformly by all the participating countries to avoid different rules and interpretations in different countries. Cargo dues or wharfage is the charge for using the port facilities and for moving cargo through it. Port dues are also based on the vessel’s tonnage and the time it spends in the port. When the logistics of cargo movement is not planned properly, it can result in increased charges both from the port as well as the carrier such as demurrage or detention.

Costing of Goods

The charges mentioned above are passed on to the customer by the ocean carrier and hence they can be factored into the organization’s costing methodology. Though the tonnage charges depend on the weight of each vessel, most of the charges are published annually by the port or relevant authorities and therefore they can be easily included in budgeting and costing. When demurrage and detention charges are incurred regularly by a business, these costs have to be factored in the budget as well. At the same time, every effort should be taken by the concerned department within the business to gradually reduce and perhaps avoid demurrage and detention on goods that are imported or exported.

Source: Marine Insight