January 18, 2022

Accounting for Detention & Demurrage: A Quick Guide

Detention and demurrage charges have recently come under public scrutiny, as shippers and importers were hit with increasingly large fees in the middle of a major supply chain crisis. Despite ramblings about government interference to eliminate these fees, there has been little movement on this front, and container detention and demurrage charges remain high throughout the U.S. 

Given this reality, freight forwarders and logistics professionals need to adopt better accounting practices in relation to detention and demurrage. This will increase visibility into charges, reduce the amount of fees accrued, and ensure faster payment. This article provides definitions on detention and demurrage, suggests accounting best practices, and explores how automation is helping minimize demurrage and detention fees.

Definitions of Detention & Demurrage

What is demurrage vs detention? Aren’t they the same thing? Understanding basic definitions of detention charges in shipping is crucial in planning shipments and managing freight payments. 

  • Free time: amount of time that carrier equipment can be used before incurring additional charges. This time period is determined in contracts by the VOCC, terminal schedule, or the NVOCC and should be monitored closely per shipment. Free time is generally 3-10 days after arrival and is indicated as Last Free Day (LFD) on documents. 
  • Demurrage: charges incurred when loaded containers are left at a port terminal past the allotted free time. These charges are related to the use of carrier equipment (container and/or chassis) and are paid directly to the carrier.
  • Calculating demurrage: daily charges typically range from $75 to $150 per container per day, with daily fees increasing the longer a container stays at the terminal. 

For example, assume a container has 3 free days, with $100 a day demurrage charges for the next 3 days, $200 for days 4-9, and $300 for day 10 and beyond.

A container that is delayed for 14 days after arrival would be subject to the following demurrage charges: 

14 days - 3 free = 11 days of demurrage

($100 x 3 days = $300) + ($200 x 6 days = $1,200) + ($300 x 2 days = $600) = $2,100 per container 

  • Detention: charges incurred when carrier equipment is still in use past LFD outside of the port. These fees are assessed in order to encourage the prompt return of empty containers to terminals. Detention may be broken down to two main categories:
  • Per diem: detention charges at a fixed rate, per container per day. Many terminals use detention and per diem interchangeably, but it always refers to a daily fee for equipment that has not been returned. 
  • Driver detention: hourly charges that are assessed when driver wait time at pickup or delivery exceeds given free time. Typically driver free time is 1-2 hours, with detention fees ranging from $50-100 an hour past that. 

Why are Detention & Demurrage Charges on The Rise?

Container detention and demurrage fees have long been contentious, but recent increases have shippers and importers wondering just how high the charges can go. Containers arriving in Los Angeles and Long Beach ports in 2021 were charged an astronomical average of $2,500 in D&D, triple the average of other large global ports, and double the average from 2020. Despite some pressure for the Federal Maritime Commission (FMC) to regulate demurrage and detention fees, no major ruling has been implemented and charges remain at an all-time high. 

From ContainerXChange

It is important to recognize that detention and demurrage charges are purportedly designed to maintain fluidity in the supply chain by incentivizing the prompt movement of cargo and equipment. Ideally, these fees would help reduce equipment scarcity and capacity constraints, by ensuring the timely flow of containers out of and back into the ports. Unfortunately, increasing port congestion, unpredictable unloading delays, and ongoing driver shortages have made the flow of containers more difficult and resulted in massive increases in D&D costs. 

Accounting Best Practices for Detention and Demurrage

It isn’t likely that detention charges in shipping are going to be eliminated anytime soon, nor is it likely to avoid them completely in the current freight market. Establishing better accounting practices around container detention and demurrage is essential to managing costs and minimizing unnecessary losses. Best practices for D&D accounting should include:

  1. Monitor accruals: verify that vendors are itemizing invoice charges correctly and providing D&D accruals based on accurate arrivals and LFDs. Invoices that are not itemized make it impossible to identify where additional charges are accruing, and create challenges in recouping those from the consignee or importer.
  1. Audit and reconcile accruals: reconcile invoiced D&D charges against anticipated charges and flag any discrepancies. Itemized reconciliations provide immediate insight into unexpected charges and can identify when a charge has been calculated incorrectly or duplicated between parties.
  1. Track patterns over time: utilize D&D data to identify patterns and inform decision-making. View D&D charges from a specific vendor or port over time to identify areas for improvement and proactively address issues to mitigate future fees.
  1. Pay vendors faster: quick invoice reconciliation leads to quicker payment to vendors and logistics providers. Freight forwarding relies on strong partnerships and relationships, getting providers paid means happier providers and better service in the long-term.

Adopting comprehensive accounting practices for detention and demurrage management is key to minimizing these costs. Unfortunately, these practices often require a high level of manual labor, which is tedious, expensive, and more prone to error. Automation and AI-technology can alleviate the pressure of manual auditing and give staff time to focus on more relevant and strategic tasks.

Role of Automation to Reduce Fees like Detention & Demurrage

Freight forwarders and ocean logistics professionals have relied on manual data processing and reconciliation for detention and demurrage for too long. Advances in automation and artificial intelligence now give logistics businesses a solution for connecting previously siloed data sources, and creates an efficient and streamlined process for identifying discrepant D&D charges. Automation helps reduce container detention and demurrage charges in both the short- and long-term, through several channels.

The first step in minimizing D&D fees is to have clear visibility over when and where the charges were incurred. Manual processes require staff to review invoices individually and track any accrued D&D in an accounting platform or spreadsheet. Automation eliminates this tedious task by mapping and extracting line item data and compiling it into a searchable database. This simplifies the process for staff and makes it easy to identify shipments that accrued D&D charges, as well any shipments with discrepant, unexpected charges. 

Beyond data extraction, automation assists in reconciliation, by recognizing discrepancies between anticipated charges and actual invoiced charges. For demurrage and detention this can be extremely valuable for identifying excessive or duplicate charges - for example, detention charges that were billed by both the ocean carrier and the drayage company. This allows staff to prioritize review of discrepant invoices and creates efficiencies in issuing payment to vendors.

Automation and AI provide the additional benefit of turning detention and demurrage data into actionable insights. By identifying patterns in D&D charges, freight forwarders can take proactive steps to address issues with specific partners or locations, and work to minimize future fees. This data is not readily available using manual processes, but is invaluable in decreasing D&D charges and building relationships with logistics partners. 

At its core, automation serves one main purpose: to take the burden of data extraction, reconciliation, and analytics away from a freight forwarder’s staff. It allows staff to be reallocated to more meaningful and beneficial tasks, like customer service and relationship building. Automation efficiencies do more than save money and reduce costs, they also create more productive workplaces.

Automating with Expedock

Expedock is on a mission to build a powerful data infrastructure that generates unprecedented efficiency and profitability to all players in the industry. Their platform delivers automation and AI-powered solutions for extraction, reconciliation, and data insights, increases accuracy, and delivers exponential cost-savings. 

See how line-item visibility and automated reconciliation can benefit your business. Get in touch to request a demo today.

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