Demurrage Explained

What is Demurrage?

Demurrage (d-mûrj) generally refers to the detention of any ship, freight car, or other cargo conveyance during loading or unloading beyond the scheduled time of departure.  In particular for the sake of this discussion we are referring to fees charged by the railroads for excessive dwell time of rail cars at the shipping or receiving facility.

Why do railroads charge for demurrage?

Many shippers have wondered how the railroad can justify charging such scandalous rates for demurrage.  There are many facets to answering that.  They are highlighted below, but each of these topics could be developed into a lengthy discussion on its own accord.

The railroads are generally charged for car hire, a fee that is paid to the owner of rail equipment for the time is spends on the railroad.  The fees are generally variable, but agreed to by the railroad and the car owner.  For example, a TTX box car sitting in a BNSF customer siding may cost the railroad $35 per day for just sitting there idle.  The cost of car hire is factored into the overall line haul rate quoted by the railroad.  However, lengthy delays at origin or destination can cause the railroad to rack up some serious car hire expense.  Passing on this expense in the form of demurrage fees allows the railroad to recover for customer impacted car hire.

Many times the railroads own or lease the cars involved and pay no car hire.  There are still costs that are associated with those cars.  Railroads are very sensitive to the cost of capital, as it is a fundamental and enormous cost for each class 1.  Railroads evaluate the depreciation schedule for assets involved when generating a rail rate.  A boxcar purchased for $100K can generate a depreciation expense of $400 per month.  Therefore a customer who continually has 10 extra cars tied up, is indirectly costing the railroad $4,000 per month.  Instead of direct ownership, railroads may have long term leases on cars which can cost them between $350-$550 USD per month for the average box car.  Depreciation and lease expense stops for no man, therefore the railroads try to mitigate these expenses with demurrage fees.

Railroads monitor their traffic and equipment with KPIs that measure car utilization.  This is done at a business unit level and also at a fleet segment level.  Demurrage charged as a penalty creates an incentive for customers to move cars more quickly.  Turning cars more quickly lowers opportunity cost and relieves yard congestion.  Railroads will often most aggressively apply demurrage rules to car types which are in high demand or highly profitable.  They may also selectively apply these rules more aggressively to customers in high congestion areas where lingering cars have a huge impact on local operations.

Constructive vs Actual Placement

Understanding demurrage requires a basic understanding of these two concepts.  The demurrage counter begins when a car is placed for loading or unloading.  "Placement" can actually mean that the car is physically put at the industry in front of a door for loading and unloading.  When this happens the car is "AP'd" or "Actually Placed".

Sometimes the railroad cannot physically spot the car because the customer cannot accept it.  In this case, the car is held in the local receiving yard and the car i s"CP'd" or "Constructively Placed".  The most common cause of a car being CP'd is that there is congestion at the customer location and they cannot take physical possession of the car due to lack of doors or lace of space in their warehouse.

Tick-Tocking Clock

Most (I believe all) railroads give 24 hours free to load a box car and 48 hours to unload.  After that they begin to charge a demurrage penalty. For the specifics of a particular railroad's demurrage policy, visit their website and get the details directly from their demurrage tariff policy.  These are public information and readily available.

• NS - $100 per day
• BNSF - $75 per day for 3 days, $150 thereafter
• UPRR - $80 per day
• CSX - $90 per day

The clock starts ticking at 12:01 AM on the day following placement.  Therefore if you receive a loaded car on Tuesday at 11:58 PM and you release it empty at 12:02 AM, you have marked up 1 day of demurrage.  By contrast if you receive the car at 6:30 AM and release it at 10:30 PM, you have not accrued any demurrage.  If your operation works 2nd or 3rd shift, it is a good idea to try to release cars prior to midnight when possible.

How is Demurrage Calculated?

Demurrage receives a debit for each day that you have a car without releasing it.  When a car is released, you receive a credit to the demurrage account.  You receive 1 credit for loading a car, or 2 credits for unloading a car.  At the end of the month, all of the debits and credits are summed up.  A debit balance will cause an invoice to be sent for the balance due.  There is no financial consequence for a credit balance.

The tally sheet is summed promptly at the end of the month and there are no carry forward amounts to the next month.  This means that timing can be a struggle and great performance in one month cannot offset poor performance in another.

Exceptions

A notable exception to this policy is the BNSF's "Modified Straight Plan" which charges a $150 penalty for excessive demurrage of more than 3 days.  This plan will not allow for the transfer or offset of the penalty and can be hugely expensive.  The modified straight plan requires that you monitor not just your entire available car supply, but also you must manage your inbound cars at an individual level.  This modified straight plan should be closely examined for operational impact.

The railroads actually attempt to be fair in how these calculations are administered.  If the railroad fails to switch your industry, they will apply credits for the number of cars that would have been spotted or released if they had properly performed their duties.  However, these credits are not cumulative, so a backlog of cars could still potentially lead to extended demurrage charges.

Substitution often occurs where cars that are not drawing demurrage are spotted ahead of those that are racking up demurrage expense.  If a particular car is ordered in, and the railroad brings a different car while the original car remains CP'd in the yard, a credit will be issued against the CP'd car so that the customer will have the same net debits and credits at the end of the month.

One of the most common reasons that a plant finds itself in a congested condition, unable to unload railcars promptly is bunching.  Bunching happens when a single industry releases cars at different points in time.  Instead of arriving at destination at varied times, the cars tend to clump up on their journey.  Bunching is essentially the fault of the rail carrier to maintain the original trip plan on the cars.  Being able to demonstrate that the carrier has bunched cars is a very successful strategy for refuting a demurrage invoice.

Bunching

Bunching is:

• Cars are loaded or empty from the same origin facility
• Cars are billed on different dates
• Cars move via the same route
• Cars are all assigned to the same destination
• Cars arrive at the serving yard at the same time

Bunching is not:

• Cars arrive on different days
• Cars are shipped from different origins
• Accumulate due to Holidays
• Accumulate due to customer specific switching schedule
• Receiving customer cannot already have a backlog of cars to be unloaded.

Industry Profiles

The first step in managing your exposure to demurrage charges is to make sure that your industry profile is correct with the railroad.  The railroads maintain a database of customer information that allows them to know how best to serve you.  If their information is not aligned with your actual situation, it can cause operational issues culminating in demurrage charges.

Spot Capacity tell the railroad how many spots you actually have for unloading cars.  In essence this is likely equivalent to the number of doors at the receiving warehouse or the number of cars that can be brought to the unloading ramp. If the railroad shows that you only have 5 spots, while you actually have 6, you may be exposing yourself to demurrage charges when you have a backlog of cars.

Standard spotting instructions tell the railroad what to do with cars when they arrive in the serving yard.  In some cases they spot on arrival, but in other cases they are to hold the cars until the customer calls for them.  This is critical information, as the demurrage clock will start ticking when these instructions are executed.

Improper contact information can cause invoices to be misdirected.  Demurrage invoices are not typically sent by the same channels that freight invoices arrive through.  Improper contact information can cause a backlog of demurrage invoices before anyone is aware of the issue locally.

It is a good policy to check on your customer profile once per year and make sure that all the information is correct.

Best Practices

• Confirm Industry profiles 
• Escalate invoices quickly 
• Keep accurate records of every load
• Track orders and pipeline of inbound cars
• Load and Unload quickly
• Become familiar with your carrier's web tools
• Ask questions