How Does a Freight Broker Calculate Rates?

How Does a Freight Broker Calculate Rates

As most logistics and trucking experts can attest, both the trucking and domestic freight markets are inconstant. The cumulative effects of the 2017 Capacity Crisis and the 2020 COVID-19 pandemic, and other factors, have led to this level of volatility. Even among carriers that provide their services on the same lanes, their cost fluctuates causing freight rates to vary significantly.

Things can become even more complicated when the freight carrier is not as transparent as it should be. Hidden costs and other concealed extra charges can drive up the freight cost, affecting both the licensed freight broker business and their clients, especially if they are delayed. These unforeseen charges can put a strain on a  broker’s relationship with their clients.

By having access to accurate and real-time market information, brokers are armed with a more predictable benchmark for freight rates, empowering them to find trustworthy trucking companies that will not overcharge or underperform in terms of their freight services.

Given the many changes that occur regularly, which can include unexpected inferences, unpredictable weather events, changes in slated programs, and more, the responsibility will eventually fall on the freight broker to ensure that deliveries take place on time and that everything goes without a hitch.

Shipping domestic goods without actually taking into consideration the additional costs is never a good idea. Freight brokers always need to take into account the key factors that go into calculating freight rates. Below, we’ll be taking a closer look at how a freight brokerage company will calculate its rates to provide the best logistics services to its customers.

What Goes Into Calculating Rates?

As mentioned, several factors influence the freight rate. These will include the shipping distance, the overall size of the goods, the urgency of transportation, temperature requirements, or shipment classification. And given the average trucking company has around only one or two trucks available at any given time, there can be a huge price variance.

  • Travel Distance – Usually, the more distance the shipment has to cover during transportation, the higher the freight rate. The main reason for this price increase will be due to the overall fuel cost.
  • Shipment Weight – Another key component that will impact the freight cost is the overall weight. The heavier the shipment, the lower the charge per hundred dollars, but the higher the overall cost. As the shipment’s weight goes up and comes closer to the next weight category’s minimum load weight, the shipment will be rated in the next category for having a low weight for that category.
  • Shipment Density – When determining the trucking rate, the shipment density also plays an important role. The density is usually calculated accurately and will describe the goods being shipped in the Bill of Lading. The typical density for your average trucking shipment is calculated by dividing the weight by the volume. When it comes to palletized loads, the dimensions are also used in addition to the weight when calculating the density.
  • Freight Classification – It’s essential to keep in mind that every cargo has a specific classification that will impact the general trucking rate. In the United States, the National Motor Freight Traffic Association (NMFTA) classifies these as less-than-truckload (LTL) and full-truckload (FTL) in its National Motor Freight Classification book. There are, in total, 18 different classes, which extend from 50 to 500. Each freight class is determined based on the cargo’s value, handling, stowability, density, and liability.

Base Rates and Minimums When Dealing with a Freight Shipper

Every carrier has its established base rate for shipments. And even if most of these rates are cited per $100, they can vary based on the carrier and transporting lane. They will also change their base rates if they are required to carry extra volume.

Aside from pricing, a licensed freight broker business also needs to have an in-depth understanding of the terminology when dealing with a shipper or freight carrier. Below is a rundown of some of the most commonly used terms used when calculating freight quotes.

  • Carrier – Asset-based company that offers transportation services.
  • Bill of Lading – Also known as a freight bill, Bol, or B/L, the bill of lading is a record of the agreement between the shippers and carriers, highlighting all the freight shipping services provided.
  • Consignor – Either an individual or trucking company that sends e freight to the consignee.
  • Consignee – An individual or trucking company that gets the freight from the consignor.
  • Loss and Damage – The loss and damage rates cover only shipments in transit or storage for a brief period and where the facility is owned and operated by the carrier.
  • Full Truckload (FTL) – These are shipments that need an entire trailer to haul goods.
  • Less than Truckload (LTL) – Shipments that do not need to use the full capacity of a trailer.
  • Drayage – refers to the movement of trailers and containers to and from railroads and seaports through the trucking method exclusively.
  • Pallets – These are stacking platforms that measure 48″ by 40″.
  • Stock Keeping Unit (SKU) – These are numbers given to products for carrying out operations and tracking purposes. A stock-keeping unit serves as a unique identifier for each product, which, in turn, helps to identify the product quickly..
  • CWT (Centum Weight) – A typical weight unit equivalent to 100 pounds and used in the industry.

Many carriers have large and complex books that sketch out various hidden charges and rules that can influence the overall freight cost. These will typically fall under the Rules Tariff section of the book. There are a couple of factors that will impact these charges.

Customers must get a full trucking freight quote before they proceed with a carrier. For this reason, it is important to work with a licensed broker that will be able to identify all of these hidden charges.

How Does a Freight Broker Calculate FTL Rates?

There are several ways that a freight broker can go about calculating rates. The first includes using load boards such as Truckstop.com or DAT.com as the most highly recommended load boards. Both load boards have built-in rating tools that give freight brokers the necessary intelligence to save them plenty of time while calculating their customers’ rates. The majority of load boards that contain useful rating information will require a subscription. That said, every licensed freight brokerage company will need to invest in such load boards and rating tools if they wish to provide the best kind of services to their clients. A good broker TMS will provide you with access to the load boards without having to leave the TMS.

Also, most load boards will provide freight brokers with the ability to search lane histories. Traditionally, this used to be the favored method of sourcing carriers and getting rates for any given lane. Load board lane histories will typically show carriers posting truck availability, which is based on specific lanes. If a truck is posted as available, they want or need loads on that lane. But rather than focusing on a single load, freight brokers can better invest their time by developing relationships with the carrier.

Another option is to post a load or lane on the aforementioned load boards. If the lane is desirable, carriers are bound to start calling looking for your freight. However, during the call, you must gather as much intelligence as possible on both rates and availability. While some people are not in favor of this strategy, it can still be a worthwhile option to gather quick rating information.

To get shippers, the freight broker will need to understand that the rates are ultimately determined by supply and demand. To be more specific, the rate is calculated as a ratio between trucks and loads in any given area or lane. But thanks to the many advancements made in logistics technology, freight brokers will have a much better time understanding these rates.

For example, Tai Software is one such freight broker software that provides its users with all the features necessary to manage their loads. It’s a cloud-based solution that uses Artificial Intelligence (AI) to facilitate its users with a centralized location from which they can automate their shipping, rating, and accounting processes. Load boards and carriers are integrated directly into the TMS so the broker isn’t jumping from platform to platform.  In doing so, Tai Software makes it that much easier for freight brokers to scale their operations.

Tai Software will analyze millions of data variables in real-time and will allow companies to increase their efficiency within the transportation and freight industry. It’s a solution that addresses every aspect of the shipment lifecycle, making it a great TMS software platform, not only for freight brokers but also for 3PLs, freight forwarders, and large shippers alike. Request a free demo today!