How to Calculate Freight Costs

The cost of shipping goods is an ongoing challenge for business owners. With supply chain complexities and pricing often subject to change, there’s a need for transparency in the freight shipping process. 

The process of determining freight rates is intricate by design. It’s not just about weight or the amount of physical space that a shipment occupies, but a combination of factors that can vary significantly from one shipment to another.

This complexity is further compounded by the changing nature of things like fuel surcharges and the ever-evolving regulations in the logistics sector. 

So, how can businesses make sense of it all? What role does technology play? Let’s demystify the factors that influence freight costs so you can have a more informed shipping strategy and budget.

Contents:

Factors influencing freight costs

Freight cost components

Calculating freight cost in 5 steps

Summary

FAQs

Factors influencing freight costs

Weight and volume

One of the primary determinants of freight cost is the weight and volume of the shipment. The choice between charging based on weight or volume depends on which is greater. Heavier or bulkier items typically incur higher charges due to their space and weight demands on transport vehicles (more on this in the next section).

Distance

The distance between the pick-up and delivery points is an essential factor to consider. Longer distances generally result in higher costs due to the increased fuel consumption and time required for transportation.

Mode of transport

The mode of transport chosen for freight shipping also has a bearing on overall cost. Different vehicles offer varying benefits in terms of speed, capacity, and cost. Aligning them with your specific needs is the key to identify the most efficient rate for your shipment.

The most common modes of freight transport include:

• Sea Freight. Ideal for extremely heavy or bulky items, sea freight is the most cost-effective option for international shipping. However, it’s slower and subject to weather disruptions.
• Rail Freight. Rail is an excellent option for transporting large volumes over long distances. It’s more environmentally friendly and usually more economical than road transport for bulk shipments.
• Road Freight. Often the most accessible and flexible option, road freight is preferred for short to medium distances. It allows for door-to-door delivery and is relatively cost-effective for smaller shipments.
• Air Freight. The fastest but most expensive mode, air freight is ideal for time-sensitive or high-value goods. Due to higher fuel costs and limited space, it’s typically used for smaller, lighter shipments.

 Additional services

Additional services that can add extra costs to your shipping include:

• Insurance. Protecting goods against loss or damage during transit.
• Packaging. Adequate packaging is crucial for the safety of goods and may vary depending on the fragility and type of items being shipped.
• Customs Clearance. Necessary for international shipping, involving regulatory and paperwork costs.
• Warehousing. Storage costs may be incurred if goods need to be stored at any point during transit.
• Special Handling Requirements. Additional costs for handling fragile, hazardous, or oversized items that require special attention.

Freight cost components

Base rates

The base rate is the foundational cost of shipping freight, determined by carriers based on factors like distance, transport mode, and type of goods. An easy way to comprehend base rates is to think of them like a taxi’s ‘flag fall’ – the minimum charge that applies as soon as a shipment is picked up. This charge ensures that carriers cover basic transportation costs regardless of the shipment’s size or distance.

Minimum rates

Minimum rates act as a safety net for carriers, ensuring they’re compensated even for smaller, less profitable shipments. These rates are akin to a fixed minimum charge, applied when the total freight cost (calculated based on weight and volume) falls below a certain threshold.

Fuel surcharges

Fuel surcharges are added to cover the fluctuating costs of fuel. This dynamic component varies with changes in fuel prices, reflecting the direct impact of energy costs on transportation.

Additional surcharges

These include various specific fees that may apply based on the unique requirements of the shipment. Common additional surcharges are:

• Tail Gate Fees. Applied when special equipment like a tail lift is needed for loading/unloading in the absence of a loading dock. This surcharge reflects the additional time and effort required for handling specific types of cargo.
• Residential Pick-up and Delivery Fees. Charged for the extra effort needed to navigate residential areas, which are typically more challenging for large freight vehicles. For example, carriers may apply fees to compensate for the extra time and resources required for home deliveries.
• Overlength Charges. Imposed for cargo that exceeds standard size limits, needing special handling. This is because transporting larger or unusually shaped items requires more resources.

Taxes

Applicable taxes, such as the Goods and Services Tax (GST) in Australia, are added to the overall freight charges. These taxes contribute significantly to the final cost and are mandated by law.

Volume vs. dead weight

This component addresses whether charges are based on the shipment’s volume (the space it occupies) or its dead weight (actual weight). Carriers will choose the greater of the two as the basis for the cost, ensuring fair pricing based on the shipment’s physical characteristics.

Typically, volume is applicable when transporting lightweight, bulky items, while dead weight is considered for denser, heavier shipments.

To give you a clearer picture of how these costs are typically distributed in a freight shipment, here’s a pie chart illustrating the estimated percentages of each component: