Written by: Matthew Bohn
This article first appeared in PARCEL January-February 2022.
Have you ever taken the time to fully read your carrier agreement from UPS or FedEx? Generally, most shippers have not. Yet, fully reading and understanding all of the non-pricing components of a carrier agreement has become more important now than it has been in the last 15 years.
In the past, shippers typically only needed to concern themselves with making sure discounting was correct or that their revenue bands were appropriate. However, in the last two years, we have seen far more one-sided punitive language being added into agreements by UPS and FedEx than we ever have in the past. Shippers need to be aware of these clauses. Our goal is to help the shipper better understand what to look for in carrier pricing agreements and what carriers generally enforce, so they are better equipped to push back. Here are the items that we see most frequently:
Early termination clauses (sorry, but you can’t push back or leave)
Most of the time, these clauses require the shipper to ship with their carrier for the duration of the contract. They typically do not allow the shipper to negotiate even if the carrier introduces new surcharges or terms. For example, when the carriers changed the Additional Handling – Weight trigger from 71 to 51 lbs, shippers with this clause and a large number of affected packages would see massive increases to their bills. They had no contractual recourse despite this surcharge being non-applicable when the agreement was signed. These charges are usually a percentage of revenue (e.g., 2%), a flat fee (e.g., $200,000), or allow the carrier to terminate the shipping agreement.
Risk of enforcement: Medium with UPS, low with FedEx. UPS often enforces these when a customer leaves but is less likely to do so in response to one or two asks, especially in response to a new charge, an acquisition, or new product line. FedEx rarely enforces these, in our experience, but that’s not to say their mandate on these won’t evolve in the future.
Minimum commitment clauses (they’ll kick you when you’re down)
Similar to the above, these require a volume commitment and also come with a penalty. For example, we have seen clauses that require shippers to commit a percentage of their volume (e.g., 10,000 packages monthly) or a fixed annual spend (e.g., $20,000,000) or face financial penalties similar to the early termination penalties. Often, these will not contain language like “unless shipping decline is outside of customer’s control,” which is especially punitive.
Risk of enforcement: High with UPS, low with FedEx. Although anecdotal, it seems that UPS can enforce these systematically via their standard invoicing process. This eliminates the potential of receiving a waiver from a sympathetic sales rep who might be more willing to understand why your revenue is down. FedEx still likely processes these manually and is thus less likely to enforce these. Generally, their reps have more flexibility to make occasional exceptions here.
What about me? Interestingly enough, we have seen carrier agreements with commitment language – say 95% – and also refuse to actually pick up 95% of the customer’s packages! It’s critical that if you are a larger shipper considering signing commitment language like that you also require the carrier to pick up said volume (or else you’d be in violation).
Not so fun fact: The carriers can enforce both items (early termination and minimum commitment) at the same time if both clauses are in an agreement.
Growth clauses (we want all of your volume, but only to certain places, and not too much)
New in the last 4-6 months, shipper’s volumes can be restricted if a shipper’s volume grows by more than 15% in an unspecified country pairing. This allows the carrier to either 1) not pick up the shipments, 2) change the shipment service level, or 3) modify your pricing.
Risk of enforcement: High. This is a brand-new clause, and it directly correlates to the international peak surcharges first introduced during the beginning of the COVID pandemic, which makes it likely to be enforced. If the carrier lane is full, and you have this clause, it makes it very easy for them to say “sorry, but you signed this – it’s in your agreement,” while shipping the packages of another customer without the clause.
US inflation clauses (our margins are more important than yours)
Also, new for 2021-2022, we have started to see carriers include inflation clauses for some shippers with rate caps. Essentially, they allow the carrier to void the rate cap in the US inflation exceeds the number inserted into the agreement. In my opinion, based on recent US monetary policy, any agreement with this clause is likely to take full increases should the carriers enforce.
Risk of enforcement: High. Although we have no history with this one, it’s very likely that they’re inserting these with the intention of enforcing them in 2022 or 2023
How can shippers fight back? Step one is to carefully read through your carrier agreement. Do not accept the presentation or a bullet-point summary of changes from your rep. Although I don’t think they ever intend to act punitively, often times these clauses will be simply overlooked by your reps.
OK, I have one or more of these clauses, now what? First, remember that absolutely none of these are required and they are both removable and negotiable. If you are unable to get the carriers to remove the clauses, make sure that they are at least reasonable. For example: if you agree to early termination, insist that it is only triggered if you decide to leave, has reduced penalties as time passes, and allows you to negotiate intra-contract.
It’s also important to remember that when you sign a carrier agreement, you are not only agreeing to the terms therein, but you are also agreeing to all of the terms in the respective carrier’s 150+ service guide.
Regardless of your relationship with your carrier and / or your carrier rep, it’s more critical now than ever that your carrier agreement be reviewed for new punitive clauses that are more prevalent than before.
About the author:
Matt Bohn is Senior Consultant, Professional Services for Shipware. Prior to his work at Shipware, Matt spent nine years as a Senior Pricing Advisor at FedEx, where he analyzed pricing programs and wrote pricing contracts for some of FedEx’s largest e-commerce and retail shippers. He also managed projects for the FedEx pricing Global Pricing Approval Systems and the Strategic Account Executive Inputs. Matt earned an MBA in Finance from the University of Pittsburgh’s Joseph M. Katz School of Business and a BS in Computer Engineering from the University of Pittsburgh.