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    Demurrage - Meaning, Charges & more

    Demurrage | Meaning, Charges & more

    In any project involving dependent activities, delays in the process can lead to additional costs. When it comes to the shipping market, time is money. To address this, let us briefly understand the journey of importing or exporting cargo by sea shipping. Whenever a cargo is imported or exported, a charter agreement is formed between the shipowner and the charterer to make sure that its loading and unloading is done in the stipulated time frame. The cargo is in the form of shipping containers and is carried by ship to the designated port. The containers are received by the customs department and are stored in the yard without any charges for a certain time, referred to as free time.

    Laytime varies as per the shipping lines. A custom duty has to be paid to release the containers, and then they are taken to the warehouse where the goods are unloaded/loaded. The empty or loaded containers are returned to the ship abiding by the timeline mentioned in the charter agreement, and the shipping process is completed.

    However, in real-time, due to any undesirable events or challenges, handling cargo can exceed the timelines and invite demurrage and detention.

    Demurrage - Definition, and Working

    Ports are one of the busiest places of trade, and cargo yards are no warehouses. The shipowners load or unload the consignment to the port in the given time frame, referred to as laytime. If the ship exceeds the laytime, it is required to stay at the port for a longer time, which will incur a cost. This cost is demurrage that is charged to the shipowner by the importer.

    The term Demurrage has its roots in the Old French word ‘demeurage’ or ‘demeurer,’ which means to linger, tarry.

    Charges - Paid by the Importer Demurrage Charges To Importer

    Charges - Paid by the Ship Owner Demurrage Charges To Ship Owner

    What is Detention?

    Post the release of consignment, from the yard and taken to the warehouse. Unloading has to be processed by the time frame. Keeping the container at the warehouse and exceeding the decided time limit will incur Detention. This penalty is paid to the owner of the container by the importer as compensation since the container could have been used for another shipping consignment.

    Are Demurrage and Detention similar?

    Often the terms Demurrage and Detention are confused with each other. To draw the difference, we can say that Demurrage occurs for loaded containers that are not released from the yard while Detention occurs for the containers that are not returned to the owner. Demurrage can occur for both shipowners and the importers, while Detention occurs for the importer. Demurrage and Detention charges can accrue up to 20 times the cost of the container itself, and hence it is imperative to understand these charges.

    Demurrage - Charges/Fees

    Demurrage charges are applicable when the importer fails to take the delivery of the containers within the stipulated number of free days allowed (decided by the Port Authority). Demurrage charges are usually calculated on a per-day basis. This charge will keep on accruing until the delivery of the containers is taken, and sometimes they overtake the actual value of goods imported, leaving the importer no choice but to abandon the shipment. Demurrage charged on the shipment may vary on the type of container being used, i.e., dry container, refrigerated container, a chassis, or any other equipment that the shipping line owns or leases.

    For conventional shipping lines/port authorities, the number of free days allowed ranges somewhere between three to seven, after which Demurrage is levied. Demurrage charges are different for all countries and are also dependent on the Shipping Line/Carrier. To complicate matters further, fees are applied on a per container as well as on a per-day basis after a designated free time.

    Why is Demurrage levied?

    Many importers or freight forwarders have asked this question because of the high per diem charges which may feel unjust and unreasonable. These charges are levied by the shipping lines or port authorities to ensure efficient and quick turnaround of containers leading to better use of storage and container space. Demurrage and Detention are levied because of two main reasons: Importers use the containers provided by the Shipping Lines and hence need to be compensated. Acting as an incentive to the importer to quickly return the empty container and have a good turnaround time.

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    Calculation of Demurrage Charges

    In the calculation of Demurrage charges to the shipowner/port authority, the demurrage rate is multiplied by the number of days/part days over the agreed free days.

    Demurrage Payable = DR * DE * n Demurrage Payable

    Example

    Total free days allowed: 7 days Number of containers (n): 5 Demurrage Rate (DR): US$ 20,000 per day pro-rata (PDPR) Days exceeded (DE): 6 days 8 hours 30 minutes Demurrage Payable = US$ 20,000 × 6 days 8 hours 30 minutes × 5 = US$ 20,000 × {6 + (8÷24) + (30÷1440)} × 5 = US$ 20,000 × 6.3542 × 5 = US$ 635,420

    From the calculation, it is evident that Demurrage Charges are directly proportional to the Days Exceeded and the Demurrage Rate. Hence, the port or the shipping carrier should be over-cautious in calculating the Demurrage days.

    Also, both the importer and the shipping carrier should judiciously read the Charter Contract to chalk out all the grey areas. It is important to note that Demurrage to the charterer would not run if the fault is on the part of the shipping carrier (for example - ship breakdown).

    Difference between Demurrage, Container haulage, Detention, Storage and Wharfage

    When a ship liner reaches the designated port, it goes through various processes until the cargo is unloaded or loaded. These processes are a cost center for the shipping liner and are forwarded to the charterer. Wharfage is the fee charged by the shipping liner to cover the port authority’s cost of using a wharf to load or unload goods. This charge is usually included in the Base Freight Rate or Terminal Handling Rate of the Charter Agreement.

    After the cargo containers or goods reach the storage facility, the port authority grants the charterer a certain number of free days for storage. In this time frame, the importer will have to work proactively to get the container unloaded. In case of a delay where the unloading exceeds the predetermined free days, a fee is charged to the charterer by the port authorities for storing the cargo, called Demurrage.

    If the port authority decides that the container needs to be moved to a private facility instead of storing it at the port storage yard, then the fees charged for using the private facility is called Storage cost.

    Container Haulage is the set period given to customers in their contract to tip (unload) their container delivery. Acceptable times for unloading are usually between 3 and 4 hours; time spent on site after that is considered "demurrage". In layman’s terms, container haulage is the time provided to the haulage contractors to unload the cargo in the shipping yard and transport it to the charterer’s warehouse.

    Post the consignment is released from the yard and taken to the charterer’s warehouse, unloading or loading activities have to be performed within a certain time. Keeping the container at the warehouse and exceeding the decided time limit will incur a Detention penalty. This is a fee to be paid to the owner of the container by the importer or exporter as compensation since the container could have been used for another shipping consignment.

    Tips to avoid Demurrage

    • Understand the salient points, do’s and don'ts of the charter agreement as a first-time importer
    • Identify special requirements for the cargo import, which may be held by customs or port authorities
    • In case of special permissions, negotiate with the Port Authority for an increase in the number of free days
    • Use the expertise of a freight forwarder
    • Be smart about customs clearance by pre-clearing the cargo or have the proper documents ready to reduce Demurrage and Storage charges
    • Make sure that Demurrage, Storage, and Detention charges are mentioned in the quotation. If not, demand for these charges to be included
    • Communicate proactively with the broker, carrier, driver, shipper, and port authorities
    • If the shipment is under Letter of Credit, make sure that you start communicating with the banks for timely document release
    • Consider Express Release if the shipment is not under a Letter of Credit and does not require an Original Bill of Lading, to avoid any delays
    • Secure a Telex Release with the shipper if they insist on an Original Bill of Lading to safeguard their payment
    • Share cargo and shipment delivery documents with all the involved parties for a smooth loading/unloading process

    FAQs on Demurrage

    Who is responsible for demurrage charges?

    In the case where goods are being imported, a Demurrage fee is charged by the port authority to the importer. For exports, when the loaded containers are not transported within the given laytime, a Demurrage fee is charged by the port authority to the shipping line.

    What are laytime and demurrage?

    Laytime and Demurrage are probably the most important terms in a Charter Party and can have significant financial implications. Laytime - It is the free time allowed by the Port Authorities to the importer/exporter to load or unload the container from the shipping yard. Demurrage - The penalty charged for exceeding the free days allowed for storage of loaded containers at the yard is called Demurrage.

    Can demurrage be capitalized?

    No. As per AS 10, the cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for the intended use. Demurrage charges are due to delayed cargo clearing. This is the charge which is incurred to bring the asset to its working condition for the intended use. It is a finance charge and should be expensed off immediately. No part of such charges should be capitalized. Contact your CA for more details.

    Is the demurrage part of inventory cost?

    All costs incurred in bringing inventory to the present location and condition should be included in Inventory Cost as per AS-2. If the demurrage cost is necessary for bringing the inventory to its present location, then it can be included in the inventory cost. Contact your CA for more details.

    Is GST applicable on demurrage charges?

    GST of 18% is applicable on the Demurrage Charges

    How do you negotiate demurrage charges?

    To negotiate Demurrage charges, the charterer must be sure of the type of cargo being imported/exported. If the cargo being imported/exported will require some special custom permission, the charterer should make sure that they have the documents and permissions in place. If not, they can negotiate for additional laytime with the port authority citing special cargo needs.

    Is demurrage the same as despatch?

    No. Demurrage is the penalty levied on the charterer in the cargo discharging operations from the shipyard after the laytime has been exceeded. Whereas, Despatch is an incentive clause included in the Charter Party by the Port Authority/ship line whereby if the charterer completes the cargo loading and discharging in a shorter period than agreed, then they may be entitled to Despatch Money. Usually, the Despatch rate is half of the Demurrage rate.

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    Vanita D'souza
    Vanita D'souza
    Communications Manager at Drip Capital
    10 min read