Opinion: A Serious Discussion of a Model Contract
B>By David R. Parker
I>Chairman, President and CEO
ovenant Transport Inc.
If you would like to cut administrative costs, streamline your business practices, treat your business partners fairly and stop subsidizing your competitors, then keep reading this article. And I am talking to the shipping community, not just to truckers. The topic is a model freight transportation contract between shippers and carriers, and the time has come to engage in a serious discussion.This column is not a call for re-regulation of the trucking industry. There have been whispers over the past year that truckers should march to Washington and ask for Big Brother's help. But deregulation has served our industry, the shipping community and the American consumer quite well. Instead of regulation, we need discipline in our industry and fairness between shippers and carriers. A model contract can serve as a modest step forward.
What is a model contract and how did it come up?
The model contract would contain suggested rules governing the relationship between shippers and carriers. The standard format and language would permit the parties to negotiate economic terms based on known assumptions, efficiently review deviations from the standard, limit the points of negotiation and reduce the opportunity for unreasonable positions.
Last year at the ATA annual meeting an ad hoc group of truckload carriers discussed the need for a model contract and proposed topics for inclusion. The group's goals were to streamline a process that wastes an inordinate amount of management time and to focus our industry on issues that, when ignored, lead to unacceptable returns on investment. The topics were covered in detail in a July 15, 2002, Transport Topics article and included the following concepts:
li> A mandatory fuel surcharge should remove fuel as a business risk.
li> Shippers that tie up capital (i.e., tractors and trailers) with detention or require additional services such as multiple stops or loading-unloading should compensate the carrier at a rate that produces an adequate return.
li> Cargo liability should specify a standard limit, and shippers with high-dollar loads should bear the additional cost.
li> The parties should indemnify each other based on fault, and indemnity should not be a back-door override of cargo liability limits.
li> Mileage should be calculated based on realistic routes, not short miles.
These points sound pretty fair: Pay for what you use, take care of things that are your fault, don't bankrupt your business partner. But as the guy in the airline magazine says, "You don't get what you deserve, you get what you negotiate."
o why should shippers go along?
Reason One: Better, Faster, Cheaper. Shippers should share truckers' desire to minimize the administrative nightmare of reviewing, negotiating and complying with hundreds of different contract forms. Even if a shipper insists on its own contract, the comments of its many carrier partners can vary significantly. Also, the one-sided and unrealistic proposals favored by many shippers lead to multiple rounds of negotiation that distract managers from productive tasks. A model contract would focus negotiations, speed the process, and lower legal and administrative costs.
Reason Two: Pay for What You Use. Shippers should want to stop subsidizing their competitors. The shippers that refuse to pay for items such as fuel surcharge, detention, unloading and high cargo insurance increase the rates for all shippers. Responsible shippers should want these costs to be spread to those who use them, rather than subsidizing them.
Reason Three: Maintain Capacity. Truckers will continue to exit the market if shippers refuse to provide the possibility of an acceptable return on the carriers' investment. The trucking industry as a whole is highly leveraged and generates minimal returns on invested capital. Thousands of carriers have gone bankrupt over the past two years in a mild recession. If shippers wish to preserve long-term capacity, they should want to be part of a process that helps carriers survive.
Reason Four: Service Quality. It is in shippers' interests to have available carriers that provide high-quality service, which is a function of keeping drivers, owner-operators and carriers in the industry, rather than marginalizing them through poor work quality and unaffordable economic burdens.
Reason Five: Fundamental Fairness. Although truckers have no one else to blame for signing some of the outrageous contracts out there — like those that make the carrier responsible when the shipper injures a driver — most people agree that a business relationship should be based on some sense of fairness. I believe most traffic managers would agree.
The model contract is not a solution to all of the problems facing shippers and truckers. But if it saves time and money, frees up management time and sharpens the focus on operating profitably, it is an effort worth supporting.
The writer is one of a group of major truckload carrier executives who propose adoption of a standardized contract that spells out a range of terms and conditions for trucking services. Covenant Transport, Chattanooga, Tenn., is a half-billion-dollar truckload company, ranked No. 32 on the Transport Topics 100 list of largest for-hire U.S. and Canadian trucking companies.
This article appears in the Nov. 11 print edition of Transport Topics. Subscribe today.