Types of Carriers 101
Carriers are individuals or businesses engaged in the business of transporting goods. The demand for various modes of freight shipment means that carriers of all types play a vital role in the logistics of the supply chain management. Two common types of carriers are common carriers and contract carriers . In the trucking industry, both types of carriers perform similar services but are generally governed by different sets of rules. For those involved in shipping goods, it is important to understand the basic distinctions between these types of carriers.
Common Carrier Explained
A common carrier is a transportation provider that must offer its services to all who are willing to pay the price determined by the market. In other words, the service is available to all members of the public without regard to economic status or need for the item to be shipped if a price determined in an open market is paid. For example, if a trucking company makes its services available to the public at large, and you want to ship an item that is within the limits of the company’s capabilities (for instance, if you want to ship a truckload because that is all the tractor/trailer the trucking company has and it has no smaller trucks), the trucking company would have to sell you the service, even if you only wanted to send one pound of cargo. The trucking company would also be able to charge you whatever the market price was for shipping at that time.
Common carriers may be either interstate or intrastate. If a common carrier wishes to operate in the federal system of interstate commerce, it must obtain a certificate of public convenience and necessity from the Federal Motor Carrier Safety Administration (FMCSA). A common carrier that seeks to exclusively operate intrastate must obtain a permit issued from each state that it wishes to operate in from the state transportation authority.
A common carrier, like a contract carrier, is subject to a heavy regulation from the government. The regulation comes from both individual states and federally. For example, the FMCSA enforces rules, regulations and order that affect nearly all facets of interstate commerce and transportation. These rules and regulations include: Hours of Service (HOS) for transit workers (such as trucking crew members); financial responsibility for operational safety (such as insurance requirements); certification for transportation industry; registration of interstate motor carriers and freight forwarders; and safety fitness of new entrants. States, through their own agencies, have similar rules and regulations that will affect intrastate transportation.
Contract Carrier Explained
Contract carriers are motor carriers that transport freight for customers according to a negotiated agreement. By contrast with common carriers, contract carriers have the ability to negotiate the freight rates and other details of transport outside of published schedules and tariffs. Contract carriers must still possess a federal DOT authority, but that is merely a license to do business and does not contain massive local and national tariffs. Because contract carriers negotiate freight rates and schedules, they typically function quite differently than common carriers.
The contract carrier’s contract with the shipper (or freight broker) will usually set forth the basic parameters for freight transport, such as: pickup, delivery points, anticipated delivery, delivery date/time, weight, price per pound, and others. The negotiation process is usually one-on-one and flexible enough that all aspects of transportation can be easily handled. The contract could even include agreements regarding deductions, offsets, and penalties for late delivery, etc.
Of course, these agreements are usually simple as long as there are no problems. If there is a problem with any aspect of the delivery, shippers (or more likely freight brokers that have handled the delivery) will look to the contract to determine what bindings the parties have. If, for example, a shipment of apples was delivered a day late, there could be a provision in the contract that says the carrier may offset or deduct $500 from its invoice in some event such as this. Such terms are not required by law, but they are important in determining the relationship between the parties.
Contract carriers are often confused with freight brokers. These document issues arise from the fact that both entities operate in the same role, on behalf of a shipper, and receive a commission for the transport of goods. In actuality, however, there is an important distinction. Freight brokers have no liability for actual transport (think of them as lead generators in the transport industry) while contract carriers actually may physically move freight. Although the contract carrier may read as the transporter, it is important not to confuse the two and make sure that there is a clear line understood between them.
Technical and Legal Distinctions
The most important statutory and regulatory differences between common carriers and contract carriers relate to the presence or absence of federal preemption and the allocation of liability between the carrier and shipper. For decades, federal law has preempted state law to the extent it establishes a lower standard of care or imposes greater financial responsibility than that imposed by the federal statutes and regulations. 49 U.S.C. § 14706. Today, many federal district courts use the Carmack Amendment as a "clean slate" basis for determining liability. This means that even if damage occurs in the state of origin, and even if the carrier can demonstrate through a valid contract that its liability is governed by state law, federal law will apply to the claim. However, a recent decision out of the Fifth Circuit Court of Appeals has renewed arguments made by carriers for decades. Under this view, the validity and scope of a binding liability limitation agreement is based on whether the agreement advances the national policy goals of the Carmack Amendment and is reasonable. If so, it will govern, even if less favorable to the shipper. Thus, lawsuits and arbitration should be filed in the State of origin, whether in federal or state court, and should be based on state law, not on the Carmack Amendment.
Pros and Cons of Contract and Common Carriers
The decision to operate as a contract carrier versus a common carrier plays out differently for the service provider, the client, and their customers. Here are some of the key considerations. For the service provider: • Common carrier. Serves multiple customers. Gains access to freight and has greater flexibility in arranging for the carrier’s equipment. Conflict of interest issues with accounts must be considered and addressed so no one has an unfair advantage. Need to make quick decisions, which can put pressure on accounting and accounting to billing processes for complex loads is generally needed. • Contract carrier. Serves only a captive clientele. Conflicts of interest are avoided. Carrier has a "real" seat at the table to participate in decisions such as selection of who buys or sells equipment. Activities are typically organized via contracts with customers. Additional structure to the company helps with organization but can also slow down decisions to address smaller problems that may occur. From the provider’s clients’ standpoint: • Common carrier. In a competitive bidding environment, there is typically an advantage to the carrier who is able to operate like a broker but without some of the regulatory constraints. Ability to maximize efficiency and to force declining margins. This is an advantage for the client if the carrier uses its additional margin to provide higher quality service. (Bias toward large volume customers who may receive abnormal benefits.) Potential issue for public relations or marketing efforts if the public realizes the carrier isn’t actually carrying the freight, and that the position might be rented out to a sub-carrier. • Contract carrier. Offers ability to increase profit via contract. Less worry from subcontractors, particularly if terms are abundantly clear and payment history exists. Security in knowing that contract carrier is obligated to represent client’s interests. Ability to bind sub-carriers with the ultimate carrier. Performance can more easily be measured via established criteria and with corrections to course if not being met on a regular basis. Continual flow of information can help with marketing efforts to distinguish the client from its competitors. For the Subcontractor (or the Client): • Common carrier. Gets access to freight. • Contract carrier. Has to wait to get paid. Needs to make a decision whether the risk of arrest is worth the potential reward. Need to have a written agreement that establishes the relationship and protects the parties via indemnification provisions, etc.
Choosing a Common Carrier vs a Contract Carrier
When choosing between common carrier and contract carrier, businesses must weigh various decision-making factors. Cost is the most critical factor for most companies. Contract carriers are the most expensive per mile of the three types of freight transportation, due to the nature of its business model requiring larger trucks and larger minimum cargo weights with less backhaul (the ability to take a return load to/from the same area), but its cost can often be offset in pricing flexibility. Contract carriers usually accept product once or twice a week, rather than daily like common carriers, while common carriers will deliver freight on a more frequent basis and can be more readily available due to its larger fleet. This greater accessibility allows common carriers to charge less, though service might be sacrificed for those savings. Common carriers also accept much smaller minimum loads than contract carriers.
Another key factor for businesses is its relationship with the carrier. Common carriers have no obligation to serve any one individual shipper whereas contract carriers have an obligation to its clients under the contract, and the techniques the carrier use to attract clients, like competitive pricing or service elements that offer larger discounts, can make them more appealing to a business than a common carrier. Contract carriers also offer guaranteed delivery times and/or routes , while common carriers do not. A company that has higher priority needs like these – or clients that impose similar needs – might want to align with a contract carrier as it can guarantee its service. A common carrier might not have the equipment or route availability to deliver freight on a given day, whereas a contract carrier can eliminate that risk. In some cases, the company might find it can live with the risk of slightly longer delivery time for a charge savings.
On the other hand, if a company is larger, it might find that it has the resources in-house to effectively manage and coordinate with a common carrier instead of dedicating them to a single contract carrier. The shipper should consider the economics of this decision and weigh the value of the cost savings against the in-house costs to see if it is a prudent business decision.
If your company offers a specialized service or is focused on a specific region, this should drive the decision when selecting transport. For example, some companies require same-day delivery for their perishable products; as a result, their carrier of choice is highly specialized in routes and capacity for those immediate deliveries.
A Logistics Manager can be a tremendous help with this decision, as they assist a company with its logistics needs including freight management and the negotiation of transport services.
Industry Applications and Case Studies
In the early 2000s, J.B. Hunt, a company specializing in dedicated contract freight transportation, wanted to expand its services and grow within the retail sector. They were already a significant player in the transportation industry but were seeking more efficient methods to serve their customers. In order to achieve their goals, J.B. Hunt decided to implement dedicated contract carrier services. A dedicated contract carrier offers its own transport equipment, drivers, and routing based on contractual agreements. The contracted arrangement allows companies to have significant control over the handling and delivery of their freight, without the costs associated with maintaining an in-house trucking fleet. As a result of J.B. Hunt’s strategic shift to a dedicated contract carrier model, they were able to better serve such prominent retailers as Target and Lowes. This strategy has worked out very well for the company, which has seen steady growth as a result. On the flip side of the equation, Great Western Transportation, a freight transportation provider, started out providing dedicated contract carrier services in the 1980s. The bulk of their business consisted of hauling freight from the Omaha area to grocery distributors across the Midwest. The company was profitable, but the market was starting to slow and the management team sensed that a change was needed to remain competitive. The management team understood the importance of being dynamic, so they began increasing their less-than-truckload (LTL) business. LTL freight allows the freight forwarder to consolidate less than full truck loads into a single shipment, making a route roundtrip and generating more revenue with fewer overhead costs. Furthermore, they expanded and placed terminals in Omaha and Denver to better oversee their LTL shipments. They are now a viable competitor in the LTL market, which they are continuing to expand in.
The Future of Carrier Usage
The future of the common carrier/contract carrier breakdown will likely see both parties meeting somewhere in the middle where each’s responsibilities are more clearly defined. With the continued bridging of the gap between contract and common carriers, the need for clearer regulations will become increasingly apparent. Many shippers will find it advantageous to make use of transportation brokers for determining the most efficient ways to get their goods onto the road; carriers will find ways to eliminate the diversity in contract terms by making the process easier and more accessible to both parties; attorneys will help identify truck brokers as either legalization or deregulation leads to regulation and enforcement of previous requirements. By way of example, Union Pacific is now offering multi-modal products that will offer rail transportation in combination with truck delivery. Where freight-forwarders are increasingly using these rail-to-truck connections, freight brokers will realize their position on the transportation continuum gets better defined. With technological changes emerging, the industry in general may find itself undergoing a bit of an identity crisis.
Wrap Up
In the preceding sections, we examined the major distinctions between common carriers and contract carriers. In addition to the differences between the carrier classifications themselves, we also reviewed the impact of these carrier types on the transportation of hazardous materials under federal law. As the previous sections showed, the primary difference between contract carriers and common carriers is that contract carriers serve a specific group of customers on an individually written service level agreement. Common carriers, on the other hand, have two distinct obligations to their customers; (1) they charge their customers reasonable rates, and (2) they accept freight generally . Essentially, common carrier shippers are entitled to order pickups and expect to obtain those pickups, whereas contract carrier shippers must negotiate the basis for all shipments with their particular contract carrier.
The contract carrier model has gained popularity over the past several decades. The overall importance of the distinction between common carriers and contract carriers cannot be ignored. Each model serves its precise purpose in the transportation system. Common carriers provide accessible nationwide service at reasonable rates. Contract carriers compete on price, fitness, reliability and risk. Both forms of service help to create the comprehensive transportation system that exists today.