05 Chapter 5 of 32Part II · The Commercial Framework
Freight Rates & Surcharges
How an ocean or air rate is actually built — the base rate plus the alphabet of surcharges (BAF, CAF, THC, GRI, PSS) that turn a quote into the real number.
- Level
- Intermediate
- Reading
- 4 min
- Quiz
- 5 questions
A freight rate is almost never a single number. The figure a carrier publishes is a base rate, and on top of it sits a stack of surcharges that move with fuel, currency, congestion and demand. A forwarder who quotes only the base rate will lose money on every shipment; the skill is knowing the full stack and which parts of it will change before the cargo sails.
The base rate and the chargeable unit
Recall from Chapter 3 that freight is billed on a chargeable unit, and the rate is applied to it:
- Ocean FCL — priced per container (per 20’/40’/40’HC box), regardless of how full it is.
- Ocean LCL — priced per CBM or per 1,000 kg, whichever is greater (the W/M rule).
- Air — priced per kg of chargeable weight (the greater of actual and volumetric).
A freight rate is the price charged by a carrier for moving a unit of cargo between two points by a given mode. It is quoted against a defined chargeable unit (per container, per CBM/1,000 kg, or per kg) and is normally exclusive of surcharges, which are added separately.
Recall the weight/volume ratio framework from Chapter 3 — it sits underneath every rate: sea is charged 1:1 (per CBM or per 1,000 kg, whichever is greater — the “W/M” rule), land ~1:3, air 1:6 (1 CBM = 167 kg). The base rate is applied to whichever unit the ratio selects. Get the chargeable unit right first (Chapter 3); then build the surcharge stack below.
The surcharges — the alphabet you must know
These appear on quotes and invoices as line items. The exact set varies by carrier and lane, but these are the ones a Middle East / India forwarder sees constantly:
| Code | Surcharge | What it covers |
|---|---|---|
| BAF | Bunker Adjustment Factor | swings in marine fuel (bunker) price |
| CAF | Currency Adjustment Factor | exchange-rate movement (rates often set in USD) |
| THC | Terminal Handling Charge | the port/terminal’s cost to handle the container (charged at origin and destination — OTHC/DTHC) |
| GRI | General Rate Increase | a carrier’s across-the-board rise in the base rate on a trade lane, announced in advance; not a separate surcharge line |
| PSS | Peak Season Surcharge | extra charged in high-demand periods |
| ISPS | Security charge | mandated port/vessel security costs |
| DOC | Documentation fee | issuance of the B/L and paperwork |
| War risk / ERS | War-risk or emergency surcharge (WRS, ECS) | routing through high-risk waters; as of October 2026, Gulf cargo has carried WRS since 2 March 2026 (Hapag-Lloyd: USD 1,500 per TEU) |
The 2003 notes treat surcharges as a short, stable list. Two big shifts since then:
- IMO 2020 capped sulphur in marine fuel at 0.5%, forcing carriers to burn more expensive low-sulphur fuel — many replaced or supplemented BAF with a Low Sulphur Surcharge (LSS / LSF). (Covered fully in Chapter 26.)
- The 2021–2022 disruption made GRI and PSS far more aggressive and frequent, and added congestion and equipment-imbalance surcharges that barely existed in 2003. A quote can now be valid for days, not weeks — always state validity.
Building a real quote — worked example
A customer asks for an all-in price, Shanghai → Jebel Ali, one 40’ container:
Base ocean rate: USD 1,200 / 40’ + BAF: USD 180 + THC origin (OTHC): USD 130 · THC destination (DTHC): USD 150 + DOC fee: USD 40 All-in carrier cost ≈ USD 1,700, before the forwarder’s own margin and any local delivery/customs.
On a real Incoterm one payer rarely pays both OTHC and DTHC: the quote splits into origin charges, ocean freight and destination charges, and the Incoterm decides who pays each block (Chapter 4). Read this total as the full cost of the move, not one party’s bill.
The customer hears “USD 1,200” from a competitor and asks why you are higher. The answer is that the competitor quoted a base rate and the surcharges will appear later. Quote all-in, and itemise — it is the difference between a transparent quote and a dispute at invoicing.
Validity, and why rates move
Ocean and air rates are time-bound. They move with:
- Fuel (BAF/LSS) and currency (CAF).
- Supply and demand — capacity on the lane vs. cargo wanting space; this drives GRI and PSS.
- Disruption — a closed chokepoint, a congested port, a blanked sailing (Chapter 26).
Every WorldZone quote should carry three things in writing: the all-in figure with surcharges itemised, the validity date, and the Incoterm scope (which legs are included). This protects both the customer and the margin: it prevents the “but you quoted less” dispute, and it makes sure a rate that has since moved isn’t honoured at a loss weeks later. The chargeable-unit arithmetic from Chapter 3 plus this surcharge stack is the quote.
What to take from this chapter
- A rate = base rate + a stack of surcharges; never quote the base alone.
- Learn the codes — BAF, CAF, THC, GRI, PSS — they are on every invoice.
- IMO 2020 reshaped fuel surcharges (LSS); disruption made GRI/PSS volatile.
- Always state the all-in price, validity date, and Incoterm scope.