Prepare a claim!
David Atkins has been engaged in the oil industry for over 30 years: in the supply business, production and transportation of oil, logistics, refineries capacity planning, freight forwarding, chartering, production and marketing of natural gas. The last and most interesting period in Mr. Atkins’ career was the demurrage and claims department at BP company. The department team had revamped the company’s practice, which led to the shortening of the claims term and to improving the department’s financial accounts. Some of these changes subsequently became the standard in the industry. Currently, Mr. Atkins is the founder Mindstone Shipping Consulting.
- David, can you explain why some companies became so interested in demurrage in recent years?
- Demurrage has always been a second fiddle in sea transportation industy. Many ignored this field of business. There are more companies in a few recent years, which begin evaluating experienced demurrage experts, but many still need to be “converted to this faith." I remember that not long ago traders were unwilling to hear anything about demurrage, ignored it, and some even did not include the demurrage from the profit and loss account. For example, before the mid-90's, one of the largest oil companies charged off demurrage costs over the general account, not relating them to the transaction in the trading portfolio, which was the reason of the expenses they incurred. Today the situation is changing. The cost of demurrage is included now in the actual reports. Moreover, the cost issue can tip the scales in the evaluation of the transaction in the direction of the profit or loss. And if the daily demurrage rate is too high, the shipowner and the charterer are trying to work much more actively to collect demurrage.
- What are the trends in the industry now?
- In recent years, the most noticeable trend becomes the practice of a more accurate and proper registration of claims, although some companies continue to post swollen bills or just turn over the claim to a third party without first checking how it is justified or accurate. Recently, I begin to note that the demurrage claims by the majority owners are becoming, as it were, "correct," that is exactly consistent with the contract of freight and are well substantiated by documents. The same practice was gradually penetrating the area of claims under the supply agreement.
- What issues become nagging problems for companies?
- If you talk about problems, one of the key one, which I would like to mention is the inconsistency of the supply agreement and the freight contract, and - let's be honest - if it were not so, our job would be a lot easier! When the trader is negotiating a supply agreement, the terms of demurrage are not in the first place, and some suppliers or consignees insist on its own terms, hence the inconsistency. We call the situations, when the transaction involves at least 3 different contract, the "triangle trade". Those corners are the freight contract, delivery contract on terms of FOB, the supply agreement on terms of CIF/CFR/DES, making demurrage inevitable in 90% cases.
- David, can you explain why some companies became so interested in demurrage in recent years?
- Demurrage has always been a second fiddle in sea transportation industy. Many ignored this field of business. There are more companies in a few recent years, which begin evaluating experienced demurrage experts, but many still need to be “converted to this faith." I remember that not long ago traders were unwilling to hear anything about demurrage, ignored it, and some even did not include the demurrage from the profit and loss account. For example, before the mid-90's, one of the largest oil companies charged off demurrage costs over the general account, not relating them to the transaction in the trading portfolio, which was the reason of the expenses they incurred. Today the situation is changing. The cost of demurrage is included now in the actual reports. Moreover, the cost issue can tip the scales in the evaluation of the transaction in the direction of the profit or loss. And if the daily demurrage rate is too high, the shipowner and the charterer are trying to work much more actively to collect demurrage.
- What are the trends in the industry now?
- In recent years, the most noticeable trend becomes the practice of a more accurate and proper registration of claims, although some companies continue to post swollen bills or just turn over the claim to a third party without first checking how it is justified or accurate. Recently, I begin to note that the demurrage claims by the majority owners are becoming, as it were, "correct," that is exactly consistent with the contract of freight and are well substantiated by documents. The same practice was gradually penetrating the area of claims under the supply agreement.
- What issues become nagging problems for companies?
- If you talk about problems, one of the key one, which I would like to mention is the inconsistency of the supply agreement and the freight contract, and - let's be honest - if it were not so, our job would be a lot easier! When the trader is negotiating a supply agreement, the terms of demurrage are not in the first place, and some suppliers or consignees insist on its own terms, hence the inconsistency. We call the situations, when the transaction involves at least 3 different contract, the "triangle trade". Those corners are the freight contract, delivery contract on terms of FOB, the supply agreement on terms of CIF/CFR/DES, making demurrage inevitable in 90% cases.
Accuracy in preparation and calculating the claims amount have led to fewer opportunities for expenses cuts, but not completely, sometimes giving a chance to make a profit, that is to make out a greater amount to counterparty exceeding the amount of your payment. When I first started working in the field of demurrage, the average reduction in the amount claimed was 17%, and now - only 10-12% - and remember, these are the average digits! Sometimes a claim can be completely rejected, then the economy reaches 100%. My best result in reducing requirements for a valid claim was 85%. A very important aspect of our work is a thorough check of claims and all the facts, including those involving third parties, such as shipping agents or inspectors.
- Why is the demurrage so important and how much the company’s demurrage department can save or lose money?
- The Company can solve demurrage issues in two different ways: first – to approach the demurrage a secondary function and turn it over to the department of transport and freight, assigning the department staff to work with claims. Actually, this leads to claims backlog accumulated, increasing the risk of delay in filing a claim. It is quite understandable that the main responsibilities will take much longer. So when it finally comes to the demurrage, not enough time is left for thorough analysis - at least, my experience proves that. Demurrage and cargo carriage should never be confused. I know what I’m talking about, and that won’t do.
Another approach, to hire a specialist, or several ones to work exclusively with reclamations result. The result - an effective review of claims and lower costs.
- What do you mean talking about ‘an active specialist on demurrage?
- When a specialist of demurrage fails to catch on in time filing a claim, it might be the most serious mistake he has ever done. So, it is important to be active that is to act in advance rather than in response to an event. I once read in a brochure for a training course on demurrage: "At the time when you have had a claim from the shipowner or contractor, you have all the necessary documents for filing your claim in turn." I am shocked that this is the example of correct approach presented to the course participants. You should never wait for a claim from the counterparty to raise your own one. You need to work actively and to begin preparing your claim as soon as possible. Of course, this is not so easy, if you have acquired consignment under CIF, since it will be difficult (but possible) to collect all the necessary documents, especially a copy of the freight or recap, before the claim is handed. But you are the charterer - all the necessary documents can be collected and send the claim to your counterparts long before the shipowner's claim gets to your table. The main part of this job is to sort the documents on all shipments over the previous months, when the purchase / sale of goods took place no later than 30 days from the date of the bill of lading and to check if there was any excess of the lay time on the freight and / or supply contract. If such a delay occurred, it is necessary to prepare the claim. If some required documents are missing, you can contact the agent serving the ship. Usually, they quickly respond to the request and provide copies of documents.
Another equally important aspect of active work is regular communication with employees of trader office and freight traffic service. A good analyst of in demurrage will be able to track interesting trends, such as large amount of claims for maintenance at certain terminals or a contract terms with any of the counterparty, resulting in losses cased by inability to recover demurrage. Experienced forwarder or trader often aware of such examples - but not always, and would therefore be grateful for the information given by the demurrage specialist. Similarly, if there is an excess of the lay time at a terminal, an expert on demurrage should ask why it happened. This question is particularly relevant if the owner or operator of the terminal is the company itself, because the methods can be changed, if it proved cost-effectiveness of these changes. For example, a company I worked for, owned the terminal, and it would take at least 4 hours to deliver goods shipment papers on board after loading operation. A specialist of demurrage serving this terminal, noticed that, and during one of his visits to the terminal asked a question, why this delay happened and was possible to deliver documents onboard faster. In response, he heard that that was possible, but the reason for the delay was that the terminal employees believed that they have 4 hours for delivery of the documents.
The demurrage expert told that under the freight contract terms for delivery of documents two, maximum three hours are given, after which the charterer incurs penalties. Delivery of the documents was forwarded. That resulted in significant costs cuts of the terminal it would pay for demurrage , but also improve turnaround of vessels and occupancy of berths.
Sophia Vinarova