So you ship to small to medium sized companies and you come to agreement with your customer that you will sell your product on a freight prepaid and add basis. After all, you ship a lot of goods and probably have better freight rates than your customer. You select the carrier, you dispatch the carrier and you pay the carrier. Then you invoice the customer for your product and for the freight charges.
A surprising number of companies decide to mark up the cost of the freight charges and make an additional profit in this way. On the other hand, some companies pass on the freight charges with no markup.
Those that decide to mark up the freight cost have thought it through. They feel that it’s their overall shipping volumes (volumes that their customer does not have) and their hard work in making sure they have ('the most competitive freight rates') possible that allow them to mark up the freight. They feel their internal costs of picking the product, packaging, calling the carrier, loading the freight and the carrying costs of paying the freight invoice prior to the customer reimbursing the freight cost should be compensated in some way.
Those that decide to simply pass on the freight cost without markup feel that their competitive freight rates allow them to compete with vendors who may be closer to the customer and if they mark up the freight costs this might not allow them to make the sale in the first place. We’ve also had clients who think the practice of marking up freight costs is just not good business practice.
The Reality- It’s all in the Freight Payment Terms
The fact is if you sell your goods with freight payment terms that specify Prepaid, Add and Handling you are perfectly within your rights to mark up the freight costs without recourse on the part of your customer. The internal costs of preparing and shipping your product referenced above is the legitimate rationale for marking up the freight costs and the inclusion of the word 'Handling' addresses those very real and significant costs.
Where you can get in trouble is marking up the freight costs with freight payment terms of sale that are simply Freight Prepaid and Add. If you markup your freight costs on a Prepaid an Add term, your customer can in fact ask you for a copy of the actual freight invoice as verification that the itemized charge for freight is accurate and has not been marked up. Additionally if the freight invoice copy does not match the itemized freight charge on your invoice for goods sold, your customer can ask for and is legally entitled to a refund on the difference of the marked up freight charge and the actual freight charge.
The possible loss of good will and confidence from the customer if you’re caught with your hand in the cookie jar ( not specifying the correct freight payment terms ) , so to speak, is certainly not a good thing and in fact could cause you to lose the customer and possibly involve you in a lawsuit.
The same scenario works on inbound shipments to your firm. Do you buy from vendors on a Freight Prepaid and Add basis? If you do there is a very good possibility that your vendor is marking up the freight costs on their invoice for materials to you. Ask for a copy of the freight invoice to determine if they are marking up the freight costs. Maybe you’re entitled to a refund.
For more information about freight payment terms of sale, its implications and your possible recourse, contact Distribution Solutions, Inc.- DSi today!