What Is An Interchange Agreement in the Trucking Industry?
The US trucking industry is highly competitive. As of June 2022, the American Trucking Associations (ATA) reported that there are approximately 2 million trucking companies and owner-operators hauling cargo for clients on different types of freight trucks.
With competition steadily increasing, trucking companies have to operate with little margin for error, especially when it comes to managing their delivery schedules. As a result, carriers are actively looking for contingencies to minimize the risk of delays and failed deliveries.
One of the most popular strategies in the industry involves truckers forming mutually-beneficial alliances to help each other when in need by exchanging equipment while still maintaining healthy competition.
However, devising and maintaining this collaborative strategy can be tricky. Hence, both parties typically sign a legal document outlining the terms and conditions of the alliance called an Interchange Agreement.
A typical trailer or equipment interchange agreement covers several aspects of freight transportation between two trucking companies. It defines the estimated time a shipment will take, the container that will be transported, and the responsibilities of each party in the process, such as maintenance.
In this article, we’ll share the main applications of interchange agreements and summarize the information found in a typical agreement between two trucking companies. Lastly, we’ll also explain the main risks associated with these types of agreements.
Interchange Agreement Applications
An interchange agreement serves as a contract that facilitates the transfer of equipment (typically a trailer) between the two trucking companies for shipment delivery.
As a result, it offers several lucrative applications for both parties involved. Carriers can provide each other with trucks following a breakdown, equipment during high loading/unloading traffic, and even drivers to operate trucks in case of leaves or emergencies.
In this section, we will further elaborate on areas in which Interchange Agreements play a vital role.
Expand Services to Multiple Industries
Most trucking companies have a selective fleet focusing on specific types of semi-trailers. Some utilize flatbed trailers, while others use reefers. Other trailer types include lowboys, dumpers, tanker trailers, and drop deck trailers, to name a few.
An interchange agreement allows trucking companies to expand their services into other industries and transport different types of cargo by partnering with other trucking companies.
For example, a trucking company that transports non-perishable goods can explore and integrate perishable goods supply chains into its infrastructure by partnering with a company that has a dedicated fleet of reefers.
In other words, they can simply secure the load and use a reefer trailer from another carrier for a trailer interchange fee.
Enhance Drop Trailer Services
Most shippers and receivers with sufficient space in their facilities usually opt for drop trailer services. Drop trailer programs involve a driver dropping a trailer at a client’s facility for a period until another driver comes to pick it up.
This method saves valuable time for truckers as it eliminates the need for live loading process from the chain. Most small trucking companies don’t offer drop trailer programs simply because they don’t have sufficient trailers, trucks, and drivers.
By partnering with other companies using an interchange agreement, they can haul each other’s loads and complement each other’s drop-off and pick-up schedules. They can also come to each other’s aid in the event of breakdowns, high road congestion, or other issues.
Simplify Cross-Border Deliveries
Delivering cargo cross-border to Canada or Mexico is much more complicated than hauling cargo across US states and cities. Truckers have to go through customs checks and inspections, such as VACIS Exams. More importantly, they need to have IFTA licenses to move cargo into other countries.
As a result, many trucking companies with no cross-border delivery experience or licenses miss out on lucrative opportunities from shippers or receivers looking to move cargo across long distances.
With an Interchange Agreement, they can partner with a carrier specializing in cross-border deliveries and have them move their loads across from a designated facility near the border. In return, they can help manage the other company’s local deliveries.
Improve Equipment Utilization
By establishing long-term Interchange Agreements, trucking companies can limit their need for investing in equipment and use each other’s resources when required.
Moreover, carriers that are operating under capacity may also stand to mutually benefit by offering their trailers to another carrier that is struggling with peak delivery volumes.
The former would improve the utilization of their trailers while the latter can temporarily increase their capacity without incurring heavy investments. Doing so will increase equipment productivity while reducing the overall cost per mile.
Reduce Delivery Delays
Perhaps, the most important application of an Interchange Agreement is to achieve an overall reduction in delivery delays. Trucking companies are no strangers to breakdowns, high cargo traffic, and equipment, driver, or labor shortages.
Any of these situations can result in unnecessary delays, incur financial losses, disrupt their entire value chain, and affect their relationships with clients. By partnering with another trucking company, you will be able to reduce the risk of delivery delays or failure through the use of an interchange agreement.
Typical Information Found In an Interchange Agreement
A typical Interchange Agreement outlines all the necessary terms & conditions both parties must adhere to commence their collaborative partnership. Below, we highlight some of the key information found in this agreement:
- Particulars of Both Parties – An Interchange Agreement contains names and contact information of key personnel (usually the decision maker or executive) of the trucking company.
- Scope of Interchange – The Scope of Interchange outlines the boundaries of the interchange and the objectives of the relationship between both companies. For instance, it could mention the type of containers, the interchange location, the final destination, contract duration, etc.
- Responsibilities – The responsibility section of the agreement describes which party is responsible for maintenance, equipment repairs, penalties, taxation, and other costs.
- Compensation – The compensation section outlines the compensation each party will receive for cargo damage, losses incurred due to late equipment return, and so on. This is often called an interchange fee or interchange agreement fee.
- Indemnity – This section protects the owner of the equipment listed in the contract from losses caused by damages or security issues if the equipment was used for any purposes other than its intended use.
- Insurance – The insurance section states that both parties must have insurance coverage for their own equipment and hired vehicles that meets the minimum coverage amount or higher. Users must also agree to cover the costs of cargo loss and physical damage to equipment while it’s in their use.
- Dispute Resolution – This section outlines how disputes will be resolved if one party is in conflict with the other for damages, penalties, or other expenses. Dispute resolutions are often tied to a process and a timeline that both parties must adhere to.
- Termination – The termination section defines the period either party has before they can send a notice of termination in writing (e.g. 10 days, 2 months, etc.). It also includes any conditions that may warrant termination of the contract, along with the grace period for returning any equipment, usually 72 hours.
- Signatories – The end of the agreement prompts authorized persons/decision makers of each company to sign the document and legally binds both parties to the interchange agreement.
Risks of Interchange Agreements
While Interchange Agreements offer several strategic advantages for both parties, they’re not without a few risks. Let’s explore these risks in more detail.
- Increased Liabilities – When trucking companies share equipment, they increase the risk of damages to cargo and the equipment itself. Therefore, they need to get proper coverage to reduce their liability and protect their cargo.
- Potential Disputes – Like any agreement, signing a poorly written Interchange Agreement can cause disputes among parties on compensation, timings, and responsibilities. Many of these disputes may have legal implications. Therefore, it’s recommended that both parties read the terms and conditions of the agreement carefully before signing.
- Equipment Availability – As both parties can use Interchange Agreements to their advantage, there is also the risk of equipment (for example trailers) being unavailable when it’s needed. For instance, it could be undergoing maintenance due to damage or in use at another party’s facility.
- Sharing of Information – Sharing resources can easily translate to sharing information about your clients, freight rates, and other aspects of your business. This may lead to an increase in competition from trucking companies that you have worked with in the past.
- Process Complications – Finally, sharing equipment and resources can elevate operational complexity and the administrative burden on both parties since the process requires extensive and continuous coordination and communication.
Co-Founder & Writer
About the Author
Andrew is a multi-business owner with over 10 years of experience in the fields of logistics, manufacturing, operations, training, and education.
Being the co-founder of freightcourse has given him the ability to pursue his desire of educating others on manufacturing and supply chain topics.