The freight of a transport operation includes a wide range of costs, and it is essential that professionals in the field look at the subject and understand the main concepts involved, such as Ad Valorem. This is a charge included in the freight that should be used by carriers to minimize their risk and avoid financial loss.
Don’t know what this concept means? In this article we answer the main questions on the subject, such as the concept of this rate, its functionality, how to calculate it, how to check its value, what is a practical example of this account, the difference between Ad Valorem and GRIS, between other important topics. Check!
What is Ad Valorem?
Ad Valorem is also called “freight of value”, which comes from the Latin “according to the value” and it is a royalty calculated by a percentage of the value of the goods. Its purpose is to cover the costs of insurance and guarantees as long as the cargo is under the responsibility of the carrier.
It is typically used when the shipper (owner of the product and contracting party to the freight) does not have freight insurance or the policy does not insure the goods while they are with the carrier. In this case, an insurance company can be engaged to protect the transport company against the risks and to pass the insurance costs on to the freight contractor.
What are these fees used for?
Brazilian law states that the carrier is responsible for the cargo it handles. All losses – such as theft, theft, accidents, collisions – that may occur during transport must be covered by the company.
In order for the carrier to be able to guarantee its survival in the market, ways will have to be found to minimize the losses caused by possible problems in its operation. Measures taken to prevent financial damage, such as purchasing goods insurance, are calculated and included in the Ad Valorem tariff.
It should be noted that in addition to insurance, the Ad Valorem fee must include other costs necessary to reduce the risks of the transport activity.
How to calculate Ad Valorem?
Usually, the percentage varies between 0.03% and 0.40%, on the invoice value, but the calculation of this rate will depend on various characteristics of the business, load and operation, as all risk-generating factors must be taken into account. cargo damage and safeguards, which may increase or decrease the value of the Ad Valorem fee.
Among the variables to be taken into account when calculating this rate are:
- travel distance: destinations that are too far away increase the risk of road problems because the carrier will take longer to complete the delivery;
- Cargo Weight and Volume: The smaller the cargo weight and volume, the easier it is to steal or steal. Therefore, light goods increase the cost;
- regional characteristics: there are places with a high rate of theft and accidents, which also increases the rate;
- Cargo handling: When cargoes are more fragile and require special care when loading, unloading or moving, problems are more likely to arise.
The National Association of Freight Transport and Logistics (NTC & Logística) has developed a costing and pricing manual for road freight transport, which can serve as a basis for the definition of Ad Valorem.
What is a practical example of calculating this rate?
Imagine that a transporter was hired to carry medicines of a high enough value, the cargo required special care, the weight was heavy and the distance traveled was great. See an example of a risk relationship with the Ad Valorem rate:
- invoice value: R $ 100,000;
- weight: 500 kilos;
- distance: 600 kilometers;
- requires special care: yes;
- probability of theft: high;
- percentage of Ad Valorem: 0.40%;
- Ad Valorem rate: R $ 400.00 (100 thousand * 0.40%).
Now imagine that the goods being transported are medical waste, but the cargo has the same weight and the distance traveled is the same:
- invoice value: R $ 2,000;
- weight: 500 kilos;
- distance: 600 kilometers;
- requires special care: no;
- probability of theft: low;
- Ad Valorem percentage: 0.20%;
- Ad Valorem rate: R $ 4.00.
As the value of hospital waste is lower, the risk of theft is low and it is not necessary to take special care in its treatment, it is only right to reduce the percentage of Ad Valorem, as well as to charge a small amount for service.
What is your difference between Ad Valorem and GRIS?
The Risk Management Cost (GRIS) is a charge applied by carriers and refers to the amount included in the freight to cover security-related expenses, such as:
- the costs of measures to combat cargo theft;
- prevention of risks, such as the building security of installations;
- risk reduction or dilution;
- risk transfer;
- labor for these activities.
The GRIS is also a percentage calculated on the Invoice, but it is an integral part of Ad Valorem, which is a larger tariff and involves other costs, such as the use of special vehicles, escorts, etc.
What’s the best way to calculate Ad Valorem?
As freight pricing is a very complex business, we recommend that you think about ways to simplify the process. In the case of Ad Valorem, the carrier can stipulate a single rate for all deliveries, regardless of the customer and the type of cargo.
For example, if the vast majority of deliveries made by the carrier are electronics for e-commerce customers and drugs for medical establishments, it is possible to average prices and charge a single percentage for all operations. , or establish a tariff by type of freight.
This increases the efficiency of internal business procedures as it reduces administrative costs and decreases the time required to calculate costs.
Another relevant tip to correctly calculate Ad Valorem is to use transport company management software (TMS) which provides complete information on transport operations, and allows you to set up the calculation rules defined by your company at the same time. advance, avoiding you to leave to consider some important aspect in the calculation of the charges for each shipment.
It is essential that the calculation of this rate be associated with the strategies of the company, because this rate brings more security to the carrier and minimizes the losses with risks in the transport operations, which improves the survival rate and the development of the company.
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