Why contract structure matters
When a fuel price spike, a carrier surcharge increase, or a capacity squeeze occurs in the market, it does not reach every shipper at the same time. The speed of transmission depends almost entirely on how the freight is contracted: what tier the contract sits in, what surcharge update mechanism it contains, and what billing cycle the carrier uses.
Two shippers shipping identical cargo on identical lanes can see cost pressure arrive at entirely different times if they are on different contract structures. The shipper on spot booking will see an invoice reflecting the spike within 30 days. The shipper on an annual contract may not see it for 90 days - or until their next contract renewal.
This is not a flaw in the system. It is the intended design. Contract structure is a risk management tool: longer contract terms trade cost stability in the short run for delayed reset risk in the long run. The problem is that most finance and procurement functions treat contract structure as an administrative category rather than a temporal cost exposure parameter.
The four pressure layers
Before explaining how each contract tier transmits pressure, it helps to understand the four layers the Sirius model measures. Each layer has its own market dynamics and its own typical pass-through mechanism:
- Fuel pressure: Driven by bunker fuel, aviation jet fuel, and road diesel markets. Transmitted through BAF, FSC, EFS surcharges. Update cycles range from monthly (ocean) to weekly (air) to ongoing (road diesel spot).
- Capacity pressure: Driven by vessel utilization, container availability, and route-level blank sailing rates. Transmitted through GRI, capacity surcharges, and rate level. Slower to build, slower to release than fuel.
- Surcharge pressure: Driven by operational cost events - war risk, congestion, port delays, emergency operational surcharges. Can apply within days on spot freight but may be absorbed for the duration of a contracted period.
- FX pressure: Driven by currency movement against trade-lane-relevant pairs. Transmitted through CAF mechanisms. Update cycle varies by carrier - some monthly, some quarterly, some semi-annually.
The key insight is that these four layers are not synchronized. Fuel and FX update on relatively predictable billing cycles. Capacity pressure can be structural and sustained. Surcharge pressure can be sudden. A contract tier's transmission coefficient describes how much of each layer passes through and on what timeline.
M1 - spot and index-linked contracts
M1 is the highest-transmission contract tier. Spot bookings, index-linked contracts, and agreements with monthly surcharge reviews all fall into M1. These arrangements have minimal buffering between the market event and the invoice line item.
For fuel pressure, M1 transmission is close to full pass-through within one billing period - typically 30 days. The carrier applies a fuel surcharge based on the published index from the prior period, so a fuel spike in week 1 appears in the week 4-5 invoice. For surcharge pressure (emergency surcharges, war risk), M1 contracts often apply within 1-2 weeks notice.
The M1 tier's strength is that it creates the most accurate real-time picture of market exposure. The weakness is that it also creates the most volatility: cost spikes in M1 land fast, without the smoothing that longer contract terms provide. For high-frequency shippers - those moving cargo weekly on the same lane - M1 exposure is manageable if the market is being watched. For sporadic shippers, it is the most unpredictable tier.
M2 - short-term contracts
M2 represents 6-to-12-month contracts with quarterly surcharge reset mechanisms. These contracts provide a structural buffer: the carrier absorbs market moves within the quarter and reconciles them at the next reset point. The typical realization lag for M2 is approximately 60 days.
The 60-day figure reflects the combination of two delays: the billing cycle (15-30 days after cargo movement) and the surcharge update cycle (30-90 days depending on where in the contract quarter the event occurs). A fuel spike in month 1 of a quarter may not appear in the surcharge reset until month 4 of the following quarter.
For capacity pressure, M2 transmission is more complex. Carriers on short-term contracts may negotiate capacity lock-in, which means capacity pressure reduces availability but does not immediately translate into a higher rate. The pressure transmits at renegotiation, not at the market event.
For FX pressure, M2 contracts often use a quarterly CAF reset. A significant currency move mid-quarter may not appear until the following quarter's billing cycle. This is the most common source of unexpected FX variance in freight budgets: the rate moved three months ago, and the invoice is arriving now.
M3 - annual contracts
M3 represents annual contracts with semi-annual or annual surcharge review clauses. These are the most common contract structure for large-volume ocean shippers - typically multinational manufacturers and retailers who negotiate directly with carriers or through freight forwarders. The typical realization lag is approximately 90 days, and in some structures can extend to 120-150 days.
M3 contracts offer the strongest short-term cost predictability. During a period of market stress, an M3 shipper may continue paying rates that are significantly below market for several months while M1 spot shippers absorb the spike immediately. This is the upside. The downside is reset risk.
When an M3 surcharge mechanism resets, it often resets on multiple dimensions simultaneously: fuel, FX, and capacity all reconcile at once. If the market has moved significantly over the contract period, the reset can be a significant step change rather than a gradual adjustment. This is the source of the "freight cost surprise" that appears in many Q4 or Q1 budget variances: an annual contract renewed in an elevated cost environment locks in the new baseline for the next 12 months.
Transmission by pressure layer and contract tier
The following table summarizes how each pressure layer typically transmits through each contract tier. Sensitivity ratings are illustrative of typical carrier practice - individual contracts may differ.
| Pressure layer | M1 sensitivity | M2 sensitivity | M3 sensitivity |
|---|---|---|---|
| Fuel | High - monthly reset | Medium - quarterly reset | Low - semi-annual reset |
| Capacity | High - GRI applies quickly | Medium - buffered by volume lock | Low - absorbed until renewal |
| Surcharge | High - applies per booking | Medium - 2-4 week notice clause | Low - usually absorbed or capped |
| FX | High - monthly CAF | Medium - quarterly CAF | Low - semi-annual CAF |
Sensitivity ratings are illustrative. Actual transmission depends on carrier, contract language, and market conditions.
How modal mix shifts the balance
The M1/M2/M3 split does not operate uniformly across modalities. Different transport modes have structurally different contract norms, which means the same shipper's ocean and air cost exposure can be in very different contract tiers simultaneously.
- Ocean freight spans all three tiers depending on volume and carrier relationship. High-volume shippers tend toward M3. Mid-volume shippers are typically M2. Spot ocean is M1.
- Air freight skews heavily toward M1. Airline cargo surcharges are updated weekly or biweekly. Even "contracted" air cargo rates are typically re-priced at 30-day intervals for most shippers outside the very largest consignors.
- Road freight is typically M2. Regional trucking contracts are usually quarterly or semi-annual. Spot road bookings can behave like M1, particularly in tight capacity markets.
A company with a 60% ocean / 30% air / 10% road modal mix will have a blended transmission coefficient that sits somewhere between M2 and M3 for its ocean component and closer to M1 for its air component. This is why two companies with similar spend can see very different quarterly cost variance patterns: the difference is often modal mix, not market exposure.
How Sirius weights contract mix
The Sirius pressure model does not assume a universal contract structure. For each of the 10 trade lanes, the model applies a default modal and contract tier mix based on the structural characteristics of that lane. High-volume manufacturing lanes (Far East to Europe, Far East to North America) carry heavier M3 weighting on their ocean component. Smaller volume or more volatile lanes carry higher M1 and M2 weighting.
The Sirius Pro report includes a full breakdown of the M1/M2/M3 weighting per lane and per modality. This allows a freight manager to map their own contract portfolio against the model's default assumptions and adjust the reading accordingly. A company with an above-average proportion of spot ocean booking on a lane would apply the M1 reading more heavily than the M3.
The pressure readings themselves are calculated three times for each lane - once using M1 transmission coefficients, once using M2, and once using M3 - and the composite reading weights them by the default modal and contract mix. The three separate readings are surfaced in the Pro report so users can isolate the exposure that is most relevant to their purchasing structure.
This decomposition is the practical bridge between the market intelligence Sirius provides and the budget variance conversations that finance teams need to have every quarter. Knowing that the Far East to Europe lane is at a composite reading of 118 is useful context. Knowing that your M3 component is lagged 90 days behind a peak reading of 124 is actionable.