What Is a Contract Warehouse?

13 December 2019

A contract warehouse offers several services – such as receiving, storing, and shipping goods – in virtue of a contract that is signed between the owner and the client for a determined period of time. Since the warehouse belongs to a third part, this type of storage is actually a form of public warehousing, although some notable differences do exist.

Not sure what exactly is entailed by a contract warehouse? If you want to know more about how this form of storage can be differentiated from public warehousing, you can find all the necessary information below.

Public vs Contract Warehousing

A public warehouse is a storage building owned by a third party and let to companies (or clients) for the purpose of holding goods during the shipping process. A contract warehouse is a similar space, but both the owner and the client are bound by an agreement that settles several aspects of their collaboration – including the duration of time and/or any special services.

To better understand the distinction between these two forms of storage, consider the following essential differences:

  • Public warehouses let storage space on a short-term basis, whereas contract warehouses are usually employed by clients for a minimum of 3 years at a time.

  • When a company inquires for space at a public warehouse, they are served based on availability. With contract warehouses, on the other hand, space is always guaranteed (as per the agreement between client and owner).

  • When using a public warehouse, a client pays for the time/space they employ and the cost may vary. For space in a contract warehouse, the client pays a steady sum every month/year and the cost is usually fixed.

  • Overall, a public warehouse offers a higher degree of flexibility, since the client can switch location and/or space requirements at any given time. A contract warehouse is less flexible, but provides a higher degree of stability, instead.

The Advantages of a Contract Warehouse

Many of the benefits of using a contract warehouse stem from the higher degree of stability offered by the latter. The most notable advantages include, but are not limited to:

Affordability and Reduced Risk. A private warehouse is theoretically the form of storage that is likely to bring the highest return on investment. However, it is also far too expensive up-front for most companies, while contract warehousing is a reasonable alternative. Because the startup and usage costs are relatively low, there is a reduced degree of risk associated with contract warehousing.

Increased Control. While private warehouses can be exorbitant, public warehouses offer clients little to no control over interior operations and distribution of space. Contract warehouses occupy a middle ground between the former two, since they are more affordable and also provide clients with some degree of control, as per contractual terms.

A Fixed Service Period. For the duration agreed upon by the owner and the client, the latter can use the assigned storage space at their discretion. In other words, a company does not run the risk of finding no available space when they need it the most.

No Fluctuations in Price. Once the warehouse owner and client agree on a specified price, it is highly unlikely that this agreement will suffer changes for the duration of the entire contract. The client needn’t worry about spikes in rent rates.

More Specialized Services. Contract warehouses are often equipped to provide additional services – such as special storage conditions, some transportation, shipping, and more. Some of these services can be included in the contractual agreement, which gives clients the possibility to customize their storage space.

The Drawbacks of a Contract Warehouse

Naturally, contract warehousing is not the optimal solution in all situations. Some of the most important drawbacks companies should consider are:

Contract warehouses require additional commitment. While they do offer more reliability, these storage buildings also require a more long-term commitment on behalf of the client. This diminishes from the flexibility of typical public warehouses, where clients can drop a collaboration after as little as 30 days.

Large companies can better streamline their supply chain with private warehouses. Contract warehouses are a great option for clients who cannot afford private warehousing, but those companies that can will usually prefer to build/buy their own storage space. This gives them maximum control over the latter and allows them to optimize the shipping process.