Thanksgiving Special: The Incoterms

Once you finally have found the part you were looking for, the next step is to ship them to the place you need. The incoterms are frequently used to determinate the payment responsibilities associated to the transport of each party, but beyond this, it also involves the point of transfer of costs, the point of transfer of risks and the business processing duties. Therefore they regulate who gets the documents of the goods and who pays possible customs costs; who is responsible for transport documents and their costs; who insures checks and packs the goods.

The Terms

Group E: Departure

Ex works (EXW) is the only clause in this group.

The seller provides the goods to the buyer at the seller’s own premises.

Group F: Main carriage unpaid by seller

These three clauses affect the main carriage which is not paid by the seller but he delivers either free to the carrier only (FCA), free to the long side of the ship (FAS) or free on board of the ship (FOB), every time to the named place or rather the port of dispatch. F-Terms are shipment contracts.

Group C: Main carriage paid by seller The four C-clauses also affect the main carriage but only when paid by the seller. Either the seller pays only cost and freight (CFR) or cost, insurance and freight (CIF); both to the port of destination. With the clause “carriage paid to” (CPT) the seller even pays transportation to the point of destination. The clause “carriage and insurance paid to” (CIP) is the same as CPT but insurance is included. The passing of risk and cost of every C-term fall apart. C-clauses are also, like the F-clauses, shipment contracts because the seller fulfills his contractual obligations in the country of dispatch. The seller must contract for the carriage of the goods without assuming risk of loss of, or damage to the goods or additional costs due to events occurring after shipment.

Group D: Arrival

All clauses in this group are terms of arrival: delivered at terminal (DAT), delivered to the named place (DAP), or delivery duty paid (DDP) to the named place. The seller is not obliged to clear the goods for export in the country of destination except for DDP. The seller bears all costs and risk.

EXW: Ex Works

Seller Buyer

FCA: Free Carrier

Seller Buyer

FAS: Free Alongside Ship

Seller Buyer

FAS: Free Alongside Ship

Seller Buyer

CFR: Cost and freight =FOB+costs

Seller Buyer

CIF: Cost, Insurance and Freight =CFR+insurance

Seller Buyer

CPT: Carrier Paid To

Seller Buyer

CIP: Carriage and Insurance Paid To=CPT+insurance

Seller Buyer

DAT: Delivered At Terminal

Seller Buyer

DAP: Delivered At Place

Seller Buyer

DDP: Delivered Duty Paid

Seller Buyer

How to choose the RIGHT Incoterm?

There are several issues one should be aware of when choosing an Incoterm:

The regulations of the buyer’s country: There are regulations in certain countries saying which terms must be used when goods are brought into the country.

Standard practice: Some countries do not have regulations saying which terms must be used. When a party offers less favorable terms (for example FOB rather than DDP) one could miss out on the business.

The used transport method: Some Incoterms are just for maritime and inland waterway transport.

Availability of information: The seller and the buyer should be able to meet their obligations under the chosen term because there may be occasions when a party is not able to clear the goods for import or to get an import license (then the DDP term cannot be used).

Customer service: One should use a competitive term which is suitable for buyer and seller and not only important for one party to get maybe an advantage from that.

When choosing an Incoterm clause, one has to be especially aware of matching the content of the clause in detail with the content of contract incidentally. Furthermore the choice of certain Incoterms has repercussions on the matching freight arrangements, letter of credit arrangements and insurance arrangements.

Written by Jacqueline Abrego

Jacqueline Abrego is Naval Engineer and a Supply Chain Management Expert

What’s the … NSN? BAE systems team awarded development contract...

Comments (0)