Understanding The Shipping Incoterms

Understanding The Shipping Incoterms

Despite being such a significant part of our everyday lives, most people don’t know much about freight and forwarding , much less the jargon associated with it. Siggol Logistics takes its time to explain to client’s terminologies used in the shipping industry. This enables our customers to understand the state of their goods and ensure ease of communication.

So, what is incoterms?

WHAT ARE INCOTERMS?

Freight incoterms (International Commercial Terms) are the standard contract term used in sales contracts with importing/exporting to define responsibility and liability for shipment of the goods. In plain English – how far along the process will the supplier ensure that the goods are moved, and at what point does the buyer take over the shipment process.

FOB (Free On Board), EXW (Ex Works) and FCA (Free Carrier) are the most familiar incoterms but there’s much about these and the other options to learn. Because they are legal terms, written from a legal perspective, incoterms can be confusing or easily misunderstood. And making the wrong choice might turn your shipment into an expensive nightmare.

AT WHAT POINT YOU SHOULD CONSIDER INCOTERMS?

Buyers should consider incoterms before the contract of sale is negotiated, or risk being stung by the supplier on the deal, and/or having unnecessary complications to the shipment.

WHEN TO CHALLENGE ADVICE

Some freight forwarders prefer only using a favored set of incoterms because they ‘seem to work’. Therefore, don’t be surprised if some forwarders push back on your selection of incoterm, despite it being the most appropriate incoterm for your shipment.

WHAT INCOTERMS DON’T COVER

Incoterms do not cover property rights, possible force majeure situations and breach of contract. Include of these within the contract of sale. Similarly, all incoterms except the C terms do not assign responsibility for arranging insurance. Cargo insurance is, therefore, a separate cost for buyers.

DEFINE NAMED PLACE IN THE SALES CONTRACT

When the incoterm is written in the sales contract, the named place should immediately follow the three-letter incoterm abbreviation. Be precise when defining the location, especially with larger cities that may have several terminals, and with larger terminals that may have several drop-off points.

HOW INCOTERMS IMPACT YOUR SHIPPING COST

You can use our freight rate calculator to help you decide how different incoterms will impact your freight cost. For example, when shipping EXW, you’ll be responsible for the added cost of getting your goods from your supplier to the seaport or airport. Simply choose container, box, or pallet shipping, enter your dimensions and weight, and you’ll get an instant estimate of freight shipping costs.

HOW LETTERS OF CREDIT LIMIT CHOICE OF INCOTERM

If the sale is being completed with a letter of credit or documentary credit, the chain that releases funds begins with the seller providing several documents to the bank, including the bill of lading/air waybill. Letters of credit are used where there is limited trust between the seller and the buyer.

That rules out EXW, because the supplier will be paid before pickup. F terms require trust because if the buyer cancels the international transit, the supplier won’t have a bill of lading to present to the bank. D terms require trust because the seller is bearing all of the transport costs. That leaves the four C terms as the best options to use with a letter of credit.

COMMON INCOTERMS MEANING

1. (FOB) FREE ON BOARD

In this, the seller is responsible of delivering the goods up to the point of agreed shipping port (the goods are suitably cleared for export and packaged). Once the goods are loaded to the ship the goods responsibility shifts to the buyer and he/she is the one to take care of the freight costs.

2. (CFR) COST AND FREIGHT

In this the seller of the goods is required to arrange for the carriage of goods by sea to a port of destination and provide the buyer with the documents necessary to obtain the items from the carrier. The seller has a responsibility for arranging and paying for transportation the ordered products.

3. (CIF) COST, INSURANCE AND FREIGHT

In this the seller delivers their part of the contract when the goods pass the ship's rail in the port of shipment. The seller pays the costs, insurance, and freight necessary to bring the goods to the named port of destination.

4. (DAP) DELIVERED AT PLACE

In this, the seller is responsible for delivery of the goods, ready for unloading, at the named place of destination. The seller assumes all risks involved up to unloading. Unloading is at the buyer’s risk and cost may it be taxes or import duties.

5. (DDP) DELIVERY DUTY PAID

In this, the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport, and ready for unloading at the named place of delivery.

6. (FCA) FREE CARRIER

The seller fulfills his obligation to deliver when he has handed over the goods, cleared for export, into the charge of the carrier named by the buyer at the named place or point.

7. (FAS) FREE ALONGSIDE SHIP

In this, the seller must arrange for the goods purchased to be delivered next to a particular vessel in a particular port in order to be ready for transfer to a waiting ship. At this point the buyer carriers the responsibility of loading the goods into the other ship and any further costs.

8. (EXW) EX WORKS

The seller makes a product available at a designated location (i.e. warehouse, factory), and the buyer of the product must cover the transport costs.

9. (DAT) DELIVERED AT TERMINAL

The seller delivering the goods, once unloaded from the arriving means of transport. Goods are placed at the disposal of the buyer at the named terminal, at the named port or place of destination.

10. (CIP) CARRIAGE AND INSURANCE PAID TO

The seller delivers the goods to the carrier nominated by him but the seller must, in addition, pay the cost of carriage necessary to bring the goods to the named destination.

For this and much more, kindly get in touch with us at; sales@siggol.com