The Incoterms are an initiative of the International Chamber of Commerce, also known as ICC. The Incoterms have been drawn up to make international trade between companies easier, clearer and safer for both the buying and selling party. The Incoterms actually tell the buyer and seller what their obligations are during the buying and selling process. In addition, all agreements do not have to be manually included in the purchase contract, but 1 reference to the Incoterms is sufficient.
So when you are going to buy or sell, it is wise to include an Incoterm in the purchase contact. Which Incoterm best suits your shipment depends on several factors. Often a golden mean is chosen. Also, not all Incoterms apply to the mode of transport you choose.
Curious about what all Incoterms mean and which one is best for you? Read on below and find out what the pros and cons are of the different Incoterms!
The Incoterms describe 3 important matters during the purchase and sale of goods, namely the obligations for who arranges what, where the Risk lies and for whom which costs are incurred. The Incoterms are a right of clause, which means that they only apply if both parties agree. A brief overview of which Incoterms are available:
With Ex Works, the selling party has the fewest obligations and the buyer the most. With Ex Works, the selling party ensures that the goods are ready for collection at its location on a specific date. The buyer must arrange for the goods to be loaded there and then transported to his location. Even the loading of the truck must be arranged by the buyer in this case. The Incoterm states that the risk passes to the buyer when the goods are made available to the buyer.
So when you are going to buy something somewhere, it is not wise to use the Incoterm Ex Works. If you have cross-border transport, it is not recommended at all. You must then ensure that any necessary customs documents are drawn up. You will also have to pay import duties yourself.
Under the Incoterm FCA, the Seller pays for transport up to the point where the goods are delivered to the first carrier, at which point the risk also passes to the Buyer. FCA is often used when the goods are delivered from the warehouse of the selling party. Therefore, specifically record the location of the FCA delivery! The Buyer normally arranges the majority of the transport, the seller loads the vehicle, takes care of a customs clearance and the correct transport documents. The risk transition point is when the seller has fulfilled its obligations. There are no agreements about any insurance of the goods in FCA, so keep this in mind!
With CPT, the Seller pays for the transportation. The risk passes to the Buyer when the goods are handed over to the first carrier. However, the purchasing party must pay close attention to this. The seller pays and arranges the transport to the agreed destination, but the risk of the transport lies with the buyer! If the goods are damaged during transport, the buyer is simply out of luck. When you use this Incoterm as a buyer, make sure you have confidence in the party that will transport it! Do your goods have a high value, for example a custom-made machine? Then it is better to opt for the next Incoterm, namely CIP!
With CIP, the seller pays for the transport and insurance to the agreed destination for the goods. The risk of the seller passes to the buyer when the goods are handed over at the destination. CIP is therefore almost the same as CPT, except for the risk. When you are going to buy very valuable goods, it is wise to choose CIP instead of CPT.
With DAP, the seller pays for the transport to the agreed destination, except for the costs of customs clearance of the goods. The risk from the seller to the buyer passes when the goods are unloaded by the buyer. The Incoterm DAP is widely used for road transport. The seller arranges that the goods arrive safely at their destination and the buyer arranges any customs clearance and unloading of the goods. DAP has not agreed on any insurance, so that the risk is for the seller.
At DPU, the obligations of the selling party are even greater. At DPU, the seller is responsible for transporting and unloading the goods at their destination. The moment at which the risk is transferred is therefore when the goods are unloaded at the agreed destination. To avoid problems afterwards, it is important to agree on the exact destination of the goods.
With the Incoterm DDP, the selling party must ensure that the goods are transported to the place of destination. The seller must also ensure that all costs are paid up to the moment of unloading. These are, for example, import duties and taxes. However, the seller does not have to unload the goods, that is done by the buyer. Because the selling party also has to arrange customs clearance, this is more risky for the seller than normal. When you as a selling party know what you are getting yourself into, you can use this Incoterm.
The name already says it a bit, but this Incoterm can only be used for transport over water. The seller must place the goods alongside the ship at the port of departure. When this is done, the risk passes from the seller to the buyer.
With the Incoterm FOB, the selling party must ensure that the goods are loaded on board the ship. The risk therefore passes when the goods are on board the ship. This Incoterm is frequently used and we regularly see it with sea freight from China, for example. The seller in China ensures that the clearance is arranged, the local costs are paid and the goods are delivered at the terminal in China. The risk only passes to the buyer when the goods are on board the ship. This Incoterm is also only valid for transport by water.
The Incoterm CFR is very similar to the Incoterm FOB. The difference is in the costs of transporting the goods by sea freight. With FOB the buyer pays this, with CFR the seller pays the costs for the transport to the port of destination. The risk also remains the same, namely when the goods are on board the ship it passes to the buyer. This Incoterm is mainly intended for transport by water.
As we wrote at the very beginning, the Incoterms are actually a sum every time, that also applies to CIF. This is the same clause as the CFR, only here are the costs of insurance for the Seller. The risk here therefore shifts further and further to the Seller. This Incoterm is intended for transport by water.
A total overview of all Incoterms with the obligations regarding transport, costs and risks for both the buyer and seller. It doesn't get any clearer than this!