Incoterms (International Commercial Terms) defines the responsibility of the buyer and seller when delivering goods. Whether you are a buyer or seller, cost and control are vital to choosing the most suitable Incoterms for your exact shipment.
If you are new to shipping, the terminology can sometimes feel overwhelming. Experienced buyers and sellers sound like they speak a foreign language. A set of concepts that cause confusion are Incoterms. The rules define the responsibility of the buyer and seller when delivering goods. Thus, Incoterms represent a crucial part of your contract with the seller. By understanding the Incoterms in your contract, you have good control of the total product costs.
What are Incoterms?
Incoterms are a set of standardized terms of delivery terms used in connection with national and international trade transactions. The rules were first published in 1936 by the ICC (International Chamber of Commerce), and are updated periodically. The latest version is Incoterms 2020, valid from 1 January 2020.
Incoterms describe who bears the responsibility, risk, and costs associated with a transaction and when it goes transfers from the seller to the buyer. The choice of Incoterms shall be included in the commercial invoice.
What are the 3 most common Incoterms?
Incoterms offer the buyer and the seller a common language, minimizing surprises and misunderstandings. Incoterms® 2020 defines rules for 11 different scenarios, we will explain the 3 most common to you.
1. EXW (Ex Works)
The buyer has the risk from the moment the seller has made the goods available at the agreed time and place, e.g., in the seller’s factory or warehouse. The buyer bears the risk and the shipping cost for the goods to the final destination. The buyer is also responsible for customs clearance.
2. DDP (Delivery Duty Paid)
The seller covers all transport costs and risks until the goods have been delivered. Also, the seller pays any customs fees unless otherwise agreed. The risk transfers to the buyer from the moment the products are available at the destination.
3. FOB (Free on Board)
The seller has the risk until the goods are loaded on board the ship specified by the buyer. The seller must clear for any export. The risk transfers to the buyer from the time the goods are delivered on board the ship.
Cost and control
Incoterms are designed to make international trade easier. They clearly communicate all the tasks, costs, and risks of transporting and delivering goods. They are contracted by the seller and buyer of the products. In simplified terms, they can be said to allow the parties to understand each other better.
You may have noticed that the terms give you different pictures of total transport costs now that you understand the most common Incoterms. Except for DDP, you must take extra shipping and import costs into account before you have control over the final purchase cost of the item.