WHICH INCOTERM® 2020 IS RIGHT FOR YOUR SHIPMENT?
Our previous article helped you to Understand Incoterms ® rules and groups. To make sure you choose the right Incoterm for your next shipment, Freight Forwarding Experts breakdown the decisions you will want to take and share common pitfalls you should avoid. Hop aboard and enjoy the journey!
The Most Popular Incoterms® in 2020
Incoterms® regulate the distribution of the delivery costs and determine when the risks of accidental loss or damage to the goods are transferred from buyer to seller. In fine, they state when the supplier is considered to have fulfilled their delivery obligations. You can find our detailed description of each of the Incoterms® 2020 on our Incoterms® 2020 dedicated page.
In Ocean Freight transportation, we at DHL Global Forwarding have found the following Incoterms® to be the most commonly used so far in 2020:
- Free On Board (FOB)
- Ex-Works (EXW)
- Free Carrier (FCA)
- Cost & Freight (CFR)
- Cost Insurance & Freight (CIF)
But how does one exactly choose the correct Incoterm®? While the decision-making process can be complex, and often tied to the traditional practices of a business sector or a specific partner, we tried to categorize and simplify how your preferred allocation of costs & responsibilities can translate into a specific Incoterm®.
Questions to Ask Yourself & Your Business Partner to Choose the Right Incoterm® in 2020
Free Alongside Ship (FAS), FOB, CFR and CIF are designed for sea or waterway transportation. If these terms are agreed upon, the seller is obliged to present a bill of lading or other maritime transport document upon delivery.
They should in all logic not be used if your shipment is not going to be transported on a barge or a ship during its international leg. The other Incoterms® can all be used for ocean, air, and rail transportation.
The ocean- and waterway-specific Incoterms generally imply that the ocean carrier is a third party. In the eventuality of vessel chartering however, the party (buyer or seller) chartering the vessel will be considered as the carrier. The main discussion point to be clarified between the parties is the responsibility for cargo loading onto and unloading from the ship.
Main-leg and inland transportation does not only include the time your container or pallets spend on a ship or a truck: they also include monitoring the loading or unloading process and the cargo’s general integrity throughout its journey.
Let us consider the specific example of perishables being delivered. If the seller owns some of the necessary equipment and/or has access to the expertise to transport such commodities over long distances (think specifically-trained staff, reefer containers…), and the buyer does not, it is reasonable to give the seller the responsibility to manage transport through the Delivered At Place (DAP) terms.
More generally, choosing between F-, C- or D-Group terms can also be decided upon based on the seller’s or buyer’s capacity to conclude the most favorable contract of carriage. In some countries, the seller or buyer can be legally bound to use a national shipping line.
Finally, who is the most capable to monitor and control demurrage, detention and storage expenses?
Let your freight forwarder put you in control of your supply chain .
Insure your goods. As a buyer, if you want to clearly show in your contract that your supplier is responsible for insuring your goods, support your transaction with the relevant Incoterms®: choose CIF or Carriage and Insurance Paid To (CIP). Specify directly in your contract which risks the insurance should cover.
In international trade, export customs duties are usually borne by the seller, and import duties are borne by the buyer. Clearing the goods for import or export also includes permits and licenses necessary to the compliance of your shipment.
As a consequence, you may wish in certain instances to let the buyer take the responsibility of this process at both import and export, which is enabled by the EXW terms.
If it is rather the seller who should take care of these formalities at both end of the journey, select the Delivered Duties Paid (DDP) Incoterm®.
You have chosen the perfect Incoterm for your shipment? Make sure you specify that you are using the 2020 edition!
Three Mistakes to Avoid When Choosing an Incoterm®
Your shipment’s invoice will be used as a basis for the determination of its customs value.
As a consequence, if your contract indicates that transportation has been agreed upon with EXW terms, an invoice mentioning a CIP delivery will raise questions and potentially delay the clearance of your cargo. This is important if your contract does not state that other conditions for the delivery or pricing of the goods may be established on the invoice.
Incoterms were created to provide a common framework of reference for international deliveries, and thus facilitate global trade. With a new edition now in application, redoubling your communication efforts on the concrete implications of the selected Incoterms® will always pay out! EXW and FCA make for a great example.
According to the FCA terms, the seller transfers the goods to the carrier, or another person nominated by the buyer, directly in the seller’s premises in another designated place. In The 2020 edition of the Incoterms®, it is established that the buyer must inform the seller of a time period or precise date for the carrier (or other designated party) to pick up the goods.
Unlike the seemingly similar EXW terms, FCA does however not establish the seller’s obligation to notify the buyer of the readiness of the goods for delivery – complaints from the buyer for that matter would be unfounded. Play it safe, let your customer know!
Under CIP terms, the seller must conclude a contract of carriage and bear the costs inherent to the shipment’s delivery at destination – irrespective of the chosen transportation mode.
The basis of CIF implies the obligation of the seller to conclude an agreement and pay all costs and freight necessary to deliver the goods to the specified sea or river port of destination. If a sale has been concluded on CIF terms, delivery of goods by road may be recognized as improper fulfillment of the delivery obligation.