What are they?
What on earth are Incoterms, I hear you ask? They’re a series of pre-defined International Commercial Terms, and if you’re involved in any commercial transactions then you need to know and understand them.
Incoterms are the basic foundation of all trade transactions, but are quite frequently overlooked or mis-understood. Established as long ago as 1936, Incoterms are International Commercial Terms which are essentially a set of globally recognised trade terms developed to establish firm ground rules for international trade.
They are regularly updated so you need to be kept an eye on them. Without them negotiations could be confusing, drawn out and, crucially, their absence might end in you spending more than you bargained for!
You may not realise it but you are most likely using Incoterms in your everyday shopping, which gives us a good illustration of their definitions;
EXW (“Ex Works”) –
This is where you can go to the seller’s premises (supermarket, shop etc), select your essentials, take them to the till and pay, load them in your car and proceed to take them home.
In this case the buyer is responsible for all risks such as transportation and taxes from that point onwards. The contract would read “EXW Location”
FOB (“Free On Board”) –
The seller gets the goods ready for export and loads them onto the ship. At this point the buyer and the seller share responsibility for risks and costs. This is different from FCA (“Free Carrier”) which uses multiple modes of transport.
For a ‘real-life’ shopping example, FOB would occur if you went to your electrical retailer, chose a home cinema system, paid for it and then had a helpful shop assistant carry it out and load it into your car, before you drove away. That bit of help is at the expense of the retailer.
DDP (“Delivered Duty Paid”) –
In this case, the seller would be responsible for delivering the goods to the destination, including all costs and risks. The buyer would only be responsible upon receipt of the goods.
For example; you go on-line, buy a loved one a gift, pay an all-inclusive price and have it delivered (gift-wrapped, naturally) straight to your door. Your on-line retailer is responsible for getting the gift to its destination. If it’s lost or broken whilst in transit you’d be entitled to compensation or replacement, but if it’s damaged after delivery you’ll have to buy another!
That’s not all…
These are just three simple illustrations of eleven Incoterms in total. With such an array of trading terms, all summarised with acronyms including EXW, DAP, CIF, FOB, DDP and FCA, choosing the right term might seem daunting. However, your friendly freight forwarder can offer a helping hand in selecting the most appropriate term.
Getting the right term agreed between buyer and seller eases negotiations and ensures that no one is caught unaware by unexpected procedures, transport requirements and, essentially, costs. In fact proper use of Incoterms can save you money even after you’ve agreed the deal, so it’s worth taking the time to get to know them.
If you’d like to know more and take active steps towards understanding Incoterms and what they mean to you, contact Gordon Humphrey at Gordon@seaspace-int.com or call 01293 554620 today.
Gordon Humphrey is Managing Director of Seaspace International Forwarders Ltd, providers of pro-active and innovative freight forwarding and logistics solutions to business for over 25 years.