Incoterms
INCOTERMS : How to use them properly
Who is this guide aimed at?
You should read this guide if you are responsible for or help in arranging the shipment of your company's goods to overseas markets.
What does this guide tell me?
It gives you an overview of how to choose the correct INCOTERM for each individual movement.
How Do I Choose an Incoterm?
There are a number of factors you should consider when choosing Incoterms. These include:
- The regulations of the country of the buyer. Certain countries have regulations regarding which terms must be used when goods are brought into the country. The main reason for this is the desire for local shipping and insurance markets to benefit from the importing industry rather than those of the exporting country;
- Common practices. Some countries and areas of the world may not have regulations regarding which terms must be used, however, commercially there may be a normal practice. If less favourable terms are offered (for example FOB rather than DDP) you could lose out on the business.
- Transport methods used. There are certain Incoterms which are only suitable for traditional sea and inland waterway - see the table and notes further down the page.
- availability of information. It is essential that you and your customer are able to meet your obligations under the chosen Incoterm. For example there may be occasions when you are unable to obtain an import licence or clear the goods for import - on these occasions the term DDP should not be used. Additionally, it is important that you are able to obtain a good service and reasonable quotes for the service you will provide to your customer. There may be times where it is not possible to obtain a quote to your customer's premises or even to ensure that the service provided is reliable and that the goods have arrived. In these instances you are able to limit the responsibility by choosing a lower Incoterms.
- customer service. Although it is essential for you to meet your obligations under the chosen Incoterm, it is equally important for you to offer competitive terms. It is unwise for you to offer what may be the easiest terms for you, if these are not suitable for your customer, but bear in mind the points raised above.
Transport considerations
As mentioned above the choice of Incoterm is affected by the way in which the goods are sent. The table below shows which terms may be used for any mode of transport and which are intended for traditional maritime and inland waterway transport only.
| Any Mode of Transport | ||
|---|---|---|
| Group E | EXW | Ex Works (named place) |
| Group F | FCA | Free Carrier (named place) |
| Group C | CPT | Carriage Paid To (named place of destination) |
| CIP | Carriage and Insurance Paid To (named place of destination) | |
| Group D | DAF | Delivered at Frontier (named place) |
| DDU | Delivered Duty Unpaid (named place of destination) | |
| DDP | Delivered Duty Paid (named place of destination) | |
| Maritime and Inland Waterway Transport Only | ||
|---|---|---|
| Group F | FAS | Free Alongside Ship (named port of shipment) |
| FOB | Free on Board (named port of shipment) | |
| Group C | CFR | Cost and Freight (named port of destination) |
| CIF | Cost, Insurance and Freight (named port of destination) | |
| Group D | DES | Delivered Ex Ship (named port of destination) |
| DEQ | Delivered Ex Quay (named port of destination) | |
You should only use the terms in the second group for maritime and inland waterway transport only. The critical point in all of these terms is the ship's rail - this obviously has no meaning when the goods are moved, for example, by air, or in a container and could lead to difficulties in allocating responsibilities between you and your customer.
In virtually all cases, for containerised cargo you should use the first group of terms (those for any mode of transport). The container is usually delivered to the carrier (or other party nominated) and, again, the ship's rail has no relevant meaning for this type of transport.
Who Chooses - the Seller or the Buyer?
Often the Incoterm to be used will be stipulated by your customer. An enquiry may be made for "the best price, CIF Novosibirsk, for the following goods …". When faced with this situation you may choose just to quote as requested. You may give your usual export quote alongside or instead of such as "ExW" or "FOB", especially if you are in a niche market, and leave your customer to accept or decide the terms offered.
It can be beneficial to both you and your customer to negotiate the terms to be used and always decide on them before the movement starts. With new trading partners negotiation can start from the beginning of the relationship, but even in an established trading relationship it is worth checking the terms used, perhaps once a year, to ensure that they are still acceptable to both parties and, just as importantly, that the terms used are still applicable to the method of trading. For example, if the term usually quoted is CFR, but you decide to contract for insurance, the term used needs to be changed to CIF to reflect this additional service.
You should also remember that the same Incoterm may not always be suitable for the same customer. If the usual Incoterm used is FOB, but an urgent consignment of spare parts is needed and sent by air, then an alternative, such as FCA, should be used.
Obviously your customer will usually have more influence but finding a term that suits both parties is often a way to ensure that you and your customer know and understand your obligations and thus avoid later issues which could destroy your supplier - buyer relationship.
Overview
The following factors need to be kept in mind when selecting an Incoterm.
- What method of transport is to be used?
- What are the terms currently used? Who chose these and what benefits do they provide to them?
- Are there any company policies on which terms should be used and how much responsibility should be taken?
- Are there any restrictions on the term to be used imposed by the country of importation?
- Are there any commercial practices in the country with which you are dealing?
- Discuss the terms to be used with your trading partner - it is important to take their point of view into account.
- Ensure that both parties understand and can carry out their obligations.
- Ensure that you are able to obtain enough information to give a quote for a certain Incoterm.
- Read Incoterms 2000. The introduction gives good advice and can clarify certain issues and the individual terms themselves are accurately described.
- Ensure all staff (especially those involved in sales, marketing and shipping) are properly trained in order to understand the basic principles of Incoterms and in particular the details of the individual Incoterms.
- Incorporate the terms decided into all relevant commercial paperwork such as invoices, quotations, terms and conditions of sale.
- Review the terms periodically and change them if necessary.
Further Information:
The above is only a guide to Incoterms. A full and frank guide is available in print : "Incoterms 2000". From the International Chamber of Commerce, 14/15 Belgrave Square, London SW1X 8PS Tel: 020 7838 9363 Fax: 020 7235 5447.
