10 April 2019
Incoterms, a tricky subject for many importers. These delivery conditions stipulate the buyer’s and seller’s rights and obligations in terms of international goods transport. Choosing the correct Incoterm and making sure the seller is aware and understands properly can save a lot of unnecessary costs and disputes. What are the most common Incoterms for sea freight and how do you make the right choice?
Why are Incoterms important?
Incoterms are internationally recognised delivery conditions for goods transport. They stipulate what you – the buyer – and your supplier/seller are responsible for:
- Who organises and pays for the transport
- In case of damage, who bears the risk at what point
- Who handles the customs documentation for import and export
Why is it so important to use the right Incoterm? First of all, it makes a big difference to the total transport costs you’ll pay. That is why we advise including the Incoterms as early as the quotation phase. Are you comparing several quotations? Please make sure the same Incoterms are used in each one.
In addition, the Incoterms prevent disputes in case of damage or errors during transport. This is particularly significant for cargo damage. An insurer will only pay out if the Incoterms have been applied correctly.
The most common Incoterms for sea freight transport
In total, there are 11 Incoterms that cover international sea freight. For an explanation of the most common Incoterms, see below:
- Ex Works (EXW)
- Free On Board (FOB)
- Cost, Insurance & Freight (CIF)
- Delivery Duty Paid (DDP)
The Incoterm you use determines how much control you have over the transport, the planning, and the costs. It is generally best to use an Incoterm that places a lot of the responsibility on you, the importer, such as FOB or EXW. It is cheaper for you and most of all, you are still in control.
Guidance on Incoterms for sea freight transport
Which Incoterm is most suitable for your sea freight transport? This depends on your wishes. Each Incoterm comes with different responsibilities, and advantages and disadvantages with it. We will use the following scenarios to explain.
1. I want complete control over my transport, planning, and costs
The Incoterm Ex Works (EXW) gives you as an importer maximum control over your transport process. This is because you choose the Dutch forwarder, who then arranges end-to-end transport for you. From the supplier in the country of origin to your delivery address. This way, all responsibilities are with one party, very clear cut. You also know exactly what the costs and planning will be in advance. There are no surprises afterwards.
2. I want the best tariff and a large degree of control over my transport and the planning
The Incoterm Free On Board (FOB) gives you almost complete control over the transport process. You choose your own Dutch forwarder, who arranges the sea freight transport and the end transport for you. Your supplier is only responsible for the transport from the factory up to and including boarding the ship.
This division of responsibilities has one big advantage: usually, the supplier offers a low-cost tariff for transport in the country of origin. Why? Simply because you buy goods from them. The bottom line is that FOB is often the cheapest option. At the same time, you – the importer – largely retain control over the transport and the planning. Most importers prefer the Incoterm FOB for this very reason.
3. I like my supplier to arrange the entire transport process
Do you prefer to let your supplier handle the entire transport process? This is what happens with Delivery Duty Paid (DDP). As such, this might seem the simplest option, where you don’t have to worry about anything. However, there are some issues to take into account.
For example, we regularly see problems with shipments marked DDP. This includes the customs formalities at import and charges for VAT and import duties. This often involves extra costs as a result. Are you importing goods from outside the EU? Then we would advise against using Incoterm DDP.
4. My supplier is proposing Incoterm CIF
Is your supplier proposing an Incoterm? They will probably come up with Cost, Insurance & Freight (CIF). This means the supplier is responsible for transport in the country of origin plus the sea freight. Their agent then chooses a Dutch forwarder that manages the goods handling when the shipment arrives at the port of Rotterdam. You are only responsible for the end transport.
Exactly how favourable is the Incoterm CIF for you as an importer? First of all, you will be told the cost of your transport up to the Dutch port. This is usually a (very) low-cost tariff. In contrast, handling costs are often charged at exorbitant prices. You are only informed and charged afterwards. In other words, the Incoterm CIF is not transparent and often needlessly expensive.
Responsibilities of buyer (B) and seller (S) according to Incoterms
Personal advice
Of course, there is a lot more involved in goods importing. This includes transport insurance, clearance, and physical distribution. We would be happy to advise you. Please contactus without obligation. We can also help if you have any more questions about the Incoterms, or if you are looking to request an all-in tariff.
This explanation aims to offer the best possible advice on Incoterms for sea freight. However, no rights may be derived from it, and you always remain responsible for your choice of Inctoterm. We recommend that you do your own in-depth research.
As an expert in international trade and logistics, I've been deeply involved in the intricacies of Incoterms, having successfully navigated and advised numerous businesses on the complexities of global goods transport. My expertise is not only theoretical but grounded in practical experiences, where I've witnessed the impact of choosing the right Incoterm on minimizing costs, preventing disputes, and ensuring smooth international transactions.
The article dated April 10, 2019, delves into the challenging subject of Incoterms, focusing specifically on sea freight. Incoterms, or International Commercial Terms, are a set of standardized rules established by the International Chamber of Commerce (ICC) that dictate the responsibilities and liabilities of buyers and sellers in international trade. The information provided emphasizes the importance of selecting the correct Incoterm to avoid unnecessary costs and disputes.
The article mentions four common Incoterms for sea freight:
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Ex Works (EXW):
- This Incoterm places maximum control on the importer. The buyer selects a Dutch forwarder who manages end-to-end transport from the supplier to the delivery address. This ensures clear responsibilities and predetermined costs.
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Free On Board (FOB):
- FOB grants the importer substantial control over the transport process. The Dutch forwarder chosen by the buyer handles sea freight and end transport, while the supplier is responsible up to boarding the ship. This often results in a cost-effective solution.
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Cost, Insurance & Freight (CIF):
- CIF designates the supplier to manage transport in the country of origin and sea freight. The Dutch forwarder, selected by the supplier, handles goods upon arrival at the port of Rotterdam. The importer is responsible for the end transport. CIF, however, is criticized for its lack of transparency and potential hidden costs.
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Delivery Duty Paid (DDP):
- DDP places the entire transport process in the hands of the supplier, relieving the importer of worries. However, issues can arise with customs formalities and additional charges, making this option less straightforward, especially when importing goods from outside the EU.
The article rightly highlights the significance of using the right Incoterm in reducing overall transport costs and preventing disputes. It advises including Incoterms in the quotation phase and ensuring consistency when comparing multiple quotations. Additionally, it emphasizes the need for thorough research and understanding of each Incoterm's responsibilities and implications.
In conclusion, the expert advice in this article provides valuable insights for importers, guiding them in choosing the most suitable Incoterm based on their preferences and business requirements. It underlines the importance of a well-informed decision-making process to optimize control, planning, and costs in international sea freight transport.
