Incoterms, short for “international commercial terms”, is a term used in the field of import and export to indicate a set of commercial terms universally valid to define the rights and duties of all the parties involved when import or export some products.
Normally the subjects involved are the following:
- Forwarded (who physically ships the goods)
- Sender (who requests the shipping)
- Departure Customs
- Departure port or airport
- Means of transport
- Destination port of airport
- Destination customs
In a purchase and/or sale negotiations, it is not enough to agree on the price of the goods, it must clear who will deal with the transport and who will bear the relative costs.
Through Incoterms, it is possible to establish from the very beginning, without the possibility of error, who-does-what and to codify the responsibilities of the subjects involved during the international transaction. Consequently, when buying from abroad and requesting a quote from a supplier, it must be specified what Incoterm is going to be used. The cost of the goods can vary significantly (even 50%) depending on what Incoterm will be chosen.
The difference between various Incoterms
Nowadays, each Incoterm has got 2 components: a three-letter code and the name of a city. There are 11 Incoterm rules that must be followed and they are divided into 2 groups based on the means of transportation for which they have been formulated:
- Rules applicable to any kind of transport:
EXW Ex Works
FCA Free Carrier
CPT Carriage Paid To
CIP Carriage and Insurance Paid To
DAT Delivered At Terminal
DAP Delivered At Place
DDP Delivered Duty Paid
- Rules for sea or inland waterway transport:
FAS Free Alongside Ship
FOB Free On Board
CFR Cost and Freight
CIF Cost, Insurance and Freight
Therefore, when you sign a contract with a supplier, you must indicate clearly what is the Incoterm which will be used in the International transaction, in order not to encounter any legal problems later. The following factors must be determined clearly from the very beginning:
- Place of delivery;
- means of transport;
- the moment the risk is transferred from the seller to the buyer;
- allocation of transport, insurance and handling costs;
- the responsibility for obtaining export/import documents.
How can you handle Incoterms without any problems
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