Which Incoterm is most suitable for your sea freight transport?
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
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 contact us 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.
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