How to choose the right delivery terms in Incoterms®?
Most companies have a strategic approach on the terms of delivery they use. Yet there are many companies that do not know the details of the delivery terms well enough to understand the costs and risks that may arise during the transportation of a purchased or sold product. So how can you go about finding your optimal delivery terms?
Incoterms® or “International commercial terms” is a global set of delivery terms and associated regulations, regulating the terms of delivery between the purchaser and the seller of a product. Whether you have the role of purchaser or seller, you can consider the Incoterms and find both advantages and disadvantages in each of the terms. There is no common blueprint on the correct delivery term to use, as this will vary depending on what is important to the individual purchaser and seller. Furthermore, some delivery terms only apply to sea transport.
To exemplify there may be different reasons why companies choose to buy or sell using the delivery term EXW (Ex Works). However, if you sell or buy goods across borders, EXW has some terms that you may want to be aware of, such as:
- If you buy goods from abroad using EXW as the delivery term, you are obliged to handle the customs export clearance in the country from which the goods are sent. Therefore, you should make sure that you know how to handle this and have the necessary expertise and proper formalities to complete such customs clearance. Alternatively, you should associate with a customs partner who is able to handle the customs clearance correctly on your behalf.
- If you sell goods on export from an EU country using EXW, you may not be able to prove that the goods have left the EU. Such proof of the goods leaving the EU is required in order to get the related VAT deducted in your tax report.
Many companies consider the delivery term FCA (Free Carrier) as the optimal delivery condition. However, this does not necessarily mean that other delivery terms in Incoterms will not work just as well (or better) for your business.
Important questions to ask yourself to find the right delivery terms.
In Incoterms, the parties “Buyer” and “Seller” agree on the terms of delivery that apply. To take part in such a decision, you should know which delivery terms are optimal for your company, which ones represent good alternatives, and which ones you should avoid. To find the answers to this there are some important questions you can ask yourself, such as:
- What can go wrong during the transport of the goods, and what consequences may potentially occur?
- What costs and responsibilities do we want to assume during transport, and which ones are we able to handle?
- What formalities do we want to assume during transport, and which ones are we capable of handling?
- Which delivery terms have the cost, risk and formality levels that we want to assume?
- What insurance policies do I have to cover for liability, transportation and/or the goods, and which ones will apply in different scenarios?
- Where and when am I – as a seller – able to deliver the goods? (In terms of cost, risk and formalities.)
- Where and when am I – as a buyer – able to take delivery of the goods? (In terms of cost, risk and formalities.)
Get an overview of the Incoterms delivery terms
As of 1 January 2020, the Incoterms® will be updated. Learn more about the changes that will take effect from 1 January 2020 via our article about the changes in Incoterms 2020.
At KGH we have set up an illustration of the updated delivery terms in Incoterms 2020. This gives a good overview of the costs, responsibilities and formalities that are imposed on the buyer and seller in each of the delivery terms. Download our illustration and find out what applies in Incoterms 2020.
You may continue to use Incoterms 2010 after 2020. If so, be sure to add “Incoterms 2010” to the agreed delivery term. Download our illustration of Incoterms 2010 if you prefer to stick with these delivery terms.
At KGH, we often see the practical consequences that the different delivery terms may entail. If you need assistance in finding the optimal delivery terms for your business, please contact us at the following email address: email@example.com
Author: Diane Lyngen Kaasbøll Rasch, KGH Customs Services AS.
KGH is part of Maersk Customs Service. We represent Maersk Customs Services in Europe and are present in 24 markets. Every day we interact with thousands of companies as well as trade associations and authorities around the world. We are 1,300 specialists, providing a vast range of customs services, from a full range of customs declaration services to consulting services and new digital solutions.