At KGH, we know from experience that many companies may not be aware of or do not consider the details in the delivery terms they use, and the consequences this could have for their business. For many companies, the delivery terms appear as 3-letter codes followed by location, address, etc. If you are unsure of the meaning of these codes, unwanted liabilities and/or unwanted costs may arise in certain situations. Here are some tips on important items to consider when negotiating terms of delivery.
What are terms of delivery?
Incoterms® or “International Commercial Terms” are a set of global rules governing the terms of delivery between buyers and sellers of goods, i.e. which of the two parties bears the costs and liabilities (risk) while the goods are being transported.
Incoterms® are drawn up and administered by ICC (International Chamber of Commerce), and the rules are renewed every ten years. The rules were last updated in 2010, and the next update will take place in 2020.
What terms of delivery to be used is determined/agreed on between buyers and sellers. The transporter is not a party in this context, and only acts on behalf of either the buyer or the seller.
Are you aware of the costs and risks inherent in the delivery terms you use?
By visualising the delivery terms available under Incoterms® 2010 on a scale where the codes EXW (Ex Works) and DDP (Delivered Duty Paid) represent the two extremes, it is possible to obtain a good overview of what costs and liabilities apply to buyers and sellers under each particular code.
You will find the KGH overview of the terms of delivery at the end of this article.
However, although an overview is useful it is not sufficient − you also need to know what the individual costs and liabilities involve and mean in practice. For example, by choosing EXW as delivery terms, you should, as the buyer, be aware of the customs and export rules that apply in the country of purchase for the goods you have bought. By using this EXW as delivery terms, it is the buyer’s responsibility to ensure that the goods are declared for export in accordance with the rules that apply in the country in question, and the buyer also bears all related costs.
If, for example, you use the delivery terms CPT (Carriage Paid To..) or CIP (Carriage and Insurance Paid to..), the seller bears the costs for transport to the named destination agreed between the Parties. However, as the buyer, it is essential to be aware that if the goods are damaged during transport when using these delivery terms, the risk is borne by the buyer.
And if you choose DDP as terms of delivery, you should, as the seller, be aware of the import rules that apply in the buyer’s country. Using DDP as a service level in negotiations with the buyer can give an advantage over competitors who may not be willing to accept the costs and liabilities that sellers take on under this code. But, as the seller, you should also be sure that you actually are able to deliver the item to the named destination agreed between the Parties.
Finding the best terms of delivery
When going through the different terms of delivery available, it is possible, depending on the party you represent, to find both advantages and disadvantages with each type. And there is no common “blueprint” for what’s best or worst – this will vary depending on what is important for the individual buyer and seller.
There are a number of reasons why businesses intentionally choose EXW as terms of delivery. For many companies, FCA (Free Carrier) is considered the optimal terms of delivery. In addition, some of the delivery terms in Incoterms® only apply to maritime transport.
Therefore, it is important that importers and exporters understand what the selected code entails, are aware of their liabilities and are sure that they are capable of dealing with any potential consequences that may arise. We know from experience that when businesses analyse the terms of delivery, they often end up changing the terms of delivery they may have used for many years, as they were unaware of what costs and/or types of liability/risk were applicable.
When conducting such an analysis, it is important to identify which elements are important for the business to include in its assessment. These may be special requirements or situations that make it important for a business to control particular areas during the transport, a desired level of service, etc. Consideration should also be given to the scenarios that may arise during transport, and what this will actually mean for the business. Other examples of factors that may influence the choice of delivery terms include type of goods, means of transport, relations between buyer and seller, etc.
Important questions to ask when choosing the right terms of delivery
When trying to find the right terms of delivery there are some important questions you should ask, for example questions such as:
– What costs and liabilities are we able or prepared to deal with during transport?
– What potential consequences could arise during transport for which we bear liability?
– Are we able to deal with these potential consequences?
– Do we want to accept the risks arising from these terms of delivery?
– Which terms of delivery code contains the costs and liabilities that we want to take on?
– Am I able (as the seller) to deliver the goods to the named destination agreed between the parties?
KGH has drawn up an overview of the terms of delivery in Incoterms® 2010 that we think provides a good summary of these terms, and illustrates the transfer of costs and risks from buyer to seller in a straightforward manner.
If you require further assistance in determining what is right for your business, do not hesitate to contact KGH via the following e-mail address: firstname.lastname@example.org