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Delivery terms and Incoterms

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Example of feedback to a delivery term in a business contract.

8. What does delivery term FAS mean?

What are delivery terms?

Delivery terms are a part of any commercial agreement involving the sale or purchase of goods or supplies. Delivery terms will explicitly outline the responsibility of internal and external logistics and the obligations that should be fulfilled on behalf of the seller or buyer. These delivery terms will clearly state the agreements between parties on how the goods will be delivered and, as a result, outlines the point at which legal ownership changes from the seller to the buyer. This is commonly known as the point of the title passage. This point of title passage will also be the point where risk passes from the seller to the buyer.

 

General specifications that are made on delivery terms will specify the delivery terms code and the place specification. Ensure you understand the costs and liabilities from delivery terms when reviewing a contract.

 

What are Incoterms?

 

Incoterms stands for International Commercial terms and were created for the purpose of assisting international companies from different countries to interpret and apply uniform transport agreements. These terms were issued by the International Chamber of Commerce (ICC). This is done through a standardized set of international delivery terms that can be applied as a legal agreement between buyers and sellers. In general, incoterms will outline responsibilities, allocate risk between parties, and detail the costs associated with the transportation of the goods. Incoterms will be largely used in the context of export, import, and the transit of goods, but incoterms will also impact factors such as transport insurance, the location of the delivery, transfer of risk, and many more.

Why are incoterms important?

 

Incoterms are crucial to the international shipment of goods as these standardized terms function to clearly allocate risk, divide obligations and share the costs associated with transporting goods. Incoterms will also clarify a lot of specifics relating to documents of the goods sold, customs fees, shipping insurance, packaging, and many more. The current Incoterms have 11 different terms, which provide for different allocations of costs, risks, insurance, and many more details. Incoterms, however, do not cover all the conditions of a sale, nor do they:

 

  • stipulate the price of the goods,

  • specify when the ownership passes from seller to buyer,

  • specify which documents are needed to facilitate or

  • addresses the liability for late delivery.

 

How do incoterms work?

 

Out of the 11 incoterms available, the seller will first determine which incoterms will be used that make the most sense. The chosen incoterm will then be written into purchasing or shipping contracts, determining factors such as if carrier companies will be involved and how the goods will be transported. The seller might be given a bill of lading if a carrier company was employed to transport the goods, as this bill will prove that the goods have been taken on the carrier.

 

What does delivery term Ex works mean?

 

Ex works is an incoterm that refers to an international trade term that outlines how the buyer must cover the transport costs when the seller makes the product available at the designated location. Once buyers have received the goods, the responsibility shifts to the buyer for such risks as loading the goods, transferring them on ships or planes, and meeting certain customs regulations. Ex works within the context of a contract will typically favor the seller and be more of a liability for the buyer, as the seller will only be responsible for safely packaging the goods, labeling them, and delivering these goods to the agreed-upon location. It may also be stipulated in an Ex works clause that the seller must help the buyer obtain export licenses or other required paperwork.

 

On the other hand, the buyer may be exposed to a wider range of risks as once the buyer receives the goods, the buyer must:

  • Cover onward expenses relating to the goods

  • Be liable for risks relating to the loading of products, transfer, dealing with customs, unloading the products, storing, and selling of the product

 

What does delivery term CIF mean?


Cost, Insurance, and Freight or CIF is an international trade term that outlines the seller is responsible for the shipping, insurance, and freight-related costs while the goods are in transit. This incoterm is only relevant to goods that are transported via sea, ocean or waterway. The seller's responsibilities may include delivering the goods, exporting, onboarding the goods onto the shipping vessel, and paying transportation costs. The seller may also be required to obtain the minimum amount of insurance coverage. Once the goods have reached the agreed-upon destination, the buyer will assume the responsibilities and costs associated with unloading and moving the goods to the final destination.

Ensure you understand the costs and liabilities from the incoterm when reviewing a contract.

What does delivery term CFR mean?


Cost and Fright, or CFR, is an international trade term that outlines the seller is responsible for the exportation and carriage of goods by sea to the agreed-upon location. This term is relevant to goods transport via ocean, sea, or waterway. What differentiates this term from the CIF incoterm is that the seller is not responsible for obtaining the appropriate insurance to protect against loss or damage during transit. The seller's obligations may include organizing export packaging and licenses, pre-carriage and delivery, loading charges, delivery at the named destination port, and bearing pre-shipment inspection costs. The buyer obligations may include the payment for goods, acceptance of goods, and importation-related costs and taxes.

 

What does delivery term FAS mean?


Free Alongside Ship or FAS is an international trade term that outlines the seller must arrange for goods to be delivered and transferred to a designated port. The designated port can be a loading dock or barge but not a container terminal. This term is relevant to goods transported via ocean, sea, or waterway. The buyer is responsible for loading the freight onto the shipping vessel, handling local carriage, importation procedures and duties, and the carriage to the final location.

 

What does delivery term CIP mean?


Carriage and Insurance Paid To or CIP is an international trade term where the seller assumes all risks and pays for all freight and insurance costs to deliver to the first carrier at the agreed-upon location. Once the goods are delivered to the agreed-upon location, the buyer assumes all the risks related to the transportation of the goods. In a CIP term, the seller must insure the goods for 110% of the contract value that offers the minimum amount of coverage. Buyers, in this instance, generally take out additional coverage that insures a larger amount of the contract value or even extra insurance coverage to protect against huge losses due to unexpected events.

What does the delivery term DDP mean?

Delivered Duty Paid or DDP is an international trade term that outlines the seller is responsible for all the risks and costs associated with transporting goods until the goods reach either the agreed destination or the possession of the buyer. Such costs can include paying for shipping, insurance, import and export duties, and other associated costs that may occur during shipping. The seller, in this instance, has extensive responsibilities ranging from obtaining the appropriate approvals to organizing export and import requirements, which may deter some sellers from accepting these incoterms. DDP terms are usually used when the supply cost is predictable and stable.

What does delivery term DAP mean?

Delivered-at-place or DAP is an incoterm that outlines how the seller will take all the responsibility and the costs relating to moving goods sold to a specific location. In return, the buyer will be responsible for paying applicable local and clearance taxes and for import duties when the shipment arrives at the agreed-upon location. Similar to ex-works, DAP means that the seller will take on the costs and risks associated with delivering the goods to the agreed-upon location, where the buyer will take over the risk thereon in.

Ensure you understand the terms regarding DAP when reviewing a contract.

What does delivery term DDU mean?

 

Delivery Duty unpaid or DDU is an international trade term that outlines that the seller is responsible for the safe delivery of goods to the agreed-upon location. The seller would also be responsible for paying all transportation costs and would take full responsibility for risks during transport. After the goods are delivered to the agreed-upon location, the buyer must obtain all the relevant licenses for important goods and pay all the relevant taxes and costs associated with importing the goods. DDU is commonly used in many transportation contracts as it gives the buyer more control over the shipping process and may be more desirable for international buyers that need a constant flow of inventory. It can be beneficial for sellers if they do not want to deal with the added responsibilities and costs relating to the different shipping laws of the country being delivered to.

What does delivery term CPT mean?

 

Carriage Paid To or CPT is an incoterm that stipulates the seller must deliver the goods at their own expense or the expense of another party that is outlined in the agreement. In this shipping term, the seller is only expected to deliver the goods to a carrier, where then the risks are shifted onto the associated carrier or buyer. In CPT agreements, the seller may also be expected to pay the freight costs associated with transporting to the goods to the carrier, which may include export fees or taxes depending on the country of origin.

 

Additional costs may come in the form of Terminal Handling charges (THC) which are determined by the terminal operator and may or may not be included in the freight rates paid to the chosen carrier. Therefore, whether or not this cost is included in the freight rates should be determined by the buyer before agreeing to a CPT term. The advantage of a CPT incoterm for a buyer is that the buyer does not take on the risk of transporting goods until it reaches the carrier and, therefore, may reduce the risks of transporting goods.

 

What does delivery term FOB mean?


Free on Board or FOB is a delivery term used to indicate when the buyer is at risk when shipping goods. Depending whether the delivery terms stipulate “FOB shipping point” or “FOB origin,” will outline that the buyer must take on liability as soon as the seller ships the product. On the other hand, “FOB destination” will mean that the seller is liable for damage or loss until the goods are in possession of the buyer. The buyer, in this case, will need to pay for the costs associated with the ocean freight, insurance, unloading, and transportation to the final destination.

 

FOB terms may also outline whether it is freight collect or freight prepaid. Freight collection will mean that the buyer receiving the shipment assumes all the risks and responsibility for all freight charges. Freight prepaid is the inverse, where the seller will accept responsibility for all freight charges and risks.

 

What does delivery term FCA mean?


Free Carrier or FCA is an international trade term that outlines how the seller of goods is responsible for delivering goods to the agreed-upon location where they will be transferred to a carrier. This destination outlined in an FCA will be either a shipping terminal, warehouse, airport, or any other location where the agreed-upon carrier operates.

 

In an FCA delivery term, the seller will include transportation costs in the price of the goods and, in turn, will assume the risks associated with shipping the goods to the agreed-upon location. Once the carrier receives the goods, the buyer must then assume the risks relating to shipping the goods.

 

The carrier in these arrangements will be any company that specializes in transporting goods as a service.

Which incoterms is the most favorable for buyer and seller?


Depending on the incoterms agreed upon, these transport agreements may be more beneficial for one party or another and, as a result, can largely influence the costs that you incur. Out of the 11 incoterms to choose from, the terms that you should consider are the ones that provide greater control over the shipping process and the shipping costs.

Ensure you understand the incoterms when reviewing a contract.

 

As a buyer, these are the incoterms that may be the most advantageous

 

 

DAP

 

Delivered at Place or a DAP incoterm is a great option for buyers as it allows the buyer to incur fewer costs for the transportation of goods. Instead, the costs and risks associated with transporting the goods to the specific location will be incurred by the seller. This, in turn, allows the buyer to cheaply buy and import goods, as the buyer will dodge all costs but the costs relating to taxes and import duties. The disadvantage of this is that because the seller takes on all these responsibilities and costs associated with moving the goods, in turn, the buyer has less control over the process.

FOB: Freight on Board


Using the FOB incoterm may give the buyer control over the expenses, and the cargo delivery to the final destination as the seller is required to leave the goods at the port of origin. This can be very desirable for a buyer as the seller will also need to take care of all the formalities and paperwork. This means less work for the buyer and allows for flexibility in the form of being able to organize international shipping services. This beneficial flexibility comes in the form of the ability to choose shipping routes and times and the ability to negotiate with the chosen freight forwarder. In general, this is the best incoterm for buyers.

EX Works

 

Shipping using EX works may have many upsides, as buying goods can be cheaper as costs associated with transportation are not reflected in the price. The Ex works incoterm can also be another good option for buyers if the buyer is familiar with the import laws of the country. If the buyer is familiar with the import laws of the country, benefits include allowing for flexibility and control over the transportation process that may reflect in cost-effective operations. However, EX works may not be the best option if you do not know the import laws of the country and you are unwilling to accept the added risks of maintaining responsibility over a longer shipping process.                  

 

As a seller, these are the incoterms that may be the most advantageous

 

Delivered Duty Paid


Delivery Duty Paid or DDP incoterms are advantageous to sellers as they will be responsible for delivering goods to the agreed upon destination and, therefore, will have more control over the shipping process. Allowing for more responsibilities can be a double-edged sword if you are not familiar with the domestic laws and regulations of the country, as this can open you up to more risks.  

Cost and Freight

 

Cost and Freight or CFR is another great option for sellers in general as it allows for control over international shipping costs up until the goods are delivered to the destination port. This control over international shipping gives you flexibility when it comes to using more cost-effective shipping routes, rates, and transit times which can cut down costs in the long run.

Cost, Insurance, and Freight

 

Cost, insurance, and Freight or CIF is similar to the CFR incoterm in terms of having control over international shipping costs as the seller will also have the obligation to arrange transportation of the goods by sea to the agreed upon destination. CIF may differ as the seller is also required to take out marine insurance to protect against any damage or loss that may happen during the transportation process. Depending on your position in negotiations with the buyer, you may want to negotiate for a CFR incoterm to avoid additional costs and extra paperwork but have a CIF incoterm as something to fall back on.

1. What are delivery terms?
2. What are Incoterms?
3. Why are incoterms important?
4. How do incoterms work?
5. What does delivery term Ex works mean?
6. What does delivery term CIF mean?
7. What does delivery term CFR mean?
9. What does delivery term CIP mean?
10. What does the delivery term DDP mean?
11. What does delivery term DAP mean?
12. What does delivery term DDU mean?
13. What does delivery term CPT mean?
14. What does delivery term FOB mean?
15. What does delivery term FCA mean?
16. Which incoterms is the most favorable for buyer and seller?

Disclaimer

Please note that this document is not legal advice. Legly, and its representatives, are not responsible for the content herein or the suitability for your company’s business. We recommend you use this in conjunction with legal advice and not as a substitute.

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