What are shipping terms and how do they affect me?

When you are buying new equipment there should be something that you pay close attention to. Next to the price listed on your quotation, there may be a three-letter acronym. Those three letters can cost you thousands or tens of thousands of dollars if you’re not careful! Fortunately, there’s a short list of terms that have been internationally agreed upon to make international contracts and shipping easier to understand.

They’re called the Incoterms, or International Commercial Terms, and they have been around since 1936 and help make the responsibilities between the buyer and the seller crystal clear. You’ve gotten your business plan written, the bank is reviewing your application for a loan, you’ve started looking at the future facilities; you have a dozen quotations sitting in your inbox and you’re about to start comparing them. Why are some cheaper than others? The short answer is it could be how much responsibility the manufacturer is taking on. The long answer is it depends on what logistics, insurance, and brokerage options there are available to the manufacturer or how familiar they are with the legalities of selling equipment in your country. Let’s look at some of the common terms used by manufacturers for shipping your new equipment!

Ex Works (EXW)
This term allows for the least amount of responsibility to be completed by the manufacturer. Essentially, they will prepare the goods and equipment for shipping by wrapping it in packaging, bundling it to a pallet, or setting it in a cradle. However, there isn’t much else that they are going to do, no shipping, no insurance, no taxes; all of that is on you. This term will likely be associated with inexpensive quotations since there are fewer responsibilities and costs for the manufacturer to uphold. Occasionally, it is common on the first set of estimations if they are not certain where the equipment will ultimately be going. While it may be the least expensive, that means that you the purchaser will have to complete more on your own end. It can also be difficult since they will likely not prepare the equipment for exportation out of the country!

Free On Board (FOB)
This term is used exclusively when the equipment will be shipped in a container on a sea vessel. It is very similar to Ex Works and used heavily by Chinese equipment manufacturers. Essentially, the seller will take the responsibility to ensure it gets on a boat, can legally leave the country of origin, and be ready to be shipped around the globe! Unfortunately, it will not cover freight costs, insurance, or duties when the equipment arrives. All of those responsibilities must be taken care of at some point. However, it is not always possible for the manufacturer to be able to complete more than this. Depending on their business partnerships, they may not have someone who is capable of organizing transportation outside of their country, ensure proper damage protection, or pay tariffs in a foreign country.

Carriage and Insurance Paid (CIP)
This is where the manufacturer starts to take on a healthy amount of responsibility. Carriage and Insurance Paid will be paired with a delivery location or a major port. The manufacturer will organize and pay for shipping and insurance up until the listed place. Any further travel will require additional costs. This is one of the more cautious options available to equipment buyers and will require little work on your end. There is something to look out for, Terminal Handling Charges and duties may not be paid with this option, ask if the carrier will be providing these. Additionally, the insurance provider may be limited and not realistically cover the shipment, or any costs accrued with having to replace and repair damages.

Delivered Duty Paid (DDP)
For someone purchasing equipment, this is the best term to see in a quote. It means that you have zero responsibility for the shipping of the goods, all you have to do is be ready with a forklift when everything shows up! It is the only incoterm where the manufacturer has agreed to pay all import duties and tariffs for the goods entering your country. One downside to this option is that it may make their quotation higher than other bids, but it reduces the number of surprise bills on your equipment significantly. The other downside is that some countries may have complicated clearance procedures for importation which can be handled more effectively by a company with local experience navigating the red tape.

Hopefully, this helps explain some of the small but critical details of international shipping. For further reading:
The Incoterms 2010 Rules. (n.d.). Retrieved June 28, 2018, from https://www.incotermsexplained.com/the-incoterms-rules/incoterms-2010-rules/

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