What is INCOTERMS?

INCOTERMS is the combination of IN – International, Co – Commercial, Terms – Terminology. These terms are highly significant in the ready-made garment export business. INCOTERMS, also known as delivery terms, are regulated by the International Chamber of Commerce (ICC). The ICC issues these international commercial terms to standardize global export and import practices. INCOTERMS are widely utilized in international purchasing processes. They are typically represented as three-letter abbreviations, each corresponding to specific contractual sales practices. When importing the fabric, accessories or any other materials from another country, the merchandiser must deal with the supplier for transportation or shipment of the fabric based on incoterms, namely, EXW, FOB, CIF, DDP, etc. INCOTERMS deal with the number of identified obligations imposed on the parties and the distribution of risk between the parties.

INCOTERMS were first introduced in 1936 and have undergone periodic updates by the International Chamber of Commerce (ICC). The latest version, known as INCOTERMS 2010, has been in effect since January 1, 2011. These terms provide a clear explanation of the responsibilities and cost allocation between the buyer and seller in a transaction.

Mostly in the garment industry, FOB (Free on board) delivery term is followed and is commonly known as FOB pricing. Sometimes CFR (Cost and freight) is also followed. It is imperative to understand the different delivery terms available and select the appropriate one for the export of goods as per the requirement. In this section, the various delivery terms are discussed. In this article I also discussed about INCOTERMS 2000.

For example, when importing the fabric from another country, the garment merchandiser must deal with the supplier for transportation or shipment of the fabric based on incoterms, namely, EXW, FOB, CIF, DDP, etc. based on these, who can bear the transportation cost can be decided. Whatever type of incoterm used, all the cost should be claimed from the buyer. For instance, if the fabric is purchased under EXW incoterm, the merchandiser should add the cost of transportation in addition to the custom clearance charges and fabric cost while determining the cost of the garment.

INCOTERMS 2010:

There are 11 terms or rules as per INCOTERMS 2010. The responsibility of the buyer and seller as per each delivery term is explained with the chart shown in below Figure. The chart shows the activities carried out in shipment ranging from export customs declaration, carriage to port of export, unloading of truck in port of export, loading on vessel / airplane in port of export, carriage to port of import, insurance, unloading in port of import, loading on truck in port of import, carriage to place of destination, import customs clearance and import duties and taxes payment. It says who holds responsibility for the goods and also for the cost incurred during shipment very clearly. The different delivery terms are explained below for more understanding:

Important INCOTERMS Used in Garment Industry

Ex works (EXW):

As per this delivery term, the seller gets the goods ready for shipment and informs the buyer about the shipment being ready. It is the buyer’s responsibility to take the material from seller place of manufacture to his place. The buyer takes care of export customs declaration and all other activities thereof till the material reaches his place. The entire risk of shipment is on the buyer in the case of ex works. This kind of term will normally be used to quote the pricing of the product apart from the delivery charges so that it will be easy for the buyer to calculate the product cost. However, if the buyer has good knowledge and presence in the exporting country with enough people working for him, then he can opt for EXW and transport the goods. If buyer is new to the exporting country, then it is better to avoid choosing this delivery term as he will not have any knowledge about the legal and export procedures followed in the exporting country and hence avoid the cumbersome process.

Free carrier (FCA):

When FCA is used, and then seller obtains export clearance and carries the material to the designated place as instructed by the buyer. It could be like handing the material over to the carrier or placing the material in seller’s own premises for the buyer to come and take it. This term is eclipsed nowadays by FOB. As per FCA term, if the material is placed anywhere outside the seller’s premise, then unloading the material from the transport vehicle and loading on to a vessel becomes the responsibility of the buyer. If the material is kept in areas where it is under seller’s control, then seller is responsible for loading the goods on to the buyer’s carrier.

Free alongside ship (FAS):

In FAS delivery term, the seller delivers the goods alongside the buyer’s vessel at the named port of shipment. The export clearances, carriage of material to port of export and unloading of truck in the port of export are all responsibilities of the seller and once material is unloaded at the port of shipment and placed alongside the vessel, then the responsibility shifts to the buyer. This term should only be used for non-containerized sea freight and inland waterway transport.

Free on board (FOB):

It is the most commonly used pricing term in apparel export. As the name indicates, the seller spends money and holds responsibility of the goods till he loads the material on to the buyer’s vessel. The buyer pays the cost for transportation (sea / air), insurance fees, bill of lading fees, unloading and transportation of goods from port of destination. Due to FCA being advocated in 1980, FOB has to be used only for non-containerized sea freight and inland waterway transport. However, in the real time scenario, FOB pricing is used for all modes of transport. Sometimes it leads to contractual risks.

Carriage paid to (CPT):

As per this delivery term, seller’s responsibility increases. The seller has to pay for the transport (sea / air), unloading of goods at named port of destination and transporting the goods to the named place of destination. The seller bears all the cost till the material reaches the place of destination. Sometimes, the unloading costs at the port are borne by the buyer; however that has to be mentioned in the contract clearly. If buyer requires insurance, then carriage and insurance paid (CIP) should be followed.

Cost and freight (CFR):

The seller pays for the carriage of the goods to the named port of destination. But the risk is transferred to the buyer once the material is loaded on to the ship in the country of export. Insurance and delivery cost at the named place of destination should be borne by the buyer. Sometimes cost for unloading in the port of import belongs to seller as per the contract requirements. In this case, seller pays the money for transport but the risk of transporting the material belongs to buyer. So if there is any issue in transit, it is at buyer’s risk.

Cost, insurance and freight (CIF):

It is similar to CFR, with the exception that the seller has to pay for the insurance for the goods in transit till it reaches the port of destination. This delivery term requires seller to insure for 110% of the value of items shipped. CFR should only be used for non-containerized sea freight and for all other modes of transport, CIP should be used.

Carriage and insurance paid (CIP):

CIP is similar to CFR where seller pays the insurance for the goods till it reaches the port of destination, with the exception that CIP can be used for all modes of transport whereas CFR can only be used for non-containerized sea freight.

Delivered at terminal (DAT):

The responsibility of the seller increases in DAT where the seller delivers the material at the named terminal. All the costs of transport, insurance and unloading at port of destination are borne by the seller. Loading at the port of destination and carrying to buyer’s place is done by the buyer. The terminal can be a sea port, airport which is having a facility to store the material for taking it to the buyer’s place later. All cost like import duty, taxes, customs, carriage costs, etc., after unloading at the terminal should be borne by the buyer.

Delivered at place (DAP):

DAP means that the material is ready at the buyer’s place for unloading. Hence all the costs till the material reaches the named place of destination is borne by the seller excluding import customs clearance and payment of import duties and taxes. However, the risk passes from seller to buyer once the material reaches the port of destination although the costs are borne by the seller. The unloading at the named place of destination should be done by the buyer. These type of delivery terms are used only when the seller has a strong foothold in the buyer’s country as new exporters may not be aware about the carriage facilities and transport regulations in the buyer’s country.

Delivered duty paid (DDP):

The most responsible person as per this delivery term is the seller. All the obligations till the material reaches the named place of destination is completed by the seller. Seller pays all the charges including import duties and taxes and takes care of import clearance also. This type of term is very risky for a new exporter who is not aware of the import policies of the buyer’s country. The only responsibility of the buyer as per this term is that he has to take care of unloading at the named place of destination. This term is similar to a non-INCOTERM called free in store (FIS). It is a very risky term for the exporter as he / she may not be aware of the extra unforeseen costs at the buyers place and also delay in delivery.

INCOTERMS 2000:

In INCOTERMS 2000, there was four more delivery terms used. However, they have been replaced in INCOTERMS 2010. These four terms may still be found in some contracts and hence it is essential to know about these delivery terms too.

Delivered at frontier (DAF):

This term is used when rail or road transport is used especially in European countries where rail / road transport is very common between two countries. Seller pays transportation cost till the named place of delivery at the frontier. Buyer takes care of customs clearance and carriage costs from the frontier. The risk is transferred from seller to buyer at the frontier.

Delivered ex ship (DES):

In this delivery term, the passing of risk from seller to buyer happens only when the material reaches the port of destination and material is ready for unloading by the buyer. Unlike CFR and CIF, seller not only agrees to bear cost, but also assumes the risk and responsibility till the material reaches port of destination and is ready for unloading.

Delivered ex quay (DEQ):

It is similar to DES, with the exception that the risk is passed on to the buyer from the seller after the goods have been unloaded at the port of destination. This helps in avoiding buyer paying for products damaged during transit.

Delivered duty unpaid (DDU):

It is similar to delivery duty paid INCOTERM, with the exception that the import duty alone is paid by the buyer and all other costs, responsibilities, risks, obtaining import customs clearance are of the seller till the material reaches the named place of destination and is ready for unloading by the buyer. It is a risky INCOTERM for the seller similar to DDP.

Conclusion:
The above INCOTERMS explain the various delivery terms used in export and as a merchandiser, knowledge about these INCOTERMS will be very handy when there is a need for discussion (damaged material, shipping delays, material lost in transit, insurance claims, passing of risk and responsibility, etc.) on delivery terms with the buyer. The highlight of INCOTERMS is that any term that is mentioned in earlier versions can also be used when mutually agreed by the buyer and seller. INCOTERMS like EXW, FOB, CIF, and others ensure clarity in cost and risk distribution, making them critical for the garment industry, where international trade is frequent. Choosing the right INCOTERM ensures smooth transactions and avoids disputes between buyers and sellers.

References:

Founder & Editor of Textile Learner. He is a Textile Consultant, Blogger & Entrepreneur. Mr. Kiron is working as a textile consultant in several local and international companies. He is also a contributor of Wikipedia.

Share this Article!