When it comes to overseas government procurement that results in international trade, using the right incoterms is crucial for both buyers and sellers to ensure smooth transactions and avoid disputes. Incoterms are a set of standardized trade terms published by the International Chamber of Commerce (ICC) that define the obligations, risks, and costs of both the buyer and the seller in the transportation and delivery of goods.
Ministry procurement officials must understand that using the wrong Incoterms rule means that the contract between the buyer and seller could result in delivery and payment problems, and unanticipated costs and dispute.
In this blog, we will discuss the different incoterms and their implications, as well as how to determine the correct incoterms to your advantage during procurement.
EXW (Ex Works) EXW means that the seller only makes the goods available at their premises and the buyer is responsible for all transportation costs, including loading the goods onto the transport vehicle. The seller is not responsible for any costs or risks after the goods have been made available. This incoterm is suitable for domestic transactions or when the buyer has a good understanding of the local regulations and practices.
FCA (Free Carrier) FCA means that the seller delivers the goods to a carrier or a named place, and the buyer is responsible for the costs and risks of transportation from that point. The seller is responsible for loading the goods onto the transport vehicle at the named place. This incoterm is commonly used when the goods need to be transported by a specific carrier or when the buyer wants to arrange their own transportation. FCA can be applied to all modes of transportation. In other words, whether you are sending and receiving goodsby airfreight, ocean shipping, or any other method, you can make a business deal using FCA terms. FCA agreements mark goods as “delivered” as soon as they are available at the origin port by the seller.
FOB (Free on Board) FOB shipping means that the supplier retains ownership and responsibility for the goods until they are loaded ‘on board’ a shipping vessel. Once on the ship, all liability transfers to the buyer. This incoterm is commonly used when when the buyer wants to arrange their own transportation. FOB, in contrast to FCA, is limited to sea and inland transportation only. The goods must be delivered to the vessel to be marked as delivered.
CPT (Carriage Paid To) CPT means that the seller is responsible for delivering the goods to a carrier or a named place, and the buyer is responsible for the costs and risks of transportation from that point. The seller is also responsible for paying the transportation costs to the named place. This incoterm is suitable when the buyer is responsible for arranging the transportation and wants to have control over the choice of carrier.
CIP (Carriage and Insurance Paid To) CIP is similar to CPT, but the seller is also responsible for obtaining insurance for the goods during transportation. The insurance must cover the same risks as if the buyer had obtained the insurance themselves. This incoterm is commonly used when the goods are of high value or when the buyer wants to ensure that they are protected during transportation.
DAP (Delivered At Place) DAP means that the seller is responsible for delivering the goods to a named place, and the buyer is responsible for unloading the goods and clearing them through customs. The seller is not responsible for any costs or risks after the goods have been unloaded. This incoterm is suitable when the buyer wants the goods to be delivered to a specific place, such as a warehouse or a construction site.
DDP (Delivered Duty Paid) DDP means that the seller is responsible for delivering the goods to a named place, and the buyer is responsible for unloading the goods and clearing them through customs. The seller is also responsible for all costs and risks, including customs duties and taxes, until the goods have been delivered to the named place. This incoterm is suitable when the buyer wants to minimize their risk and costs, and when the seller has a good understanding of the customs regulations and practices in the buyer's country.
Determining the correct incoterms to your advantage during procurement requires a good understanding of the transportation and delivery requirements, as well as the risks and costs associated with each incoterm. Ministries should consider the transportation method, the destination, and the nature of the goods when choosing the incoterm. They should also negotiate the price and the delivery terms with the seller to ensure that they are getting the best deal possible.
Choosing the right incoterms is crucial. Ministries and suppliers should work together to determine the most suitable incoterm for their transaction and negotiate the terms to their advantage. Government procurement officials must have a good understanding of the different incoterms and their implications in order to recommend the best option for approval.
