Incoterms

Incoterms are short for international commercial terms which is a set of standardized trade terms which is published by International Chamber of Commerce or ICC. When it comes to shipping machinery, there is a lot at stake. The terms related to the cost of distribution, risks, handling heavy equipment, must be discussed before hand between the buyer and seller. In this case Incoterms comes into play. Dealing with heavy machinery involves complex logistics, handling specialised equipment, needs crisp agreements.

In simple terms Incoterms defines the responsibilities of both buyer and seller in term of transportation, customs, insurance and delivery. Incoterms helps to reduce unwanted hustle, misunderstanding between the parties and unexpected costs.

Incoterms are generally categorised into 2 depending upon the method of delivery i.e.

1. Rules for any mode of transportation- In this category regardless of the mode of transportation, these rules will be used.
2. Rules for waterway transport – In this category , rules are specified for both sea and inland shipment transportation my water.

These are the list of commonly used Incoterms specifically for machinery shipping.

1. EXW (Ex Works)

• Seller’s Responsibility: The seller makes the machinery available at their premises or another agreed location (e.g., factory, warehouse). The seller will not be loading the machinery into the transport vehicles or will not be handling export duties or shipping.
• Buyer’s Responsibility: The buyer is responsible for all costs and risks associated with transporting the machinery from the seller’s location, including loading, export customs clearance, freight, insurance, and delivery to the final destination.
• Use Case: This method is used mostly by a buyer who is familiar with the logistics at seller’s location or the buyer wants full control over the shipping process.

2. FOB (Free On Board)

• Seller’s Responsibility: The seller is responsible for delivering the machinery to loading it on to the vessel. Seller also handles all the export duties and formalities.
• Buyer’s Responsibility: Once the machinery is loaded onto the vessel, the buyer assumes all risk and responsibility for transport, insurance, unloading at the destination port, import duties, and shipping cost till it reach final destination.
• Use Case: FOB is commonly used for machinery shipments when the seller is near a major port, and the buyer has better control over the import process at the destination port.

3. CIF (Cost, Insurance, and Freight)

• Seller’s Responsibility: The seller takes care of both the freight and insurance to transport the machinery from the beginning to the destination port. The seller also handles all export documentation and customs clearance.
• Buyer’s Responsibility: The buyer assumes risk from the moment the machinery is loaded onto the ship, although the seller provides insurance to cover the journey to the destination port. After the arrival of machinery at destination port, the buyer is responsible for unloading, customs clearance, and transportation to the final location.
• Use Case: CIF is often used when the buyer wants the seller to handle the logistics and insurance, but still takes on the responsibility of dealing with the machinery once it reaches the destination port.

4. CFR (Cost and Freight)

• Seller’s Responsibility: Similar to CIF, the seller pays for the transportation to the destination port. But , unlike in CIF, the seller will not be providing insurance for the shipment.
• Buyer’s Responsibility: The buyer takes on the risk once the machinery is loaded onto the vessel. The buyer must arrange for insurance if they are interested and must pay for customs clearance, and must handle all the inland shipping once the machinery reaches the destination port.
• Use Case: CFR is used when the buyer prefers to arrange their own insurance but wants the seller to manage the shipping costs and logistics up to the destination port.

5. DAP (Delivered at Place)

• Seller’s Responsibility: The seller will be taking the significant portion of the shipping responsibility including paying for all costs to deliver the machinery to the agreed place of destination The seller also handles export customs clearance.
• Buyer’s Responsibility: The buyer will be responsible for import duties, taxes, and unloading costs at the destination point.
• Use Case: DAP is commonly used for large machinery shipments where the seller is willing to cover almost all costs and risks up to the final destination, with the buyer assuming the responsibility for the import process.

6. DDP (Delivered Duty Paid)

• Seller’s Responsibility: The seller will be taking the maximum responsibility for the shipment which includes covering all costs and risks involved in delivering the machinery to the buyer’s location like transportation, insurance, export and import duties, taxes, and unloading.
• Buyer’s Responsibility: The buyer is only responsible for receiving the machinery at the agreed location. No further involvement in shipping or customs is required from buyer part.
• Use Case: DDP is ideal when the buyer wants to offload all responsibilities for logistics, duties to customs processes. This is commonly practised in machinery shipping when the buyer is unfamiliar with the destination country’s customs and import regulations.

7. FCA (Free Carrier)

• Seller’s Responsibility: The seller delivers the machinery to a certain pre-decided carrier at an agreed location which can be either seller’s premises or any another location like warehouse, ports etc. The seller will be handling all the export duties and will provide all the necessary shipping documents.
• Buyer’s Responsibility: The buyer assumes the risk only after the machinery is handed over to the carrier and then own wards responsible for all the transport, insurance, and import duties expenses once the goods leave the seller’s premises.
• Use Case: FCA is often used for large machinery shipments where the buyer has a preferred shipping company or wants to take responsibility for the inland transportation after the goods are handed over to the carrier.

8. FAS (Free Alongside Ship)

• Seller’s Responsibility: The seller will deliver the machinery alongside the ship at the port of shipment. The seller handles export formalities and all costs until the goods are placed next to the vessel which will transport the goods.
• Buyer’s Responsibility: The buyer takes over responsibility only after the machinery is alongside the ship which include loading the machinery onto the vessel, freight, insurance, customs, and transportation once it reach destination.
• Use Case: FAS is less common for machinery shipping but might be used in certain situations where they ship large or heavy machinery that requires special handling at the port.

9. CPT (Carriage Paid To)

• Seller’s Responsibility: The seller only pays for the transport to the agreed destination. But once the machinery is handed over to the carrier all the risk automatically transfers to the buyer. The seller arranges for the initial stages of the shipping journey.
• Buyer’s Responsibility: The buyer assumes responsibility for the machinery as soon as it is handed over to the carrier, including insurance, import duties, and any costs after the transport is completed.
• Use Case: CPT is useful when both the seller and buyer agree to split the logistics but want the seller to cover transport of the goods up to a certain point.

10. CIP (Carriage and Insurance Paid To)

• Seller’s Responsibility: in this case the seller covers both transport and insurance to a specified destination point only. After that the seller manages the shipping logistics and ensures that the machinery is insured until it reaches the agreed location.
• Buyer’s Responsibility: The buyer assumes the risk after the goods are handed over to the carrier but benefits from the seller’s insurance during transit. The buyer is responsible for customs clearance and inland shipping.
• Use Case: CIP is commonly used for machinery shipments when the seller is responsible for both shipping and will be providing the insurance But in this case the buyer will take responsibility once the goods are handed over to the carrier.

Key Considerations for Machinery Shipping

• Size and Weight: Machinery is often bulky and heavy, which means transportation costs and risks will be higher. The choice of Incoterm will impact how much responsibility the seller or buyer are ready to take up for the cost of transportation, handling, and any necessary lifting equipment.
• Customs and Import Duties: Import regulations vary from place to place. When it comes to machinery some Incoterms like DDP help streamline the import process, while others like EXW place the burden of customs on the buyer.
• Insurance: Machinery can be expensive and vulnerable throughout including shipping, making insurance a key consideration. Some Incoterms like CIF and CIP often include insurance, but others like FOB or EXW do not, leaving the buyer responsible for arranging coverage.
• Special Handling: Heavy or oversized machinery often requires special equipment or care during loading, unloading, and transit. Incoterms such as FCA or FOB may be more suitable for buyers who have specific needs or expertise in managing specialized transportation.

As the world is progressing with a faster pace, there must be a constant updating regarding the terms of Incoterms reflecting the changes in international trade. The latest version of Incoterm is Incoterm 2020, which incorporate latest international trading standards. Choosing the right Incoterm for machinery shipment helps both the buyer and seller to understand their duties as well as helps them to navigate through all the processes of shipment smoothly.