In any sales agreement, it is important that there is a common understanding of the delivery terms since confusion over their meaning can result in a lost sale or a loss on a sale. The terms in international business transactions often sound similar to those used in domestic business, but they frequently have very different meanings. For this reason, the exporter must know the terms before preparing a quotation or a pro forma invoice.
A complete list of important terms (including many new terms and abbreviations)and their definitions is provided in Incoterms 1990. This booklet is issued by ICC Publishing Corporation, Inc., 156 Fifth Avenue, Suite 820, New York, NY 10010; telephone 212-206-1150.
The following are a few of the more frequently used terms in international trade:
- CIF (cost, insurance, freight) to a named overseas port where the seller quotes a price for the goods (including insurance), all transportation, and miscellaneous charges to the point of debarkation from the vessel. (Used only for ocean shipments.)
- CFR (cost and freight) to a named overseas port where the seller quotes a price for the goods that includes the cost of transportation to the named point of debarkation. The the buyer covers the cost of insurance. (Used only for ocean shipments.)
- CPT (carriage paid to) and CIP (carriage and insurance paid to) a named place of destination. These terms are used in place of CFR and CIF, respectively, for all modes of transportation, including intermodal.
- EXW (ex works) at a named point of origin (e.g., ex factory, ex mill, ex warehouse)where the price quoted applies only at the point of origin. The seller agrees to place the goods at the buyer’s disposal at the specified place within the fixed time period. All other charges are put on the buyer’s account.
- FAS (free alongside ship) at a named port of export where the seller quotes a price for the goods that includes the charge for delivery of the goods alongside a vessel at the port. The seller handles the cost of wharfage, while the buyer is accountable for the costs of loading, ocean transportation, and insurance.
- FCA (free carrier) at a named place. This term replaces the former “FOB named inland port” to designate the seller’s responsibility for handing over the goods to a named carrier at the named shipping point. It may also be used for multimodal transport, container stations, or any mode of transport, including air.
- FOB (free on board) at a named port of export where the seller quotes the buyer a price that covers all costs up to and including the loading of goods aboard a vessel.
- Charter Terms:
- Free In is a pricing term that indicates that the charterer of a vessel is responsible for the cost of loading goods onto the vessel.
- Free In and Out is a pricing term that indicates that the charterer of the vessel is responsible for the cost of loading and unloading goods from the vessel.
- Free Out is a pricing term that indicates that the quoted prices include the cost of unloading goods from the vessel.
It is important to understand and use sales terms correctly. A simple misunderstanding may prevent exporters from meeting contractual obligations or make them responsible for shipping costs they sought to avoid.
When quoting a price, the exporter should make it meaningful to the prospective buyer. For example, a price for industrial machinery quoted “EXW Saginaw, Michigan, not export packed” is meaningless to most prospective foreign buyers. These buyers would find it difficult to determine the total cost and might hesitate to place an order.
The exporter should quote CIF or CIP whenever possible, as it shows the foreign buyer the cost of getting the product to or near the desired country.
If assistance is needed in figuring CIF or CIP prices, an international freight forwarder can help. The exporter should furnish the freight forwarder with a description of the product to be exported and its weight and cubic measurement when packed. The freight forwarder can compute the CIF price usually at no charge.
If at all possible, the exporter should quote the price in U.S. dollars. This will eliminate the risk of exchange rate fluctuations and problems with currency conversion.