CFR and CIF / EXW / FOB – the most common Incoterms 2020
Continuing our series of “Practical advice from our experts”, we present the most common Incoterms, together with advice on what to look out for when concluding a transport contract.
CFR and CIF
The CFR (Cost and Freight) and CIF (Cost, Insurance and Freight) rules are two of the eleven Incoterms 2020 rules that define the allocation of costs and risks in commercial transactions. In the case of delivery on CFR and CIF terms, the seller (exporter) organises and pays for transport to the port of discharge and, in the case of CIF terms, insurance. All local costs, i.e. handling, transshipment, storage, customs clearance and transport to his headquarters, are borne by the buyer (importer). When the goods are taken on board, the transport risk passes to the buyer.
Our experts’ experience shows that the buyer is often unaware of the amount and local costs associated with the exporter’s choice of shipping line that must be paid at the port of discharge. They are often much higher than expected.
From the exporter’s point of view, choosing the CIF/CFR formula is most convenient because the exporter controls the cargo. From the importer’s point of view, this formula carries the risk of additional, unanticipated costs at the port of discharge.
We would like to point out some of the things that you should pay attention to when you sign a transport contract. Remember that the seller will clear the goods for export, but there is no obligation to clear the goods for import or transit through third countries. Also make sure that the freight is correctly stated on the invoice, otherwise you may not be able to get the goods cleared through customs.
EXW (Ex Works) is one of the eleven rules of Incoterms 2020 used to determine the allocation of costs, obligations and risks of transportation of goods between the seller and the buyer. In the case of EXW, the seller’s (exporter’s) only obligation is to prepare the packaged goods together with the documentation and deliver them to a pre-determined place of receipt – usually the factory or warehouse. The buyer (importer) is responsible for the remaining stages of the transport process.
The customers who sell their goods on an EXW basis are convinced that they do not have to worry about anything once they have signed the contract. And so it should be. Our experts’ experience shows that the buyer transfers to the seller many activities that should be the buyer’s responsibility, including:
- booking the goods with the shipowner,
- introduction of VGM,
- introduction of Bill of Lading Instructions.
It should also be remembered that it is the seller’s responsibility to send documents such as the goods specification/packing list and the commercial invoice for customs clearance.
FOB (Free On Board) is one of the eleven rules of Incoterms 2020 used to determine the allocation of costs, obligations and risks of transportation of goods between the seller and the buyer. Under this rule, the seller is responsible for all the costs associated with the organisation of the transport until the goods are loaded onto the ship. All costs, risks and insurance issues are then transferred to the buyer (importer).
Our experts’ experience shows that when concluding a contract on FOB terms, it is worth paying attention to the determination of the cost payer at the time of the transfer of management, that is, at the port of loading, which is usually on the seller’s side, but in practice it is different. This will help avoid disruptions at a later stage of the collaboration. These are primarily:
- THC costs at the port of loading,
- local costs, which may vary depending on the choice of shipowner,
- additional costs of the freight broker, e.g. freight forwarding services,
- costs for introducing VGM.
It is worth taking this opportunity to identify the party responsible for introducing VGM.
Our experts will be happy to answer any additional questions.