Shipment Terms Guide
There is much confusion when we talk about the shipment terms which the buyer should accept and what the supplier is offering, the associated costs with it and the practical implementation itself. The guidelines given here serve’s the purpose of better understanding the shipment terms specifically for Pakistani market
“Incoterms” these are the standard guidelines for shipment terms and buyer and seller responsibilities published by the International Chamber of Commerce. The latest version was published in 2018. This is international governing code which is referred when talking about the shipment terms.
There are several shipment terms that are used widely. We won’t be going into details of all and will discuss only few which are mostly applicable for Pakistan market. For a summary, a graphical representation of all the shipment terms is shown below
Ex-Works
FOB
CFR
CIF
This means that the material is stored in Seller’s warehouse/depot and it is the buyers responsibility to pick up the items from Seller’s warehouse and arrange the shipment, freight, etc
Ex-works quotations are quick quotation. Suppliers don’t need to ask the freight forward agent about the transport charges and can just quote the material cost. They need not worry about the transport, responsibility and the costs because these will be borne by the Buyer. Documentations required for export are provided by the Seller but the forwarding agent must ask for all the documents and ensure no documents are left.
Buyers are advised to avoid Ex-works shipment dealings. Why because you will need to arrange pickup, export documentation and freight yourself. Obviously, you wont be doing it yourself by sitting in Pakistan, you will be requiring a freight forwarding agent who is in the Sellers country and will pickup the goods from warehouse and do the necessary proceedings. People might ask here how will they find a forwarding agent in foreign country while sitting in Pakistan. So you don’t need to search for forwarding agent. You just need to contact a local custom clearing agent in Pakistan. These local Pakistani custom agents have links in all countries and can arrange all the pickup from the Sellers warehouse.
You might be wondering why should we not opt for Ex-works as our pickup and shipment part is being done by the Pakistani custom agent? The reason is that the risk of shipment is passed onto you from the moment your Pakistani custom agent picks up the material from his warehouse. If the item gets damaged anywhere in between then it wont be the sellers responsibility. Also, in this case since the transfer of goods is taking place in workshop then you must pay the supplier in advance. Previously since Jul-2018. It was possible to send advance payment to any supplier as long as the amount was less than $10,000. However, as of now its nearly impossible to do advance payment to supplier irrespective of the cost. (We will cover payment methods, State bank rules in another guide)
this is the most widely used shipment terms. The Seller will pack the material with complete documentation for export and will load the items onto the ship.
The Seller will inform the buyer of the ship details and will provide a Bill of Lading (proof of loading the material on the ship). The terms are fairly easy and should be acceptable to all Pakistani buyers. As soon as the material is loaded onto the ship, It is the buyers responsibility for any damage. However, it is still not recommended to deal with FOB as since the shipment cost is borne by the buyer, the seller have little interest in selecting the good, cost effective shipping agency.
This is the best shipment term one must adhere to and must ask the supplier to provide quotation with CFR payment terms. In this scenario the risk factor is same as in FOB.
The material ownership is transferred to the Buyer as soon as the material is loaded onto the ship. The only difference in this case from FOB is that the cost of freight is absorbed by the Seller. This payment term is recommended as suppliers need to provide competitive quotation, so they will always choose for a lost cost freight which saves the Buyers money.
Regarding the risk of material damage while being on ship or being unloading at Pakistan (in all three cases mentioned above EXW, FOB, CFR). The simple solution here is that the buyer takes marine insurance. The buyer needs to contact local Pakistani insurance companies and ask them about the insurance cost of the material they will be importing. Normally for machinery and industrial equipment’s 0.5% is good estimate. However, it could be as high as 3% for perishable food items. It is always recommended to take Marine Insurance. Make sure this is done in advance as the Insurance company may demand some documents of the ship. Its better if you talk to the insurance company before taking quotation and write all the requirements of the Insurance company in your RFQ (request for quotation) document.
This is exactly same as CFR. However, the insurance is the Sellers responsibility and the insurance amount is already built in the quotation.
This is even more hassle free than CFR. But if any damage claim has to be done by the buyer. The risk is transferred to buyer as soon as the goods are loaded onto the ship..