Purchase Terms – What you need to know about purchasing goods from overseas

When you are purchasing from overseas, you need to understand what you are paying for, and who is supposed to do what.

The last thing you need to have (not) happen, is for your shipment to be delayed because you and/or the supplier have misinterpreted or misunderstood the responsibilities of either party.

If you are unsure as to what your overseas supplier is offering, you should always talk to your forwarding and/or your customs agent who can explain these terms and ensure you get the best services to match the purchase terms.

These shipping terms are referred to as INCOTERMS and are common globally. The exception is USA where what they understand and the rest of the world understands are very often different. So, when dealing with the USA, you need to be particularly clear with what the supplier means when he is quoting you a price or giving you a proforma invoice. Do not presume that FOB means the same to them as what you think it means.

There are INCOTERMS to cover every possible transport option; but the vast majority of purchase terms are: EXW, FOB, CNF, CIF, DDU and DDP.

 

As a general guide; this is what they mean:

EXW = ex works. Very simply, your supplier has quoted you a rate ex their factory/premises. Your supplier will pack the goods for export or may even pack the goods into a container for export – but you are responsible for providing the transport and container if the shipment is FCL (Full Container Load), plus all of the freight, port and handling charges that end. Some suppliers do not have the facilities to pack containers on their site and may only give you the cargo for you to arrange the packing of the containers as well- you need to confirm this with your supplier and your forwarding agent.

FOB = Free On Board. This is similar to EXW, except that the supplier is responsible for the delivery of the goods to the port for shipping. In most cases the supplier is responsible for the export documentation and the export shipping line and port charges. Unfortunately, USA is generally an exception; many suppliers think that FOB is actually EXW. You should always check with your suppliers that you both understand what is covered by your terms of purchase – particularly when it comes to the USA.

 

 

CNF = cost and freight. In this case, the supplier is to also arrange and pay the freight all the way from ex works to arrival at your nominated port of discharge. In this case, it is your responsibility to arrange and pay for any insurance on the goods.

CIF = cost, insurance and freight. Similar to CNF except that your supplier also arranges the transit insurance. As the purchaser, you should always insist on a copy of the insurance policy or certificate and make sure that you check with the local correspondent for this insurance that it is completely valid and covers exactly what you expect it to.

DDU = Door delivered, duty unpaid. Your supplier is responsible for all charges for having the cargo delivered to your nominated address, but you are responsible for any import duties, GST and customs entry fee.

DDP = Door delivered, duty paid. In this case you do nothing, your supplier is responsible for all charges including any duties and taxes up to you receiving the goods.

 

Each of these arrangements has its place. There is no right or wrong reason to purchase your goods under any of these terms, although some may make more sense depending on your specific requirements.