In the following article we will explain the main differences between types of shipments. Reading through the next pages you will also understand who has to pay these charges depending on the conditions under which the freight is conducted. Basically the cost of shipping refers to what it costs to move goods from A location to B location. There could be different types of shipments and depending on them, the costs will cover different aspects of transport. The easiest way to divide the types of cost of transportation is to divide them into Landside and Ocean costs:
- Ocean Related Charges – The cost of transporting goods by the sea. Though there are different types of shipments. It can be Port-to-Port or even Door-to-Door among various other services. Typically your ocean freight will be charged after the volume of your shipment in cubic feet. Here are the most common Ocean related charges:
- Ocean Freight Costs
- Bunker Adjustment Factor (BAF).
- International Ship and Port Facility Security (ISPS)
- Low Sulphur Surcharge
- Currency Adjustment Factor (CAF)
- Landside Charges – The cost of Landside shipment can be divided into subcategories. These can be among others customs, road and rail. Each of these categories have their own costs. Such as:
- Terminal Handling Charge
- Chassis Usage Surcharge
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Who Pays for these Charges?
The party that will be paying these charges is completely up to the buyer and the seller. However usually they use the International Commercial terms to decide based on a set of rules defined by the International Chamber of Commerce. This will allow them to agree on specific terms regarding a given shipment.
There could for instance be a divided fee both parties have to pay to the shipping line. Though oftentimes the exporter will pay all the Ocean related charges. This could include the Freight, ISPS or BAF. On the other hand the Freight Forwarder will pay all Landside related charges such as Service Fees, Bill of Lading and THC. If it is a Free on Board (FOB), then the transporter needs to pay all fees with regards to FOB at the given port.
The fees associated with FOB among other can be:
- Bill of Lading
- Pre-Carriage Fees
- Other Service Fees
It is key that three is a clear and mutual understanding between the buyer and the carrier regarding who is responsible for paying which fees exactly. Coming to an agreement before the shipment takes place is best, this will prevent any confusion.
11 Shipment Terms Defined Under the Incoterms
There are 11 main terms defined by Incoterms. These are useful and important terms as they allow both parties to conduct their part of the job, without confusion and with a sense of security that conditions will be matched. Generally the term will be specifically used and changed depending on the exact business transaction and its location. For instance FOB Hamburg and so on.
- Ex Works (EXW) – The Seller provides a notice for the Buyer as to when the goods are ready. The seller’s only responsibility is to provide the goods for pickup by the Buyer. The Buyer then takes all responsibility for additional charges as well as delivery of the goods.
- Free Alongside Ship (FAS) – This is a term only applied during water transport. The Seller has all responsibility until the goods have reached the port of destination. From here on all responsibility is taken over by the Buyer.
- Cost of Freight (CFR) – This too is only applicable to waterway shipping. Here the Seller pays all necessary costs in order to bring the goods to the agreed upon port. The Buyer then takes over the responsibility of: loading of goods, transportation and import.
- Free Carrier (FCA) – After agreeing on the location on the Seller’s side, the Seller will be responsible for loading the goods. Then the transport, risk of loss and additional freight charges then will shift to the Buyer.
- Cost Insurance and Freight (CIF) – It is very similar to CFR. The main difference is that the Seller must obtain insurance in case of damage or loss of goods.
- Free on Board (FOB) The term is always followed by the name of the port where the goods are transported (f.e.: FOB Boston). This too is only applicable to waterway shipping. The Seller pays for and is responsible for loading the goods onto trucks or other means of transport. Then the responsibility shifts to the Buyer.
- Carriage Paid To (CPT) – A location is agreed on the Buyer’s side. After which the responsibility of the import is the Buyer’s. The Seller is responsible for transport, freight charges, exporting obligations and risk of loss as well.
- Delivered at Terminal (DAT) – A terminal, or a specific point within a terminal is named by the Buyer and the Seller on the Buyer’s side. Apart from import and unloading responsibilities, everything else falls onto the Seller.
- Carriage and Insurance Paid (CIP) – A place is named on the Buyer’s side. The seller will prepare the freight here. The seller is responsible for every single aspect of the transaction apart from unloading the goods from the final vessel.
- Delivered at Place (DAP) – A specific place of destination is named by the Buyer. The goods will be delivered here and apart from import and unloading obligations, the Seller carries all other responsibilities.
- Delivered Duty Paid – (DDP) – The parties assign a stipulated location for the Buyer. Here all goods will be delivered. The only responsibility the Buyer has is unloading the goods at the end of the transaction.
Commonly Used 3 Incoterms
The above 11 definitions are useful to see all options. However 3 noteworthy terms are FOB, CIF and EXW. These terms are commonly used. Their main difference is that while using Ex Works, the Buyer covers most charges, when going with Cost Insurance and Freight, and Free on Board shipping terms, the Seller needs to cover the majority of the expenses. Out of the 3, CIF will be the most costly though. There will be additional charges such as: costs of arrangement.
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