What does DDP mean in shipping terms?
- DDP is an incoterm that stands for “delivered duty paid.” Used in sea freight and air freight importing, when shipping under this Incoterm, the maximum responsibility is placed on the seller. DDP can be risky since sellers are responsible for the delivery, and may lack local destination knowledge and requirements. This is especially true when factories in China quote DDP.
DDP Agreement: Buyers and Sellers Responsibilities
In this agreement, the supplier (seller) is liable for all shipping arrangements, including the import customs fees, until the goods are delivered to the buyer. DDP means the supplier must pay for all import and export costs, and the buyer is not responsible for any fees related to the shipping of the cargo.
The buyer is essentially not responsible for any part of the logistics process, except for receiving the goods. Part of receiving the goods is the unloading process. Any unloading fees are the responsibility of the buyer, so the buyers need to understand these costs, especially when shipping to fulfillment warehouses.
The buyer needs to understand, this Incoterm only focuses on the shipping costs, import and export duties, and taxes, any fees beyond that will most likely fall on the buyer.
Typically, the seller will bundle the total shipping costs, called landing costs, which serve as a cumulative quotation for services. When a seller is quoting a product, they will most likely quote the combined value of their product as DDP. When a seller quotes a price and includes the Incoterm abbreviation, DDP, it means the cost of the goods is including the delivery and duty charges.
Seller’s responsibilities go beyond the delivery of final goods and include:
- Drawing up sales contracts and related documents
- Meeting all import and export requirements
- Paying for all import and export duties and taxes
- All transportation costs, including delivery to a final agreed-upon destination
- The cost of all government inspections
- Proof of delivery
- In the event of damage or loss in transit, the supplier is responsible
Advantages and Disadvantages of a DDP Agreement
We will cover the advantages and disadvantages for buyers opting to use DDP as their Incoterms when purchasing internationally.
DDP Advantages for the Buyer:
- The buyer is not responsible for any delivery costs, taxes, or surprise charges of any kind that occur during the shipping and delivery process. This can often be beneficial, as there can be unknown costs when shipping, as both the export and importing countries can require inspections of varying degrees, of which, those costs are always passed down to the shipper.
Inspection fees can be high, and while they are rare, it is an aspect that should be accounted for. When purchasing under DDP terms, this risk goes away, because, even if it does happen, the costs will be billed to the seller.
- They have no additional costs to calculate for. As the name suggests, delivered duty paid indicates the buyer is paying for the cost of delivery and duties into the price of the products. Once the products have safely arrived, there are no additional costs they will be responsible for.
- Once the products are shipped, the buyer simply needs to wait for their cargo to arrive, and accept it. This can take a lot of stress away from the buyer, as they know, anything that might happen to the products in transit would be the responsibility of the seller.
- If the buyer can structure their purchase agreement in a way that reduces the risk of shipping delays and unqualified logistics companies, then DDP becomes more beneficial to the buyer.
If a seller can agree to use a specific logistics company that specializes in shipping from and delivering to the two destinations, and they define a required delivery date, then the overall advantages can outweigh the disadvantages.
DDP Disadvantages for the Buyer:
- There is a big opportunity for error because the supplier needs to be an expert on customs clearance, VAT or import taxes of the destination country. Even when the supplier feels confident their local freight forwarding company can assist, the buyer has no way to verify the local agents will be qualified to handle the delivery accordingly.
When freight forwarders lack qualifications, mistakes can lead to disasters quickly, and the cost to resolve the errors will continue to compound. The scary thing a buyer needs to consider is how far their supplier is willing to go to rectify issues before they give up and abandon their cargo.
While this could be a massive loss for them, it will also be a massive loss for the buyer, as deposits were inevitably paid for the products, and a lot of time was spent on the production and shipping process.
- When sellers are tasked with the shipping, it is in their own financial interest to find the cheapest option available. Like most industries, you get what you pay for. If a supplier chooses the cheapest, most unreliable option, the chance of issues, including loss of cargo or damaged cargo increases exponentially.
While this will ultimately cost more for the supplier, it is oftentimes a risk they are willing to take, as the more they can save, the more they will profit.
- When sellers are in charge of shipping, they will almost always choose the slowest option, as it will be the cheapest for them. DDP Incoterms removes the opportunity for the buyer to control to delivery time, or identify opportunities to speed the delivery process up should they need to.
Because of this, delays are inevitable. Experienced buyers know that they can usually reduce delays by opting for faster shipping times. While most buyers like to plan for the slow, inexpensive options, it is common to factor in the faster, higher cost shipping options as backup plans. When shipping via DDP, this opportunity is often lost, as the buyers do not control how their cargo is shipped.
- In the event of shipping delays, the buyer often has to communicate with the seller if they want to help rectify any issues. Since sellers are often in different timezones as the buyers, this slows down the communication and can lead to delays taking longer than if the buyer was able to communicate directly with the local shipping agents.
- The seller is always going to be working against the buyer during the shipping process. While products are in production, the seller wants to do a good enough job for the buyer to accept the products. The seller is financially incentivized to work to please the buyer. During the shipping process, the seller no longer needs to satisfy the buyer because they have already agreed to purchase the products. Any issue or delay in shipping can have the blame passed along to the shipping company, and the seller can play the part of the victim as well.
In reality, delays that occur when the Incoterms are DDP can be attributed to the seller choosing the wrong logistics company to ship the cargo. Most of the time, the seller could resolve the issues faced by paying more. Because the buyer has already accepted the products, and all the seller needs to do is fulfill their end of the contract, they hold little interest in reducing their profit margin to satisfy the buyer. Sellers already know, the buyer is going to pay for the product regardless of when they are delivered.
- DDP is usually going to cost more than if a buyer were to hold responsibility for the delivery fees. The reason for this is because the buyer does not have control to shop the quoted price, and the seller needs to factor in all possible additional costs into their sales price, regardless of whether or not they incur them.
When purchasing via DDP terms, the buyer is undoubtedly paying the highest possible price for shipping every time.
When to Use a DDP Agreement?
- Due to the disadvantages discussed above, the ideal time to look towards using DDP is when the supply chain costs and routes are stable and predictable.
- It may also be advisable to use these terms when the seller expresses confidence in shipping their products to your country and possess a successful track record of delivering to other customers under DDP Incoterms.
- At Guided Imports, the only time we will quote DDP is when a supplier reaches out to us directly. When a buyer requests their products be quoted in DDP, the supplier has the opportunity to choose their own China freight forwarder.
It is essential only to choose DDP when you can trust your supplier and their freight forwarder.
If your supplier quoted you DDP, and you would like to see how much you can save by allowing Guided Imports to act as your logistics company, get a shipping quote.
We will cover the most common questions we get asked when discussing DDP Incoterms.
What is the difference between DDP and DAP?
In a DDP agreement, the buyer is only responsible for the cost to unload their cargo. The seller must pay for all other shipping expenses, duties, and taxes. Under DAP Incoterms, the seller is responsible for only the shipping costs. The buyer is responsible for all customs, duties, and taxes associated with the shipment.
Who pays freight on DDP?
In a DDP agreement, the seller of the goods is responsible for all shipping costs, as well as customs clearance fees, import duties, and VAT. Essentially, the seller pays for all fees associated with getting the goods to the buyer. It is important to note that the buyer is responsible for any costs associated with unloading the goods.
Does DDP include Customs Clearance?
In a DDP agreement, the seller of goods is responsible for customs clearance, including import duties or VAT. When a buyer purchases products under this agreement, they are not responsible for the costs associated with customs clearance.
Are DDP agreements a good idea when importing from China?
A DDP agreement can be useful if a company is happy to pay a premium for low-quality shipping, and does not want to split the cost of their purchase between their supplier and a shipping company. There are better ways to ship from China, such as FOB, which are less expensive and have less risk of shipping delays and uncontrollable issues.
What are the payment terms a factory requires when shipping DDP?
Incoterms are different from payment terms. Because of this, a seller can request any type of payment terms for their order.
In China manufacturing, some factories will require the buyer to pay the full amount of the products once the goods are on the boat, whereas others will ask for final payment once the goods have cleared customs.
Is it possible to reject a DDP shipment on arrival?
In theory, yes, however, buyers need to understand what their purchase contracts state. Also, frequently, sellers require some form of payment before the goods have arrived, and in these situations, if the buyer were to reject a shipment, they would most likely lose their deposits.
Who is the consignee and importer on record in a DDP shipment?
This depends on the destination country. When shipping to the U.S., usually the seller is listed as the importer on record, and a consignee would be the ultimate receiver of the goods.
Which party clears customs under a DDP agreement?
The seller is the responsible party for clearing customs under the DDP agreement. The seller’s name or the name of the entity they use to assist with the formal entry will be listed as the importer on record. DDP also states that the seller must pay for all customs duties, so this responsibility will never be the buyers if shipping via DDP.