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A Beginner’s Guide to Incoterms

ICC Incoterms 2010

Whether you are just starting out or have been importing and exporting for a while, incoterms can confuse the best of us. So what are incoterms and what do they actually mean?

Incoterms are terms of trade that identify the division of costs and risks between the buyer and seller when shipping internationally. They are often discussed when costs are negotiated during the sales process. Make sure you know your incoterms to avoid any hidden charges during the shipping process. 

Read on to discover a breakdown of each term you need to know about or download our incoterm reference chart for quick and easy use!

EXW (Ex Works)

The Ex Works incoterm provides the seller with the least obligation, in regards to shipping costs and liabilities. The seller makes the goods available at a chosen premises and the buyer must organise all elements of shipping. This includes collection at origin, freight, delivery, duties and GST. The risk transfers to the buyer when they collect the goods from the named premises. The buyer takes on all costs until final delivery. 

FCA (Free Carrier)

For FCA shipments, the seller makes the goods available to a carrier stipulated by the buyer. The buyer must also coordinate the export clearance. From here the risks and costs are transferred to the buyer. This includes terminal and loading charges at the port of origin. The buyer will also be responsible for all charges from freight to final delivery and customs charges at the end destination.

FAS (Free Alongside Ship)

For FAS shipments the seller makes the goods available alongside the vessel at the named port of shipment and coordinates the export clearance. The seller takes on all origin charges including terminal charges but the buyer pays for loading onto the vessel and all charges thereafter.

FOB (Free On Board)

When shipping on FOB terms the seller is responsible for all origin charges. This includes loading onto the named vessel. The risks and costs are then transferred to the buyer. The buyer is then responsible for the freight, any insurance required and all charges to final destination.  

CPT (Carraige Paid To)

When shipping on CPT terms the seller is responsible for making the goods available at a named place of destination. With these terms the buyer is responsible for any additional transportation, duties and taxes. The buyer is also responsible for any insurance required during transit.

CFR (Cost and Freight)

The CFR incoterm means all charges, including freight up until the intended port of destination, are born by the seller. However, as a buyer be cautious. The risk for the buyer takes over when the goods are loaded on the vessel, so even though you are not paying for the freight you may want to insure your shipment. All remaining charges at the destination are then settled by the buyer. 

CIP (Carraige & Insurance Paid To)

Similar to CPT terms the seller is responsible for making the goods available at a named place of destination. The seller must also procure insurance to cover the goods during transit to the named destination. The buyer is only responsible for any additional transportation and duties and taxes upon arrival.

CIF (Cost, Insurance and Freight)

This term is the same as CFR only the seller is responsible for the goods and any insurance up until the goods arrive at the intended destination port. Once the goods arrive the buyer takes on all risks and final associated charges.

DAT (Delivered At Terminal)

On DAT terms the seller ensures the goods are delivered to the destination terminal. The seller is also liable for all costs and insurance up until this point.  The buyer then takes on responsibility for any clearance and final delivery charges.

DAP (Delivered At Place)

DAP means the shipment is delivered to a chosen location at the destination. The seller is responsible for all charges up until the goods are delivered to the final location. The buyer is responsible for unloading these goods and any duties and taxes applicable.

DDP (Delivered Duty Paid)

DDP terms represent the least cost and risk for the buyer. The seller is responsible for ensuring the goods are delivered to the final destination import cleared. This means the seller takes on all costs and liability for the entire shipment. The buyer is only responsible for unloading goods upon arrival.

One Last Tip

Knowing your incoterms and discussing these with your buyer or seller prior to arranging a shipment will avoid any surprises during the shipping process.  Speak to your forwarder before agreeing your terms. You can also ask for comparison rates on different terms so you can calculate the best option for your business.

For full details check out the International Chamber of Commerce website HERE.

Should you have any further questions regarding incoterms please contact your ICE team member on 1300 CARGO1.

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