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?
Read on to discover a breakdown of each term you need to know about.
As a bonus, download our incoterm downloadable chart for quick and easy use!
What Are Incoterms?
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.
Incoterms is an acronym standing for international commercial terms. “Incoterms®” is a trademark of International Chamber of Commerce, registered in several countries.
The latest version of Incoterms®, which are the Incoterms® 2020, was released in 2019.
Why are they so important?
Unlike national trade policies, Incoterms rules are universal, providing clarity and predictability to business around the world. A requirement on every single commercial invoice, they greatly reduce the risk of potentially costly misunderstandings.
What Are The Different Types Of Incoterms?
The incoterms 2010 revisions have modified the 13 total rules in the 2000 version to 11 total rules in the 2010 version – which is still in effect as to 2019.
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 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 (Carriage 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 (Carriage & 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) – No longer in use 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 Unloaded)
The DAT term contained in Incoterms 2010 has changed to DPU in the Incoterms® 2020 edition.
Delivered at Place Unloaded (DPU) requires the seller to deliver the goods at the disposal of the buyer after they’ve been unloaded from the arriving means of transport. It is the only Incoterms rule that requires the seller to unload goods at the place of destination and it can apply to any—and more than one—mode of transport.
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.
Incoterms Two Main Categories
Aiming to simplify the drafting of contracts and more clearly stipulate the obligations of buyers and sellers, two main categories of Incoterms were updated and organized by modes of transport in 2010:
Incoterms that apply to any mode of transport:
- EXW Ex Works
- FCA Free Carrier
- CPT Carriage Paid To
- CIP Carriage and Insurance Paid To
- DPU Delivered at Place Unloaded (former DAT Delivered at Terminal)
DDP Delivered Duty Paid
Incoterms that apply to sea and inland waterway transport only:
- FAS Free Alongside Ship
- FOB Free on Board
- CFR Cost and Freight
- CIF Cost, Insurance, and Freight
Understanding Incoterms and Insurance
In this other article, “Insurance Responsibilities Explained: Who Insures What and Are You Covered?”, we explain how marine insurance interacts with the Incoterms, and explain whether the term you select appropriately divides the responsibilities for you in the shipping process. We’ll also look at how insurance is affected by each of these Incoterms.
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.
Should you have any further questions regarding the different types of incoterms please contact your ICE team member on 1300 CARGO1.