What Are Incoterms?
Incoterms is an acronym standing for international commercial terms. 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 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. They are reviewed every ten years by the ICC.
Why are they so important?
Unlike national trade policies, Incoterms rules are universal, providing clarity and predictability to businesses 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?
Aiming to simplify the drafting of contracts and more clearly stipulate the obligations of buyers and sellers, Incoterms were separated into two main categories.
There are 11 types of Incoterms® in the 2020 edition, being 7 terms for any modes of transport (air, sea inland) and 4 terms exclusively for sea and inland waterway transport.
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)
- DAP Delivered at Place
- 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
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.
Who is responsible for insurance ex-works terms?
If you’re a buyer under this term, you are responsible for loss and damage under the so-called ‘main carriage’ of the journey. Freight is covered under an insurance policy for this. Many marine insurance policies, however, don’t automatically cover for the time when goods are on the seller’s premises or after loading and awaiting transit (even though buyers are responsible).
It’s important to check your insurance policy to ensure you are covered for all parts of the journey and ask ICE if you require marine insurance for your shipment.
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.
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.
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.
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.
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.
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.
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 in the 2020 version 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.
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 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 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.