“Without Incoterms, having a contract is simply not enough, especially given the potential language barriers and different meanings around a particular term or phrase.”
Mark Agnew — Senior director, International Policy, Canadian Chamber of Commerce
Introducing: Incoterms
Using the wrong incoterm can cause major headaches. So before you hit that "send" button on your shipping documents, make sure your Incoterms hold up.
Not sure what to look for? We're here to help, in this blog we cover:
What are incoterms, how do they work?
The 11 Incoterms Explained
Our Advice on using incoterms like an expert
In Short: What Are Incoterms?
“Incoterms” stands for International Commercial Terms. Since 1936, these terms of trade have been defined and updated by the International Chamber of Commerce (ICC). With new incoterms released every decade alongside yearly revisions, these standardized rules can be hard to keep up with.
In simple terms, incoterms are a set of international rules that define the responsibilities of the buyer and the seller in a transaction involving the shipment of goods.
The Incoterms rules describe:
Obligations: Outlines responsibilities of the buyer and seller in a trade transaction
Risk: Clarify when risk passes from seller to buyer under each of these rules.
Costs: Outlines how costs are distributed between the seller and the buyer.
Prior to signing off on the commercial arrangement, the involved parties select the Incoterms. What this does is determine who is responsible for; the transport cost of each transportation segment, who loads and unloads the cargo, and who bears risk at any given point if something goes wrong.
Incoterms Explained
Incoterms for Any Mode or Modes of Transport
EXW: Ex-Works
Suitable for domestic sales, but care should be exercised for international sales as full responsibility rests with the buyer.
The seller, or exporter is to make the cargo available to the buyer, or importer at the seller’s premises.
The buyer is responsible for all costs, duties, insurance and risk associated with the shipments,
Risk transfers from seller to buyer once the seller has placed the goods outside their factory/premises.
FCA: Free Carrier
Any mode/s of transport, delivery at origin, buyer arranges carriage.
The seller, or exporter is responsible to transport the goods to an agreed place, commonly specified by the buyer, and is required to complete all origin customs formalities.
The buyer arranges transport and is responsible for import, where applicable. But if commercial practice or at buyer’s request, Seller may arrange transport at buyer’s cost and risk
Risk transfers to the buyer once the cargo has reached a warehouse, or consolidation depot for example.
CPT: Carriage Paid to
Carriage Paid To means that the seller delivers the goods to an agreed place, often the origin port. This is decided by both parties prior to shipping and transfers the risk to the buyer.
The seller is responsible for export and pays for transport, but does not have transport risk.
The buyer is responsible for import where applicable.
Risk transfers when Seller hands goods to the carrier.
CIP: Carriage, Insurance Paid to
Carriage, Insurance Paid To means that the seller delivers the goods to an agreed place, often the origin port. This is decided by both parties prior to shipping and transfers the risk to the buyer. Seller insures buyer’s risk.
The seller is responsible for export and pays for transport, but does not have transport risk. Seller contracts for ‘all risks’ cover insurance against buyer’s transport risk.
The buyer is responsible for import where applicable.
Risk transfers when Seller hands goods to the carrier.
DAP: Delivered at Place
Seller arranges carriage, delivery at the destination door.
The seller is responsible for export and pays for transport.
The buyer is responsible for import where applicable.
Risk transfers when the seller delivers the goods at the buyer’s disposal
DPU: Delivered at Place Unloaded OR
DAT: Delivered at Terminal
NEW: Name change from Delivered at Terminal (DAT) to Delivered at Place Unloaded (DPU). Now comes after DAP.
Seller responsible for delivery to the terminal. Either the Wharf or Airport of Destination.
The seller is responsible for export and pays for transport
The Buyer is responsible for import where applicable.
Risk Transfers when the seller unloads the goods from arriving transportation and places them at Buyer’s disposal at the named place of destination.
DDP -Delivery Duty Paid
The seller is responsible for export and pays for transport. The seller is also responsible for destination duties and taxes.
The buyer is responsible for import where applicable.
Risk transfers when seller places the goods, cleared for import, at buyer’s disposal on arriving means of transport at the named place
Incoterms for Sea and Inland Waterway Transport
FAS: Free Alongside Ship
Seller delivered goods alongside the vessel, buyer arranges carriage.
Seller is responsible for export. Seller transports the goods from their premises, completes origin customs formalities, and ensures the goods are safely delivered alongside the international mode of transport (e.g. vessel).
Buyer pays transport and is responsible for import where applicable.
Risk Transfers once the seller has delivered goods to the named port alongside the vessel.
FOB - Free on Board
Seller delivers goods on board the vessel, buyer arranges carriage. For goods in containers, consider using FCA instead.
FOB is very similar to FAS, however differs in that risk transfers to the seller once the goods have been loaded onto the vessel (specifically when the cargo has crossed the ‘ship's-rail’).
When negotiating FOB terms, for the purpose of clarification, it’s important to state the port in which the terms apply to. For example, if you’re importing/exporting out of Shanghai the terms should read FOB Shanghai.
CFR - Cost and Freight
Seller delivers goods on board the vessel and arranges carriage
The seller, or exporter is now responsible for all origin formalities and is also required to cover the international freight charges to the destination port.
The buyer is responsible for import where applicable
Risk transfers when the seller hands goods to transport or carrier, without bearing transport risk.
CIF - Cost Insurance and Freight
Seller delivers goods on board the vessel, insures buyer’s risk and arranges carriage.
The CIF term carries the same conditions as CFR.
The seller, however, is also required to purchase insurance for the goods, with the buyer, or importer named as the beneficiary.
Risk transfers when seller hands goods over to carrier BUT seller pays for transport, without bearing transport risk
It’s important to note two things in particular for the CIF term:
Firstly, should the goods be damaged in transit, the buyer is required to file the insurance claim, not the seller.
Secondly, for a shipment to qualify for the CIF term, the cargo must be partially moved by ocean freight.
Our Expert Advice
1. Be specific when naming places or destinations
When it comes to logistics, being specific is key. This is especially true when it comes to naming places or destinations in incoterms. Unclear or vague terms can lead to misunderstandings, delays, and extra costs.
For example, if a seller uses the term "port" in the incoterm, it may not be clear which specific port is intended, leading to confusion and potential issues with customs clearance.
So, always take the time to be clear and specific.
2. Know the difference between ownership and risk
Ownership refers to who owns the goods, while risk refers to who is responsible for the goods during transport.
In some incoterms, ownership and risk transfer at the same time, while in others, they transfer at different points in the shipping process.
For example, under FOB (Free on Board), ownership and risk transfer at the same time when the goods are loaded onto the ship.
However, under CIF (Cost, Insurance, and Freight), ownership transfers when the goods are loaded onto the ship, but risk remains with the seller until the goods arrive at the destination port.
Understanding these distinctions can help ensure that both parties understand their responsibilities and liabilities throughout the shipping process.
3. Use the right incoterm
Choose the correct incoterm and you get a seamless, cost-effective and efficient shipping process. Pick the wrong one and you can get hit with unexpected costs, delays and even legal troubles.
Using FOB or CIF for containerised cargo. With FOB, risk is transferred when the cargo is loaded onto the vessel. However many shippers hand over their cargo to the carrier at the terminal where it awaits to be loaded onto the vessel. FCA, CPT, and CIP are the correct alternatives to CIF or FOB in this case, with risks transferred at the origin when the cargo is handed over to the carrier.
Using EXW (Ex Works) when the seller is unable or unwilling to provide the goods at their premises, leading to confusion over delivery responsibilities.
Using DDP (Delivered Duty Paid) when the seller is unable to clear the goods through customs, leading to delays and potential penalties.
Using FOB (Free on Board) for containerized cargo without considering the additional costs and responsibilities associated with containerization and transshipment.
Using CIF (Cost, Insurance, and Freight) without specifying the exact destination port, leading to confusion and potential issues with customs clearance.
Finally, check that you're not using outdated incoterms that do not reflect the current business practices or transport options.
Are you still feeling lost in a sea of incoterms? Our team of experts is here to help you navigate the complexity and choose the right incoterm for your needs. Whether you're importing or exporting, our logistics experts can provide clear guidance and advice to ensure that your cargo arrives safely and on time.
Contact us today and let us help you chart a course to success!
