INCOTERMS
What are Incoterms?
Freight incoterms (International Commercial Terms) are standard terms used in importing and exporting sales contracts. They are used to define who is responsible and who is liable for goods during the course of a shipment. In other words, they define the point at which responsibility for the goods passes from the supplier to the buyer. They also specify who is responsible for which costs associated with the goods and their transportation.
Here are some of the most common incoterms and when you might choose them:
FOB (Free on Board)
This very common incoterm applies only to sea freight and means that liability and responsibility for costs are transferred to the buyer when the goods are loaded “on board” the shipping vessel.
FOB gives the buyer complete control over the freight shipping process. Because the buyer selects their own forwarder, they benefit from greater cost, term, and shipping planning flexibility.
EXW (ExWorks)
The ExWorks incoterm indicates that responsibility is transferred to the buyer at the supplier’s warehouse rather than on board the vessel.
This means that the buyer pays for and is responsible for the goods’ transportation from door to door. The supplier only needs to prepare the goods for pickup.
This incoterm gives the buyer complete control over freight costs, but it also means they are liable for everything that occurs in the origin country, which is frequently not their home country. This incoterm may benefit more experienced shippers.
FCA (Free Carrier)
When using FCA, the buyer assumes responsibility and costs once the goods are loaded onto a mode of transportation or delivered to a specific location agreed upon by the buyer and seller, which is typically a port.
This incoterm is used for all modes of transportation.
With FCA, the supplier is in charge of packaging and transportation at the point of origin. This means that the supplier bears more responsibility than with ExWorks, but the buyer still bears costs and responsibilities earlier than with FOB.
FAS (Free Alongside Ship)
When the goods are placed alongside the vessel (e.g., on a quay or a barge) designated by the buyer at the named port of shipment, the seller delivers.
When the goods are alongside the ship, the risk of loss or damage passes. From that point forward, the buyer is responsible for all costs.
CFR (Cost and Freight)
The seller either delivers the goods on board the vessel or obtains goods that have already been delivered. When the goods are on board the vessel, the risk of loss or damage passes to the customer.
The seller is responsible for contracting for and paying the costs and freight required to transport the goods to the specified port of destination.
CIF (Cost, Insurance and Freight)
The seller either delivers the goods on board the vessel or obtains goods that have already been delivered. When the goods are on the ship, the risk of loss or damage passes to the customer.
The seller is responsible for contracting for and paying the costs and freight required to transport the goods to the specified port of destination.
The seller also arranges for insurance to cover the buyer’s risk of loss or damage to the goods during transportation.
The buyer should be aware that under CIF, the seller is only required to obtain minimum cover insurance. If the buyer wants more insurance coverage, he or she must either expressly agree to it with the seller or make his or her own extra insurance arrangements.
CPT (Carriage Paid To)
At an agreed-upon location, the seller delivers the goods to the carrier or another person designated by the seller (if any such site is agreed between parties).
The seller must contract for and pay the costs of carriage required to deliver the goods to the specified location.
CIP (Carriage And Insurance Paid To)
The seller bears the same responsibilities as CPT, but they also arrange for insurance coverage against the buyer’s risk of loss or damage to the goods during transportation.
The buyer should be aware that under CIP, the seller is only required to obtain minimum cover insurance. If the buyer wants more insurance coverage, he or she must either expressly agree to it with the seller or make his or her own extra insurance arrangements.
DAP (Delivered At Place)
The seller delivers when the goods are placed at the buyer’s disposal on the arriving means of transport, ready for unloading at the specified location.
The seller assumes all risks associated with delivering the goods to the specified location.
DAT (Delivered At Terminal)
The seller delivers when the goods, once unloaded, are placed at the buyer’s disposal at a specified location.
The seller assumes all risks associated with transporting the goods to and unloading them at the specified location.
DDP (Delivered Duty Paid)
The seller delivers the goods when they are placed at the buyer’s disposal, cleared for import on the arriving means of transport, and ready for unloading at the specified location.
The seller bears all costs and risks associated with transporting the goods to their final destination. They must clear the products for both export and import, pay any duty for both export and import, and complete all customs formalities.
FAQ
Being in charge of an international standard is no easy task. 13 ICC commissions comprised of private-sector experts from around the world decide on these international trade terms. These people specialise in everything from local issues to international business.
The most well-known incoterms are FOB (Free On Board), EXW (Ex Works), and FCA (Free Carrier), but there are others. Which one is best for you is determined by factors such as the type of goods you’re shipping, your shipping experience, and your relationship with your supplier.
The majority of incoterms can be applied to any mode of transportation. FOB, FAS, CFR, and CIF are exceptions that are only used for sea freight.
Before negotiating a contract of sale, importers and exporters should consider which incoterms are best for them. This can help to avoid unexpected costs and complications.
When multiple parties and stakeholders are involved, choosing an incoterm means getting on the same page as your supplier – it aligns everyone on shipping procedures. These globally accepted terms ensure that goods, services, and duties are paid on time, while also protecting suppliers, carriers, and buyers.
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