Incoterms Explained for Beginners
Importing and exporting can be pretty confusing if you’re new to the game, but fortunately, there is a system in place that can help to simplify matters – Incoterms.
In this article, we will provide a simple introduction to Incoterms for the first-time or new international shipper, and explain the rules that make up the Incoterms framework. Read on to learn more.
What are Incoterms?
Incoterms (International Commercial Terms) is a set of rules that can be used to make shipping contracts and trading agreements easier to set up between parties in different countries. They are used to standardize contracts and clarify who holds the risk, responsibility, and cost of each stage of your shipment, so that both partners involved in international trade know their role and what is expected of them.
Incoterms 2010 is the current set of Incoterms rules, and they are reviewed every ten years, with the next review due in 2020. When you work with a trading partner abroad and use Incoterms, it is a good idea to make sure that you are both using the current Incoterms 2010 rules, just to be on the safe side!
Understanding the Eleven Incoterms
There are eleven Incoterms rules, cif intercoms & cfr intercoms and trading partners can choose which rule to use for their shipments based on their needs, and how they prefer to do business. If you’re just starting out, you might find it easier to use an Incoterm that places most of the burden on the other party. Ho if you’re prepared to do a little more from your side, you might be able to make significant savings on your total shipping cost.
The Eleven Incoterms are:
EXW: Ex Works (named place of delivery).
Under EXW, the seller or supplier makes the goods available to the buyer at a named place such as their own factory or warehouse, and the buyer is responsible for their collection or onward journey.
The goods will not be cleared for export nor loaded up for the onwards journey for the buyer, and so the EXW Incoterm places the maximum responsibility on the buyer in terms of the shipping risks, costs, and duties.
FOB: Free on Board (named port of shipment).
FOB again applies to shipments by the ocean. All costs and risks are under the seller’s responsibility until the goods in question are loaded onto the ship. However, the seller’s responsibilities only end here if the goods are “appropriated to the contract,” or “clearly set aside or otherwise identified as the contract goods.”
This means that FOB requires that the seller deliver the goods onto the ship chosen by the buyer in the way normally used at that port, including arranging for export clearance. From that point on, the buyer pays for:
- the cost of transport
- fees for the bill of lading
- onward transport
It is also important to note that within certain common law countries (including the USA), the use of FOB applies to inland transport of any type, and does not refer only to inland waterways shipping.
FCA: Free Carrier (named place of delivery).
FCA makes the supplier or seller responsible for delivering export-cleared goods to a named place decided by the buyer.
The place of delivery affects who is responsible for loading and unloading. If the named place is under the supplier or seller’s control, the seller is responsible for loading and unloading. However, for delivery at another location, the buyer is responsible for loading and unloading.
FAS: Free Alongside Ship (named port of shipment).
The FAS rule applies to shipments by vessel only, not by air or land. Under FAS, the seller is considered to have delivered the goods when they are cleared for export and placed alongside the buyer’s ship at a named port.
The seller is responsible for the cost and the risk up until the point of delivery, but as soon as delivery has been completed, responsibility passes to the buyer.
CFR: Cost and Freight (named port of destination).
CFR is an ocean shipment Incoterm that sees the seller carrying the risk for the goods up to their named destination port, and also, the cost of shipping to the port of destination. However, the risk for the onward journey passes to the buyer when the goods have been loaded onto the ship in their country of export. The seller, then, is not obligated to insure the shipment.
CIF: Cost, Insurance & Freight (named port of destination).
The CIF rule is similar to the CFR rule for water shipments, but the seller must insure the goods to their port of destination at 110% of their value, with the coverage level set by the Institute Cargo Clauses of the Institute of London Underwriters.
The insurance policy must be in the same currency used in the contract. The seller must give the buyer any documents that they might need to get the goods from the carrier, or to make a claim against the insurer.
CPT: Carriage Paid To (named place of destination).
Under CPT, the seller or supplier pays for carriage (transport) to a named destination, including haulage and customs export clearance fees. However, the risk for the goods passes to the buyer as soon as the goods are handed over to the carrier.
CIP: Carriage and Insurance Paid to (named place of destination).
CIP is similar to CPT, but the seller or supplier must also insure the goods in the shipment for 110% of the contract value, to a coverage level set by the Institute Cargo Clauses or similar.
DAT: Delivered at Terminal (named terminal at port or place of destination).
DAT requires the supplier or seller to deliver and unload the goods at a named terminal, and cover all of the fees including haulage, loading and unloading, export fees and port charges, as well as potentially demurrage or delay fees. DAT also places the risk for the shipment with the seller until the goods arrive at the named terminal.
Any costs and charges after unloading, such as taxes, customs fees, and import duties, as well as onwards transport, are the responsibility of the buyer.
DAP: Delivered at Place (named place of destination).
DAP is defined as “Delivered At Place” (named place of destination) and means that the seller has delivered the goods when they are made available to the buyer at the named place of destination. At the point of destination, the risk passes to the buyer, who is responsible for arranging the shipment unloading.
Packaging and loading the shipment to the named place as well as the journey and safe arrival are the responsibility of the seller in terms of risk, liability, and cost. When the goods arrive in the destination country, import duties and customs clearance costs are paid by the buyer. Yet, the delays or demurrages charges remain the responsibility of the seller.
DDP: Delivered Duty Paid (named place of destination).
The seller is responsible for delivering the goods to a named place in the buyer’s destination country, including all of the costs, such as customs and taxes as well as shipping. No risk or liability passes to the buyer until the goods are safely delivered at the named place of destination.
Why are Incoterms important?
Using Incoterms helps to standardize contracts and determine the assumed responsibility for the risk, liability, and cost of every handover point in a freight shipment journey between trading partners based in different countries. This will help you to avoid being caught unawares with an unexpected cost, or with your shipment waiting on a dock somewhere for you to move it, with no idea that the other party wasn’t taking care of that for you!
They help to avoid problems between partners who speak different languages, and make sure that both partners understand and agree on what their role is in the shipment, which is important if you’re dealing with someone who does not speak your language-or even someone who does, but who lives in a country with different regulations and standard operating procedures. After all, anyone who has ever vacationed abroad will know only too well that many things are done differently elsewhere, and that misunderstandings are easy.
It also means that disputes and confusion can be avoided, they help to promote good business relationships. When keeping on good terms with your freight shipping stakeholders you are making sure your shipment arrives safely and on time. Avoid arguments and you both walk away happy, ready to trade together again another day.
Tips for Getting the Best Out of Incoterms Transactions
- Incoterms can make it easier to get like-for-like quotes from different companies without having to draw up a full contract first, which is especially helpful if you are just starting out or planning your very first shipment.
- Remember that Incoterms only outline the risks and costs of each stage of shipment-not when ownership of the goods changes hands.
- Finally, Incoterms can be a really helpful and important part of a shipping or purchase contract, but they don’t make up a contract in their own right.
- Asking suppliers to provide quotes for EXW and FOB Incoterms allows you to check with your freight forwarder if they can better the rate provided, and collect your goods from the supplier for transportation to the port of departure on your behalf.