Incoterms explained

Understanding them is key to doing successful business

Incoterms are 11 standardized definitions of commonly used shipping and trade terms (INternational COmmercial TERMs) that cover such issues as control of goods and financial responsibilities, including payment of cargo insurance and freight.

They provide traders with a common set of rules, outlining each party’s obligations, thus reducing misunderstandings. You’ll want to discuss with your trading partners what its requirements are and which best suits your needs. Here you’ll find the complete meaning of the 7 general modes and the 4 sea-freight specific ones.

FOR ANY MODE OF TRANSPORTATION

These terms are applicable to any kind of shipments, but in case of non-containerized ocean freight and inland waterway transportation of goods there are more specific modes outlined in the next section.

EXW - EX Works (named place of delivery)

The seller provides the goods at its own location, or on a specified one. The obligations are maximum for the buyer and minimum for the seller. In this mode the buyer assumes all the risk involved in carrying the goods to its intended destination. The seller does not have the obligation to load the goods in the trucks or other collecting vehicles. If both parties decide that the seller will load them this has to be specified clearly in the contract as it’s not included in the EXW terms of sale. It’s a common term when discussing the bulk price of goods as it leaves all added costs out.

Also the clearance of Customs and the export documentation are also part of the buyer’s duties. This has some implications because in many places the declarant of an export documentation has to reside in the jurisdiction. Also in most places companies are required to provide proof of export for taxing purposes. And in the EXW mode the buyer does not have the obligation to provide it to the selling party, and this could make the seller liable for local taxes as if the whole operation were a local sale. In this situation the FCA mode might be more appropiate.

FCA - Free CArrier (named place of delivery)

The goods are delivered by the seller, cleared for export purposes, in an agreed place. The receiving party at that named place can be the buyer or somebody designated by the buyer. If the delivery process happens at the seller’s place, or in any place under control of the seller, it’s the seller who has to load the goods into the buyer’s means of transportation. If the meeting happens in any place outside the seller’s control, it’s obligations end once its transport arrives at the named place. The buyer will have to unload and load the goods on its own transport means.

CPT - Carriage Paid To (named place of destination)

Here the seller party assumes the cost of bringing the goods to the agreed place of destination. The important point here is that the goods are effectively delivered when they are handed to the first carrier, and the risk transfers to the buyer party from the moment that the goods are in the hands of the carrier at the place of shipment.

The seller has to pay the export clearance and shipping costs to the agreed place of destination (it could be the buyers’ facilities or a destination port, depending on what’s stated in the agreement). In cases where the buyer prefers that the seller insures the goods, the CIP mode might be the best solution.

The CPT mode replaces the CFR (valid for sea & waterways shipping) for all the shipping modes except the non-containerized ocean freight and inland waterway transport of goods.

CIP - Carriage and Insurance Paid to (named place of destination)

This mode is very similar to the previous CPT with the added benefit to the buyer that the seller has to insure the goods while travelling to its agreed destination. The CIP mode implies that the seller has to obtain an insurance for 110% of its contract value in the same currency as the sale agreement and enable all the interested parties to make a claim should the need arise.

The CIP mode is a valid option for every kind of shipping while the CIF mode (at the end of this list) is to be used only for non-containerized ocean freight and inland waterway transport of goods.

DAT - Delivered At Terminal (named terminal at port or place of destination)

Under this mode of shipping the seller has to deliver the goods, unloaded, at the agreed terminal. The seller party assumes all the transportation costs (export charges, transport, unloading from main carrier at the destination harbour and, if present, destination port charges) as well as all the risk until the goods arrive at the agreed port or terminal.

This terminal can be a port, airport of land freight interchange facility where the goods can be received. In cases where the seller can not organize the unloading at the agreed destination place, it’s better to opt for the DAP mode.

The buyer is responsible for all the costs incurred after unloading (as could be import duties, taxes, customs, etc).

DAP - Delivered At Place (named place of destination)

Here the selling party is considered done with its obligations when the goods are ready to be unloaded in the chosen transportation method at the agreed place of destination. At this precise moment the risk transfers from the seller to the buyer. The seller is responsible for the packing of the goods at origin, as well as the export clearance.

When the goods arrive in the destination country, it’s the buyer who is responsible for the customs clearance proccess as well as the payment of the necessary duties and taxes. The seller assumes all the transportation costs up to the agreed place of destination, where the buyer has to cope with the unloading cost.

DDP - Delivery Duty Paid (named place of destination)

In the DDP mode the seller has the maximum of obligations and the buyer the minimum. It’s at the opposite side of the spectrum from the FCA mode. The selling party has to deliver the goods at the agreed place of destination, and has to pay all the transportation costs, duties and taxes. The only part which is not its responsibility is the final unloading of the goods.

As the seller has to obtain all the necessary import authorizations, and pay all the customs and taxes needed in the destination country, this mode can be very risky for the seller if the destination country’s legal regulations are not very well known.

FOR OCEAN FREIGHT AND INLAND WATERWAY TRANSPORTATION

These terms are generally not applicable to container shipments as these are sealed end-to-end and it’s not possible to assess the goods’ conditions inside the containers.

FAS - Free Alongside Ship (named port of shipment)

The selling party’s obligations end when it delivers the goods at the dock alongside the buyer’s ship at the agreed port of shipment. From that moment it’s the buyer who assumes the costs and risks involved with the goods transportation. It’s the seller’s obligation to have the goods cleared for exportation, but it can be assumed by the buyer if they so explicitly state it in the agreement.
This mode is only applicable for non-containerized ocean freight and inland waterway transportation of goods.

FOB - Free On Board (named port of shipment)

The seller assumes all the costs and risks until the goods are delivered on board the ship. The export clearance is also part of the seller’s obligations but it’s the buyer who has to pay for the ocean freight costs, bill of lading fees, insurance, unloading and transportation charges from there to the final destination.
It’s important to note that FOB should only be used for non-containerized ocean freight and inland waterway transportation of goods. For other shipping modes FCA should be used instead.

CFR - Cost and FReight (named port of destination)

The seller has to pay for the transportation of the goods up to the agreed port of destination. However, the risk transfers from seller to buyer as soon as the goods have been loaded on board the ship at the export country. The shipper assumes the cost of the export clearance and the ocean freight to the destination port. The delivery from the destination port to the buyer’s premises lays upon the buyer as well as the insurance costs. In cases where the buyer wants the seller to get the insurance it might be desirable to look upon the CIF mode.
It’s important to note that CFR should only be used for non-containerized ocean freight and inland waterway transportation of goods. For other shipping modes CPT should be used instead.

CIF - Cost, Insurance & Freight (named port of destination)

This mode is very similar to the previous CFR with the added benefit to the buyer that the seller has to insure the goods while travelling to its agreed destination. The CIF mode implies that the seller has to obtain an insurance for 110% of its contract value in the same currency as the sale agreement and enable all the interested parties to make a claim should the need arise. The CIF mode should only be used for non-containerized ocean freight and inland waterway transportation of goods.

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