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Incoterms

A Guide to Incoterms

Incoterms describe the practical arrangements for the sale and movement of goods between a seller and a buyer. In this article we look at each Incoterm, consider what they mean for a business and answer some frequently asked questions.

Introduction

"Incoterms®" is the short way of saying International Commercial Terms. They are a set of 11 internationally recognised 3-letter trade terms that are produced by the International Chamber of Commerce (ICC). Incoterms are updated every ten years to reflect changing trade practices with the latest version published in 2020.

What do Incoterms cover?

Incoterms describe the practical arrangements for the sale and movement of goods between a seller and a buyer. The correct Incoterm agreed upon between the two parties will determine:

Where the goods will be delivered.
Who is responsible for arranging the transportation.
Which party is responsible for insuring the goods.
Who handles any customs procedures and pays any related duties and taxes.

What do Incoterms not cover?

Whilst Incoterms cover a range of areas around the arrangements between a buyer and seller, they do not cover:

Price of the goods.
Specify the type of goods.
The time, place, method, or currency of payment.
Provide remedies in event of a contract breach.
Provide guidance regarding force majeure.
Transfer of ownership of goods.

What should my business consider regarding Incoterms?

1. Understand the Incoterms: You must ensure you have a detailed understanding of Incoterms to guarantee the correct term is being selected when agreeing on a new sale so that you fully understand the obligations on your business and what part you must play.

2. Team communication: Incoterms are usually agreed upon by a member of the sales team or procurement department, though the delivery of the order is normally passed over to the shipping or logistics team. It’s important that all team members involved communicate effectively and ensure the correct term is chosen for each contract.

3. Review your contracts: It’s important that you regularly review any existing contracts to ensure they are still using the correct Incoterm for that particular contract and most importantly, that they are using it correctly.

What are the 11 Incoterms?

There are 11 Incoterms, each has a three digit code followed by the full name of the Incoterm.

The seven Incoterms below apply to any mode of transport:

EXW:

Ex Works

EXW (Ex Works) places nearly all responsibility for the goods in the hands of the buyer. The seller will make the goods available for collection at their premises or another named place. It's then up to the buyer to load the goods on any collecting vehicle and to ensure the goods are cleared for export, where such clearance is applicable.

FCA:

Free Carrier

FCA gives the seller responsibility to deliver the goods to a carrier or another person nominated by the buyer at the seller’s premises, or another named place. It is then the responsibility of the buyer to collect the goods from this named place.

A crucial element of FCA is clarifying in as definite terms as possible the specific point within the named place of delivery, as the risk passes to the buyer at that point.

CPT:

Carriage Paid To

When using the CPT (Carriage Paid To) incoterm the seller delivers the goods to a carrier or another person nominated by the seller at an agreed place.

The seller must also contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. Under CPT the seller is not responsible for the payment of insurance.

CIP:

Carriage and Insurance Paid To

CIP gives the seller the same responsibilities as CPT, however, the seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.

When using CIP, the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, they must either agree to this in advance with the seller or make their own additional insurance arrangements.

DAP:

Delivered at Place

When using DAP, the seller bears all risks involved in bringing the goods to a named place.

The buyer is responsible for unloading the goods of the arriving mode of transport at the named place of destination.

DPU:

Delivered at Place Unloaded

DPU is very similar to DAP in that the seller bears all risks in bringing goods to a named place, however, when using this Incoterm, the supplier is also responsible for the unloading of the delivery.

DDP:

Delivered Duty Paid

DDP places all responsibilities on the seller.

The seller bears all the costs and risks involved in bringing the goods to the place of destination. They must clear the products not only for export but also for import, pay any duty for both export and import and carry out all customs formalities. The seller may charge the buyer more if DDP is agreed upon to cover additional customs and logistics costs incurred by them.

The four Incoterms below apply to sea and inland waterway only:

FAS:

Free Alongside Ship

When using FAS, the seller places the goods alongside a vessel (e.g. on a quay or a barge) nominated by the buyer at the named port of shipment.

The risk of loss or damage to the goods passes when the products are alongside the ship. The buyer bears all costs from that moment onwards.

FOB:

Free on Board

When using the FOB incoterm, the seller places the goods on board a vessel (e.g. on a quay or a barge) nominated by the buyer at the named port of shipment.

The risk of loss or damage to the goods passes when the products are on board the vessel. The buyer bears all costs from that moment onwards.

CFR:

Cost and Freight

When using CFR, the seller’s responsibility is to deliver the goods on board the vessel or procure the goods already so delivered.

Although the risk of loss or damage to the goods passes to the buyer when the products are on board the vessel, the seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

CIF:

Cost, Insurance & Freight

With CIF, the seller delivers the goods on board the vessel or procures the goods already so delivered and the risk of loss or damage to the goods passes when the products are on the ship.

Like CFR, the seller must also contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

In addition, it is also the seller’s responsibility to contract for insurance cover against the buyer’s risk of loss or damage to the goods during the carriage.

However, the buyer should note that under CIF the seller is only required to obtain insurance only on minimum cover.

Select this link to access a downloadable PDF, or see below for an infographic that explains the point of delivery and transfer of risk.

A graphic explaining point of delivery and transfer of risk

Incoterms FAQs

1. Who decides on what Incoterm to use?

The Incoterm should be agreed upon between the buyer and seller as an initial first step when negotiating the sales contract. The most appropriate term will depend on the size of the firms involved and their experience handling freight movements. Businesses may take advice from third parties such as shipping agents, insurance brokers, banks, and customs agents but ultimately the responsibility lies with the seller and buyer.

2. What factors should I consider when deciding on the best Incoterm to use?

There are a number of factors businesses should consider when deciding on the best Incoterm for their business and beginning negotiations with a supplier / customer. Two key points to consider are:

What is your business’s understanding of Incoterms?

Firstly, businesses must ensure that staff members who are negotiating the Incoterm have a detailed understanding of the term they choose and what responsibility it puts onto the business. It is normally the logistics or shipping department that carries out the relevant activities associated with the chosen Incoterm so it’s important that each department involved in the movement of the product agrees on the term and can adhere to the relevant requirements.

How much responsibility is your business comfortable with?

When it comes to the transport and safe delivery of goods, it is important to decide if you want to engage a transport company and have the responsibility for the shipment or whether you want to pass this on to your customer or supplier. Businesses may wish to retain more control of the transportation process and would therefore select an Incoterm which gives them this control, for example, Ex Works as this would allow businesses to collect the goods from the seller’s premises and have complete control of the movement and transportation of the goods.

3. Can businesses still use Incoterms® 2010?

Although the ICC recommends using Incoterms® 2020 from 1 January 2020, businesses can still use Incoterms® 2010 or any earlier version if agreed upon by both parties and the Incoterm is clearly stated (i.e. Incoterms® 2010, Incoterms® 2020, or any earlier version) on all export-related documents (i.e. commercial invoice and packing lists, etc).

4. What are the most used Incoterms?

Depending on the movement of your goods and negotiations between both parties, the below terms are most used within international trade:

Ex Works (EXW)
Delivery Duty Paid (DDP)
Delivered at Place (DAP)
Free on Board (FOB)
Cost, Insurance, and Freight (CIF)

5. We want our supplier to handle the customs clearance. What should we do?

Within the 11 Incoterms, there is only one (DDP – Delivery Duty Paid) which allows the seller to take complete responsibility for the movement of the goods. Your supplier can therefore handle the customs clearance procedures but it’s important to understand your supplier’s experience and capabilities as they may not be an experienced exporter / importer or may factor in additional costs to the overall sale to cover the additional resources for them when using DDP.

Further information

A detailed description of the obligations associated with the use of each Incoterm can be found in the International Chamber of Commerce publication, "Incoterms 2020®". This can be purchased from a range of online retailers and the information contained will be valid until the next planned revision of Incoterms in 2030.

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Article reviewed: Nov 24