October 5, 2021

Understanding Incoterms

Understanding Incoterms

What Are Incoterms

It is a program put into practice by the International Chamber of Commerce to standardize the terms used in international trade. Terminology, called Incoterms, is offered to exporters and importers with 11 different delivery options. In addition, it provides clear rules for buyer and seller companies in export and import operations, transportation of goods, determination of responsibilities, and distribution of risks. So, Incoterms offer a universal set of rules and guidelines that help facilitate international trade.

Note: Insurance is color coded in this article, however, it is negotiable with your trading partners in all Incoterms except in CIF and CIP

Incoterms Glossary

Brief History Of Incoterms

In 1936, in Paris, theInternational Chamber of Commerce (ICC) published a set of international rules under Incoterms 1936 (INternational COmmercial TERMS) to harmonize and facilitate international trade. As a result of the work of the ICC and the commercial experience of the members: Incoterms were revised in 1963, 1967, 1976, 1980, 1990, 2000, 2010, and finally in 2020. The version we currently use is called "Incoterms 2020".
Quick note: Just because a new incoterm is in effect does not mean that the old ones cannot be used. Exporters and importers have included the term "Incoterms 2000 FOB" in the sales contracts. They are deemed to have accepted the FOB delivery terms in"Incoterms 2000".

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Ex Works (EXW)/Ex-Works/Ex-Factory

Shipping Method: Ocean and Land
Transfer of Risk:
At Buyer's Disposal

The term "ExWorks" means that the seller delivers the goods at the buyer's disposal a this place or another named home (such as factory, warehouse, workplace). 

Ex-works delivery term determines the maximum liability on the buyer, "i.e., the importer,"and the minimum obligations on the seller, "i.e., the exporter." The term Ex Works is often used by exporters when making an initial bid, as it does not include any expense items other than the price of the goods and the cost of packaging. All other incoterms prices are obtained by adding other expenses on the ex-works price.

Seller Obligations: The seller's sole responsibility is to prepare the goods to be loaded into the vehicle or container. It is the most risk-free shipping type for the seller. 

Buyer Obligations: The buyer is responsible for all costs and risks, including transportation, insurance, customs clearance, until the goods loaded from the seller's warehouse or factory reach their destination.

EXW Price Calculation: Product cost + packaging + profit share 

Example: Company "A" in Canada buys garden equipment from company "B" in China. The sales contract includes the phrase "EXW Guangzhou." Accordingly, the Chinese company "B" is responsible for delivering the loads in its factory. All costs, including inland shipping of goods in China, customs clearance, shipping costs, insurance costs, and customs costs in Canada, are borne by the buyer company "A."

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Free Carrier (FCA)

Shipping Method: Ocean and Land
Transfer of Risk:
On Buyer's Transport

In the FCA delivery method, the seller/exporter, delivers the cargo at a point requested by the buyer, the importer. An FCA point can be, for example, a train station for train loading or a port for ship loading. 

The main difference between FCA and FOB in container shipments is that the costs incurred at the loading port belongs to the buyer in the form of FCA delivery and the seller in FOB delivery. According to the FCA delivery method, the seller's responsibility ends when the buyer delivers the cargo or the loaded container to the point requested.

Seller Obligations: The seller's responsibility is to deliver the products or the container to a warehouse, station, or port requested by the buyer and clear the customs. 

Buyer Obligations: The buyer receives the cargo or container at a previously requested point. The buyer is responsible for all processes except domestic shipping and customs clearance in the export country. All costs and risks, including overseas shipping, insurance, customs clearance, belong to the buyer.

FCA Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + profit share 

Example: The French company"A" buys furniture from Canadian company "B." The sales contract includes the phrase "FCA Montreal Port." Accordingly, theCanadian company "B" is responsible for delivering the cargo to aware house at the specified port and customs clearance. If it is a sea shipment, all costs, including port costs, international shipping costs, insurance, and customs fees in France, are borne by the buyer company "A."

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Free Alongside Ship (FAS)

Shipping Method: Ocean
Transfer of Risk:
Alongside Ship

In the form of FAS delivery, the seller is obliged to deliver the goods at the port where the ship is located, to the vessel's side. For example, if loading is to be done on a ship anchored in the open and both parties have agreed, the seller delivers the cargo by taking it to the ship's side with barges.

FAS Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + profit share 

Example: Italian company"A" buys machine parts from the German company "B."According to their contracts, German company B should deliver the goods along side the ship in the port of Hamburg. From this point on, the Italian company "A" is responsible for shipping goods to Italy by ship, insurance costs, port costs in Italy, inland transport, and customs costs.

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Free On Board (FOB)

Shipping Method: Ocean
Transfer of Risk:
On-Board Vessel

In the form of FOB delivery, the seller, the exporter, must deliver the cargo to the port requested by the buyer, i.e., the importer, according to the ship loading date.When determining the FOB, the selling company must anticipate the inland shipping cost and the inland shipping time if a port is requested in a different location where the seller company is based.

Seller Obligations: The seller prepares the goods following the contractual conditions. The exporter loads the ship that the buyer has booked at the designated port on the specified date.The buyer's responsibility ends with the completion of customs clearance. 

Buyer Obligations: Buyer is responsible for overseas shipping, insurance, and processes after the ship arrives in their home country.

FOB Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + profit share 

Example: The UK food corporation agreed with the Canadian sugar beet producer with "FOB Vancouver CityPort." The UK corporation organizes the shipment and lets the Canadian producer know about the shipment port and shipment date. According to an agreement, the Canadian exporter company schedules the inland delivery and loads the bulk goods to a ship.

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Cost and Freight (CFR)

Shipping Method: Ocean and Land
Transfer of Risk:
On-Board Vessel

CFR is the Incoterm where the seller is expected to suppose all the responsibility in terms of cost from the seller's facility to the point where the buyer will be collecting the goods. The seller must contract for and pay the fees and freight necessary to bring the goods to the named port of destination.

Seller Obligations: The exporter organizes the transportation process without insurance to be delivered at aport requested by the importer. The responsibility of the exporter ends when the ship arrives at the port. 

Buyer Obligations: The buyer's responsibility begins at the delivery port. After unloading the cargo from the ship, the port costs, inland transport, and import customs costs are the buyer's responsibility.

CFR Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges +profit share 

Example: Greek fruit producer company "A" agrees with the Spanish company "B" to sell 20 tons of fruit. Incoterms are referred to as CFR Barcelona in the sales contract. Following the contract, company "A" ships the container loaded with 20 tons of fruit for delivery at the port of Barcelona. The difference between CFR from CIF is that the responsibility of making insurance belongs to the buyer company.

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Carriage Paid To (CPT)

Shipping Method: Ocean and Land
Transfer of Risk:
At Carrier

In the form of CPT delivery, the exporting company is responsible for the overseas shipment. It completes the operation by delivering the cargo to the buyer at the destination point in the importer's country. CPT is frequently used in multimodal transports. For example, truck+roro or truck+train

Seller Obligations: The exporter organizes the shipping process to be delivered at an address requested by the importer. The exporter is responsible for providing the goods to the address but is not responsible for insurance and customs costs in the importer's country. 

Buyer Obligations: The importer must ensure the cargo against the possibility of damage on the way. After the delivery vehicle arrives at the delivery point, the importer carries out the customs procedures and pulls the goods.

CPT Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges +profit share 

Example: Italian Garment producer company "A" sells full truck of goods toFrench company "B." The shipment is made by truck to the warehouses of company "B" in France under CPT incoterms. Shipping costs are borne by company A, but insurance is by company "B."

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Cost Insurance Freight (CIF)

Shipping Method: Ocean
Transfer of Risk:
On-Board Vessel

In the form of CIF delivery, the seller organizes the international shipment process by undertaking the freight + insurance costs to be delivered to the buyer at a port in the importer's country. CIF applies to ocean or inland waterway transport only. It is commonly used for containers and also bulk cargo.

Seller Obligations: The seller organizes the shipment, pay the freight cost, and also the necessary to bring the goods to the named port of destination

Buyer Obligations: The importer company is responsible for the import process and the costs associated with shipment through customs and delivery to the final destination.

CPT Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges + insurance + profit share

Example: US company "A" contracts for game console imports from China so that the goods are delivered at the port of Los Angeles. Chinese company B organizes the transport. Exporter Company A is responsible for the process after the container lands in the port of Los Angeles.

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Carriage and Insurance Paid to (CIP)

Shipping Method: Ocean and Land
Transfer of Risk:
At Carrier

According to the CIP mode of transport, the exporter is responsible for all processes, except import customs clearance, until the goods are delivered in the importer's country. CIP mode of transportation is widely used in road vehicle transportation, and it is also a suitable incoterm for multimodal shipments.

Seller Obligations: The seller is responsible for the goods till the delivery addresses. The exporter company finalizes all steps, excluding import customs charges. 

Buyer Obligations: The buyer, i.e., importer company, is responsible for the costs of import formalities: customs, taxes, import and transit permits.

CIP Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges +insurance + profit share 

Example: British company"A" contracts with Austrian company "B" to buy one container of toys with "CIP London" incoterms. Austrian exporter company "A" plans multimodal shipments in trucks to Rotterdam, RoRo ship from Rotterdam to London, and trucks for delivery in London.

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Delivered at Place Unloaded (DPU)

Shipping Method: Ocean and Land
Transfer of Risk:
At Named Place, Unloaded

The DPU mode of transport entered into force with incoterms 2020 instead of the DAT transport form in incoterms 2010. As a result, the exporter bears all risks involved in bringing the goods to and unloading them at the destination point.

Seller Obligations: The seller must deliver and unload the cargo to the final destination. The seller is responsible for all steps, excluding import customs fees. 

Buyer Obligations: The importer company is only responsible for import duties, taxes, and customs clearance.

DPU Price Calculation:Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges +insurance (if its seller side) + destination terminal charges + delivery to destination + profit share 

Example: Brazilian company"A" agrees with Dutch company "B" to sell coffee. Incoterms are determined as DPU in the contract. After the company "A"completes the export operations in its own country, it delivers the container of coffee to the Netherlands by ship. After Company B completes the customs clearance, Company "A" pays the port charges and organizes the inland transport to deliver the goods to the address previously specified by Company"B."

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Delivered At Place (DAP)

Shipping Method: Ocean and Land
Transfer of Risk:
At Named Place

DAP is the delivery term describing a deal where the seller is responsible for all costs and responsibilities, excluding insurance and import customs. If the DAP has been accepted, the parties must specify who will make the insurance and add it to the contract.

Seller Obligations: The seller delivers goods up to the destination mentioned in the contract. The DAP delivery location may differ from the buyer's address; the seller should clarify the delivery point and who is responsible for insurance by negotiating with the buyer.

Buyer Obligations: The importer/buyer is responsible for the customs clearance process and the payment of the duties & taxes.

DPU Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges +insurance (if its seller side) + destination terminal charges + delivery to destination + profit share 

Example: Indian company "A" will import coal from Australian company "B." In the contract between the parties, it is also stated that the seller is obliged to insure. Exporter company "B" organizes all processes except import customs duties and tax payments. After the importer company "A" completes the customs clearance, the goods are delivered to a warehouse address specified by company "A".

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Delivery Duty Paid (DDP)

Shipping Method: Ocean and Land
Transfer of Risk:
At Named Place

DDP is the only Incoterm that requires the seller to pay all duty charges. Therefore, the seller bears all the costs and risks involved in bringing the goods to the place of destination and should clear the goods.

Seller Obligations: DDP means that the seller takes on all the risk and costs to deliver cargo to a pre-decided location. 

Buyer Obligations: The DDP product price includes shipping, insurance, customs clearance costs, and customs duties and local taxes in the importer's country.

DDP Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges +insurance + destination terminal charges + delivery to destination + import duty, taxes, security clearance + profit share 

Example: US company A buys agricultural machinery from German company "B" with "DDP New York" incoterms. The German company "B" bears all costs, including shipping and insurance, including customs clearance costs, and taxes in both countries, as per DDP incoterms. Company "B" is not responsible for any process and expense during this process.

The State of Incoterms 2020

There are 11 delivery methods in Incoterms 2020. Four of them (FAS, FOB, CFR, CIF) can only be used in maritime and inland waterway transportation. In contrast, the remaining seven delivery modes (EXW, FCA, CPT, CIP, DAP, DPU, DDP) can be used in all transportation modes (road, air, rail, sea and inland waterway) can be used. 

There are some critical differences between Incoterms 2010 and Incoterms 2020. We have listed the main changes for you:

  • DAT stands for Delivered-At-Terminal, has been replaced by DPU – Delivery-At-Place Unloaded. 
  • FCA now allows the parties to agree that the buyer will instruct its carrier to issue an on-board bill of lading to the seller.
  • Align different levels of insurance coverage in Cost Insurance and Freight (CIF) and Carriage and Insurance Paid To (CIP).
  • FCA, DAP, DPU, and DDP delivery terms allow buyers and sellers to ship with their vehicles.
  • They are compatible with commercial contracts because they show the distribution of costs and risks more clearly.