December 13, 2022
Freight & Logistics -
All You Need to Know About Incoterm's | OneLink Holdings
Learn about the 11 different international commercial terms (Incoterms) and their definitions, used in freight and logistics. These terms are also known as “delivery terms”. From what they are, to when they should be used, this guide has it all!
If you’ve ever been involved in international trade, you’ve probably heard of “Incoterms.” Incoterms are a set of international rules that govern the responsibilities of buyers and sellers for the delivery of goods. While they may seem confusing at first, Incoterms are quite simple once you break them down. In this blog post, we’ll give you a brief overview of what Incoterms are and how they work.
In short, incoterms are a set of three-letter trade terms published by the International Chamber of Commerce (ICC) that are commonly used in international contracts for the sale of goods. The trade terms specify who is responsible for things like transportation, insurance, customs clearance, and more.
Not Covered by Incoterms
While incoterms outline the tasks, costs, and risks to be borne by buyers and sellers, it does not cover things such as
- All conditions of the sale
- Identification and price of the goods being sold
- Method or timing of payment negotiated between seller and buyer
- When title/ownership of goods passes from the seller to the buyer
- Documents to be provided by the seller to the buyer for them to facilitate the customs clearance process at buyers’ country
- Address liability for the failure to provide goods in regard to contract of sale and delayed delivery
There are 11 different incoterms in total, divided into two categories: E terms and F terms. E terms are used for any mode of transport, while F terms can only be used for transport by sea or inland waterways. In this blog, we will look at all 11 incoterms.
The provided quick reference guide depicts the transfer of risk for each of the incoterms, as well as the seller’s and buyer’s individual obligations.
Incoterms for any mode of transport
EXW – Ex Works
This is one of the simplest incoterms to understand. Ex Works maximises the buyer’s risk and responsibility. When you agree to EXW terms, you as the seller are only responsible for making the goods available at your premises. The buyer takes on all remaining risks and costs associated with getting the goods from your door to their destination—including export clearance if required.
FCA – Free Carrier
FCA terms are very similar to EXW, except that you as the seller also agree to deliver the goods to a carrier nominated by the buyer—for example, to their rear loading dock. If delivering to a container freight station or yard, this means the seller is only responsible for making the goods ready for unloading but are not required to unload the goods at this point. The buyer is responsible for unloading goods from the arriving transport (that the seller has provided), loading charges, main carriage and the costs associated with import formalities and duties.
DDP – Delivered Duty Paid
As its name suggests, DDP requires you as the seller take on all risks and responsibilities associated with getting the goods delivered right up until they arrive at an agreed location—and that includes paying any applicable customs duties and taxes too! The risk transfers to the buyer once the goods are unloaded from the carriage. The seller must also take responsibility for import customs duty and clearance. So if you’re looking for an Incoterm that provides maximum protection for your goods in transit, DDP might be it.
CPT - Carriage Paid to
CPT means the seller bears all cost/responsibility for the transportation of goods to the nominated place that the buyer has requested. The responsibilities of the seller include the export packing, loading charges, delivery to port/place, export duties and taxes, origin terminal charges, loading on carriage and carriage charges. The responsibility transfers from the seller to the buyer when the goods reach the first carrier at the place of shipment in the country of export. The seller is responsible for export formalities, with the buyer responsible for import formalities.
CIP - Carriage and Insurance Paid To
Carriage and Insurance Paid To is like CPT (Carriage Paid To) with a difference of the buyer being required to pay for minimum insurance until the named place of destination. The seller is responsible for clearing the goods for export and must deliver the goods to the carrier that was nominated by the seller. While the seller must pay for the cost of carriage, their risk ends at the place of shipment and transfers to the buyer.
DAP - Delivered at Place
Delivered at Place requires the seller to take on all the risks and costs associated of delivering goods to an agreed-upon location. The responsibilities include packaging, documentation, export approval, loading charges and delivery. The buyer will then take over responsibility when the goods arrive to the pre-determined location, meaning they are responsible for unloading and clearing the goods for import.
DPU - Delivered at Place Unloaded
Delivered at Place Unloaded has the same responsibilities as Delivered at Place, with the added responsibility of unloading the goods at the agreed-upon location. The seller will have the same responsibilities such as export packaging, licenses, customs formalities, loading charges and carriage fees. The extra responsibilities include unloading charges, proof of delivery and cost of pre shipment inspection. The buyer will be responsible for import formalities and duties, including the cost of the import clearance pre-shipment inspection.
Incoterms for Sea and Inland Waterway Transport
FOB – Free on Board
Free on Board stipulates the seller is responsible for clearing the goods for export and delivery and loading onto the vessel at the named port of departure. Once they’re loaded onto a ship, responsibility for them transfers to the buyer. The sellers’ obligations include documentation, export packaging and licenses, loading charges, delivery onboard the vessel and proof of delivery. The buyer must cover the costs such as main carriage, import duty and clearance and the pre-shipment inspection.
CIF – Cost, Insurance & Freight
CIF builds on FOB by adding two more responsibilities onto your plate as the seller: obtaining Marine Insurance against buyer’s risk of loss or damage during transit; and paying freight charges necessary to bring goods from named port of shipment up until named port of destination. The seller is responsible for obtaining export licenses, charges associated with shipping and loading goods to the seller’s port, packaging costs, fees for customs clearance, the cost of freight via sea, the insurance of the shipment to the buyer’s port of destination and covering any damage to the goods. When the goods arrive to the buyer’s destination port, the buyer now takes responsibility for costs associated with the import including unloading the goods at the terminal and transferring goods from terminal to delivery site.
FAS - Free Alongside Ship
Free alongside ship stipulates the seller is responsible for arranging goods to be delivered to the designated port and next to the specific vessel, ready for reloading. The seller is usually responsible for ensuring goods are cleared for export, while the buyer is responsible for costs such as reloading of goods, ocean transport and insurance.
CFR - Cost and Freight
This trade term requires the seller to transport goods by sea to the required port. The seller is responsible for clearing goods for export, delivery onboard the vessel at the required port of origin and covering the cost of carriage to the specified port of destination. This term is like CIF, but CIF requires the added marine insurance to protect against loss or damage while being transported. The buyer becomes responsible for the shipment once loaded but does not have financial responsibility until goods are unloaded at the port of destination. This means the buyer is responsible for import clearance and duties and any necessary transport from the port.
Incoterms are an important part of international trade, and it is crucial that both buyers and sellers understand their responsibilities under each term. By knowing the ins and outs of each incoterm, you can avoid costly misunderstandings and ensure a smooth transaction. Now that you have a better understanding about what Incoterms are and how they can affect your business dealings, you can make sure that you are using them correctly in any contracts going forward. Be sure to do your research and consult with an expert if needed so there are no surprises down the road!
Incoterms are an important part of international trade, and it is crucial that both buyers and sellers understand their responsibilities under each term. By knowing the ins and outs of each incoterm, you can avoid costly misunderstandings and ensure a smooth transaction. Now that you have a better understanding about what Incoterms are and how they can affect your business dealings, you can make sure that you are using them correctly in any contracts going forward. Be sure to do your research and consult with an expert if needed so there are no surprises down the road!
Written By
One Link Holding team
With our experience it puts us in a very unique position in being able to take your business from idea to reality, or if you’re part of the way there we can help with a number of individual areas in your business.
