Understanding Incoterms is imperative for importing and exporting goods. Incoterms define the responsibility of buyers and sellers throughout the shipping process.
Use our simple guide to understand what the Incoterm definitions mean and why they are important.
What are Incoterms?
First of all, you need to understand what an Incoterm is and what they are used for.
Incoterms are international commercial terms used within trade contracts for importing and exporting goods. Having a standardized set of contract terms allows for responsibility and liability to be apportioned during the shipping process.
There are 11 Incoterms in total. Each term offers specific guidance, clarifying the tasks, costs, and risks to buyers and sellers within the transaction. Incoterms are essential to ensuring the terms agreed are clear and understandable by all parties in the sale.
The main responsibilities Incoterms address are:
Point of delivery – the terms at which goods are exchanged from seller to buyer
Transportation of goods – who is responsible for the payment of transportation fees?
Export and import formalities – who ensures that all the necessary documents and tasks have been carried out before export/import?
Insurance – who is responsible for insurance costs?
When used within purchase orders, sales contracts, or other trade documents, Incoterms are legally binding.
Who Publishes Incoterm Rules?
Incoterms are published by the International Chamber of Commerce (ICC). The first set of Incoterms was published in 1936. They have been developed and maintained since in order to reflect industry and legislative changes. Revisions usually take place every 10 years.
The most recent set of Incoterms was published in 2020; an update to Incoterms 2010. They have been grouped into 2 categories: Incoterms for Any Mode of Transport and Incoterms for Sea + Inland Waterways.
There are 7 Incoterms for Any Mode of Transport and 4 for Sea + Inland Waterways.
7 Incoterms for Any Mode of Transport
EXW: Ex Works – the seller makes goods available at their location so that the buyer takes over all transportation costs, responsibility and risk of taking goods to their final destination.
FCA: Free Carrier – the seller assumes all responsibility of the goods until delivered to a named carrier. Responsibility and risk then passes to the buyer when the carrier is in possession of the goods.
CPT: Carriage Paid To – the seller is responsible for the goods, and the risks and costs associated, until delivered to an agreed-upon destination.
CIP: Carriage and Insurance Paid To – the seller is responsible for the transportation of goods, as well as the cost of carriage and insurance for goods until delivered to a named destination point, but risk passes over on delivery to the first carrier.
DAP: Delivered at Place – the seller is responsible for the transportation of goods, costs and risks associated with delivering goods to a specific location. Responsibility transfers to the buyer when the goods are available to be unloaded. Import custom clearance and all import duties are the responsibility of the importer.
DPU: Delivered at Place Unloaded – the seller is responsible for the carriage, costs and risks associated with the delivery and unloading of goods to a specific location. The importer is responsible for import custom clearance and import duties.
DDP: Delivered Duty Paid – the seller assumes all responsibility and risk for the delivery of goods to a named location including transportation, costs and customs clearance and import duties.
4 Incoterms for Sea + Inland Waterways
FAS: Free Alongside Ship – the seller is responsible for placing the goods alongside the ship at a named port. Responsibility, risk and associated costs pass to the buyer when goods are alongside the ship.
FOB: Free On Board – the seller assumes responsibility for goods until loaded on board a named vessel. When goods are loaded, all responsibility, risk and associated costs transfer to the buyer.
CFR: Cost and Freight – the seller is responsible for arranging the carriage and freight of goods via sea to a named port. Risk is transferred to the buyer when goods are loaded onto the ship.
CIF: Cost, Insurance and Freight – the seller is responsible for arranging the carriage and freight of goods via sea to a named port, as well as the cost and procurement of insurance. Risk is transferred to the buyer when goods are loaded onto the ship.
What Do Incoterms Not Cover?
Incoterms are used to apportion responsibility and risk during the shipping of goods. They do not cover all conditions of a sale.
They do not:
Identify the goods included in the sale
Determine the contract price
Dictate the method and timing of payment
Specify when ownership of the goods transfers from seller to buyer
Detail the necessary documents required to facilitate customs clearance
Denote liability for failure to provide goods as described or delayed delivery
Offer dispute resolution mechanisms
Which Incoterm Should I Use?
Deciding which Incoterm to use will depend on a variety of factors. In most cases, it is a negotiation between the seller and the buyer. It will be influenced by how much responsibility each party is comfortable with, costs, familiarity with customs processes, and trading partner experience.
It could also be influenced by external factors such as transport providers, insurance companies, banks, and customs brokers. For example, a seller or buyer may have links with a certain transport provider meaning they want to take responsibility for the transportation of goods.
Where Can I Find More Information About Incoterms 2020?
To find out more about Incoterms 2020, visit the ICC website.
We can also offer expert advice for the import and export of goods. We provide end-to-end Delivered Duty Paid (DDP) services allowing you to transfer all risk and responsibility to us.
When will Incoterms 2020 Next be Revised?
Incoterms are generally updated every 10 years. The latest set of Incoterms was published in 2020 meaning that the next scheduled update is in 2030.