What are Incoterms®?
Essentially, the 11 Incoterms® rules set out your obligations and those of your trading partners (for example, who is responsible for transport, import and export clearance etc) and, importantly, the point in the journey where risk transfers from the seller to the buyer.
Who created the Incoterms® rules?
They were created and published by the International Chamber of Commerce (ICC), and are revised every ten years. The ICC announced Incoterms® 2020 rules in September 2019. You can purchase official documentation and guides from the ICC Store.
Why are Incoterms rules important to you?
Because you and your trading partner need to agree a precise understanding of your obligations to each other, and where responsibility lies in the event of loss, damage or accident.
What, exactly, do the rules cover?
The eleven rules are divided into two groups. The first seven rules apply to all modes of transport, while the last four rules apply to sea and inland waterway transport only.
The rules for any transport mode you use include:
- Ex Works (EXW)
- Free Carrier (FCA)
- Carriage Paid to (CPT)
- Carriage and Insurance paid to (CIP)
- Delivered At Place (DAP)
- Delivered at Place Unloaded (DPU) NEW
- Delivered Duty Paid (DDP)
The rules for sea and inland waterway transport only include:
- Free Alongside Ship (FAS)
- Free On Board (FOB)
- Cost and Freight (CFR)
- Cost Insurance and Freight (CIF)
The eleven rules
These apply to all modes of transport.
What is Ex Works – EXW?
EXW means the seller delivers the goods when they are packaged and made available to the buyer at an agreed place – which could the seller’s premises or another named place such as a factory or warehouse.
It’s the buyer’s responsibility to load the goods onto a vehicle, to complete all export procedures and to transport the goods. The buyer is responsible for the costs related to the collection. So, if you are the seller and you load the goods, it is at the buyer’s risk!
What is Free Carrier – FCA?
FCA is a flexible rule where the buyer organises the main carriage.
The seller delivers the goods to the carrier or person nominated by the buyer. If the nominated place is the seller’s premises, then the seller has the responsibility of loading the vehicle – in contrast to EXW. Remember, you and the other trading party need to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.
The seller is responsible for export clearance, while the buyer assumes all risks and costs after the goods have been delivered to the named place.
FCA is the preferred choice for containerised goods.
What is Carriage Paid To – CPT?
In this case, the seller arranges carriage to the named place, but doesn’t insure the goods to the named place. Risk transfers from the seller to the buyer at the point where the goods are taken in charge by the carrier. Watch out for Terminal Handling Charges (THC), which are not always included by the carrier in their freight rates. So, if you are the buyer, be aware of this!
What is Carriage and Insurance Paid to – CIP?
CIP means the seller is responsible for arranging carriage and insuring the goods – although remember the seller only has to arrange a minimum level of cover. As with CPT, delivery takes place, and risk transfers from seller to buyer, at the point where the goods are taken in charge by a carrier.
As with CTP, be aware of Terminal Handling Charges (THC), which are not always included by the carrier in their freight rates. Again, buyer beware applies!
What is Delivered at Place – DAP?
The seller is responsible for carriage and delivering the goods to the named place – but not for unloading the goods. That’s the buyer’s responsibility and this is when risk passes from the seller to the buyer, who is also responsible for import clearance and other local taxes or import duties.
What is Delivered at Place Unloaded – DPU?
This Incoterm® is new for 2020.
The seller is responsible for carriage, delivering the goods to the specified place and for unloading. Risk transfers to the buyer once the goods are unloaded from the arriving means of transport.
The place of delivery - and therefore unloading - should be specified as precisely as possible. Ideally, the place should be specified to a point within a location, e.g. Loading Dock 2 at the customer's premises, and not just the street address.
What is Delivered Duty Paid – DDP?
The seller arranges carriage, delivers the goods to the named place and clears them for import and pays the applicable taxes and duties (eg VAT, GST etc) – and this is the only rule which obliges the seller to take care of duties and taxes.
Risk transfers to the buyer when the goods are made available, ready for unloading.
This rule can be problematical for a seller, because import rules are often complex and bureaucratic. If you are the seller, it’s usually best left to the buyer to take care of the incoming obligations.
Rules for sea and inland waterway transport only
What is Free Alongside Ship – FAS?
This rule works best in situations where the seller has direct access to the vessel for loading, for example, bulk cargos or non-containerised goods. If you are shipping containerised goods, consider FCA instead.
The seller delivers the goods, cleared for export, alongside the vessel at the named port, and at this point the risk transfers to the buyer, who is responsible for loading the goods and all costs which follow.
What is Free on Board (FOB)?
FOB, as with FAS, is best used where the seller has direct access to the vessel for loading. If you are shipping containerised gods, consider FCA instead.
The seller delivers the goods, cleared for export, and loads the goods on board the vessel at the named port. Once loaded, the risk transfers to the buyer, who bears the costs from this point.
What is Cost and Freight – CFR?
As with FOB and FAS, this rule is best used in situations where the seller has direct access to the vessel for loading, and again, if you are shipping containerised goods, consider CPT instead.
The seller arranges and pays for transport to a named port, delivers the goods cleared for export, and loads the goods on board the vessel. However, the risk transfers from seller to buyer when the goods have been loaded on board, before the main carriage takes place. The seller is not responsible for insuring the goods for the main carriage.
What is Cost, Insurance and Freight – CIF?
As with FOB, FAS and CAF, if you are the seller and have direct access to the vessel for loading (bulk cargos or non-containerised goods), then you should consider using CIP instead.
When using CIF, the seller arranges and pays for the transport to the named port, delivers the goods cleared for export, and loads the goods onto the vessel. As with CAF, the buyer assumes the risk once the goods are loaded on board the vessel, before the main carriage takes place.
The seller also arranges and pays for insurance for the goods for carriage to the named port, but as with CIP, only a minimum level of cover is required.
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