What are Incoterms?
Incoterms is short for ‘International Commercial Terms’ and is a series of commercial terms set out by the International Chamber of Commerce (ICC) relating to the international commercial laws. The incoterms rules are intended primarily to clearly communicate the tasks, costs, and risks associated with the global or international transportation and delivery of goods. A supplier will state which incoterms they are providing within a product quotation so you as a buyer fully understands the terms under which your products have been quoted.
The up-to-date list of Incoterms 2020
The set of incoterms were recently updated and are currently referred to as Incoterms 2020. There are currently eleven incoterms and below is a brief outline of each of the codes:
EXW – Ex Works (named place of delivery)
This is where the seller is providing a quotation for products to be collected from their premises. This term places the maximum obligation with the buyer and is often used for initial quotations on any request for quotation correspondence. The buyer needs to make all arrangements and pay the cost of collection of goods from the supplier’s premises and shipping to their required destination, including all TAX, duties and clearance documentation and costs.
FCA – Free Carrier (named place of delivery)
The seller delivers the goods, cleared for export, at a named place (possibly including the seller’s own premises). The goods can be delivered to a carrier nominated by the buyer, or to another party nominated by the buyer.
In many respects this Incoterm has replaced FOB in modern usage, although the critical point at which the risk passes moves from loading aboard the vessel to the named place. The chosen place of delivery affects the obligations of loading and unloading the goods at that place.
If delivery occurs at the seller’s premises, or at any other location that is under the seller’s control, the seller is responsible for loading the goods on to the buyer’s carrier. However, if delivery occurs at any other place, the seller is deemed to have delivered the goods once their transport has arrived at the named place; the buyer is responsible for both unloading the goods and loading them onto their own carrier.
CPT – Carriage Paid To (named place of destination)
CPT replaces the C&F (cost and freight) and CFR terms for all shipping modes outside of non-containerized sea freight.
The seller pays for the carriage of the goods up to the named place of destination. However, the goods are considered to be delivered when the goods have been handed over to the first or main carrier, so that the risk transfers to buyer upon handing goods over to that carrier at the place of shipment in the country of Export.
CIP – Carriage and Insurance Paid to (named place of destination)
This term is broadly similar to the above CPT term, with the exception that the seller is required to obtain insurance for the goods while in transit. CIP requires the seller to insure the goods for 110% of the contract value.
DPU – Delivered At Place Unloaded (named place of destination)
This Incoterm requires that the seller delivers the goods, unloaded, at the named place of destination. The seller covers all the costs of transport (export fees, carriage, unloading from main carrier at destination port and destination port charges) and assumes all risk until arrival at the destination port or terminal.
DAP – Delivered At Place (named place of destination)
Incoterms 2010 defines DAP as ‘Delivered at Place’ – the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. Under DAP terms, the risk passes from seller to buyer from the point of destination mentioned in the contract of delivery.
Under DAP terms, all carriage expenses with any terminal expenses are paid by seller up to the agreed destination point. The necessary unloading cost at final destination has to be borne by buyer under DAP terms.
DDP – Delivered Duty Paid (named place of destination)
Seller is responsible for delivering the goods to the named place in the country of the buyer and pays all costs in bringing the goods to the destination including import duties and taxes. The seller is not responsible for unloading. This term places the maximum obligations on the seller and minimum obligations on the buyer.
👉 Read more about DDU vs DDP shipping.
Now that you understand what each code means you can see the allocation of costs to buyer or seller according to each of them here:
Incoterms for transportation by sea
The four rules below are for international trade where transportation is entirely conducted on water.
It is important to note that these terms are generally not suitable for shipments in shipping containers; the point at which risk and responsibility for the goods passes is when the goods are loaded onboard the ship, and if the goods are sealed into a shipping container it is impossible to verify the condition of the goods at this point.
FAS – Free Alongside Ship (named port of shipment)
The seller delivers when the goods are placed alongside the buyer’s vessel at the named port of shipment. This means that the buyer must bear all costs and risks of loss of or damage to the goods from that moment. This term should be used only for non-containerized sea freight and inland waterway transport.
FOB – Free on Board (named port of shipment)
Under FOB terms the seller bears all costs and risks up to the point the goods are loaded onboard the vessel. The FOB contract requires a seller to deliver goods on board a vessel that is to be designated by the buyer in a manner customary at the particular port. In this case, the seller must also arrange for export clearance.
CFR – Cost and Freight (named port of destination)
The seller pays for the carriage of the goods up to the named port of destination. Risk transfers to buyer when the goods have been loaded on board the ship in the country of Export. The Shipper is responsible for origin costs including export clearance and freight costs for carriage to named port. CFR should only be used for non-containerized sea freight and inland waterway transport; for all other modes of transport it should be replaced with CPT.
CIF – Cost, Insurance & Freight (named port of destination)
This term is broadly similar to the above CFR term, with the exception that the seller is required to obtain insurance for the goods while in transit. CIP requires the seller to insure the goods for 110% of the contract value. CIF should only be used for non-containerized sea freight; for all other modes of transport, it should be replaced with CIP.
You can see the allocation of costs for these water transport Incoterms here: