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 international commercial laws. The different types of incoterms and their 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 Incoterms 2020 chart
The types of incoterms were recently updated and categorized and are currently referred to as Incoterms 2020.
You can see an overview of each of the incoterms and the allocation of costs to buyer or seller according to each of them here in this chart:
There are currently eleven incoterms and below you’ll see a brief outline of each of the codes – hit the links to see more detailed explanations of how each is used and its pros & cons.
Types Of Incoterms Used For Any Mode Of Transport (Land, Air, and Sea)
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.
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.
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.
Types Of Incoterms Used For Transportation By Sea or Inland Waterway Only
You can see the allocation of costs for these types of incoterms that are meant for water transport here:
Table source (Wikipedia)
The four rules below are for international trade where transportation is entirely conducted on water.
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)
One of the most popular types of incoterms for importers from the Far East. Under FOB terms the seller bears all costs and risks up to the point the goods are loaded on board 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.
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.
P.S. You don’t need to be rigidly constrained by any single incoterm…
Remember that the types of incoterms you see on this page are just pre-packaged sets of shipping terms, they’re suggested but not mandatory, and they should not limit your creativity if you’re buying a large volume of goods.
We wrote about this in this blog post:
Here is an example. The customer wants to receive the goods in their warehouse and have the seller pay for import duties, BUT the customer wants to control the transport (because they know they are more efficient than the supplier when it comes to transportation). So they want DDU except for the transportation aspect, which should be similar to FOB.
Writing this into a contract is not really complicated, and a logistics professional can help you both in opening your eyes on the opportunities and in ensuring your contract includes all important provisions.
If you purchase small quantities from a Chinese or Indian supplier, they might not be open to customizing the shipping terms. But if you represent a certain size of their business, they will usually listen to you and show some flexibility.
My point is to avoid thinking “so, which incoterm to choose?” without looking at alternatives.