Incoterms explained
Entering the world of global trade and ocean shipping, means understanding your roles and responsibilities in importing or exporting goods – and that requires an understanding of Incoterms.
What are Incoterms?
INCOTERMS are rules, standard trade terms most commonly used in international contracts for the sale of goods. It is essential that you are aware of your terms of trade prior to shipment.
Incoterms are here to guide you
Whether you are handling a bill of lading, creating a packing list for a shipment, a customs invoice or commercial invoice; or preparing a certificate of origin at a port – Incoterms provide guidance along the way.
- They do define the obligations and costs between a buyer and seller.
- They do define the point at which the risk for cargo passes between buyer and seller.
They provide understanding for carriers, freight forwarders, customs brokers and others involved in shipping your goods.
- They don’t cover the passage of title or ownership.
- They don’t cover payment – this is negotiated separately.
- They don’t cover insurance – only two Incoterms, CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid), outline insurance as the seller’s responsibility.
What are the most common Incoterms?
There are eleven Incoterms that are used the most are:
EXW (EX Works)
Ex Works means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e., works, factory, warehouse, etc.).
FCA (Free Carrier)
Free Carrier means that the seller delivers the goods to a carrier or another person nominated by the buyer, at the seller’s premises or another named place. With FCA shipping terms, the parties are well advised to specify, as clearly as possible, the point within the named place of delivery, as the risk passes to the buyer at that point.
CPT (Carriage Paid To)
Is an international trade term which means that the seller delivers the goods at their expense to a carrier or another person nominated by the seller.
CIP (Carriage & Insurance Paid)
Is when a seller pays freight and insurance to deliver goods to a seller-appointed party at an agreed-upon location
DAT (Delivered at Terminal)
In this Incoterm, the parties stipulate that the goods must be delivered once they have been transported by sea, unloaded from the ship and deposited in the stipulated container terminal.
DAP (Delivered at Place)
The DAP term in shipping means that 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. The seller bears all risks involved in bringing the goods to the named place.
DDP (Delivered Duty Paid)
The DDP Incoterm, means that seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.
FAS (Free Alongside Ship)
It goes back to the days of sailing ships. This rule indicated that the seller had to place the merchandise next to the ship designated by the buyer. Suitable for heavy machinery shipments.
FOB (Free on Board)
FOB shipping means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. They are responsible for all costs up until that point. Once the shipment is boarded, the buyer assumes risks and costs.
CFR (Cost & Freight)
is a legal term used in foreign trade contracts. In a contract specifying that a sale is cost and freight, the seller is required to arrange for the carriage of goods by sea to a port of destination and provide the buyer with the documents necessary to obtain them from the carrier.
CIF (Cost Insurance & Freight)
is an expense paid by a seller to cover the costs, insurance, and freight of a buyer’s order while it is in transit. The goods are exported to a port named in the sales contract.