Incoterms explained

Incoterms

Incoterms were first published way back in 1936, they’re a set of 11 rules defining which party is responsible for what during international transactions.

The terms spell out all the tasks, risks and costs involved during the transaction of goods from seller to buyer. The most common Incoterms are EXW, DAP & DDP.

Incoterms are important because they’re known and accepted by the whole world. Also they are a requirement on every single commercial invoice, this is because they greatly reduce the risk of potentially costly misunderstandings.

Below you will find all Incoterms explained.

The seven most common Incoterms for any mode(s) of transport are:

EXW – Ex Works

The buyer bears all costs and risk from the loading point to end destination. The seller’s only job is to make sure the buyer can access the goods at an agreed location.

FCA – Free Carrier

It is up to the seller to make the goods available, at his own cost and risk, at an agreed location. The seller is also responsible for the export clearance of the goods.

The point at which the cost and risk shifts to the buyer is once they received the goods at the agreed location.

CPT – Carriage Paid to

Seller has same responsibilities as at FCA, but also bears the transportation costs to the agreed destination place.

The point at which the cost and risk shifts to the buyer is once the cargo arrived to the agreed destination.

CIP – Carriage and Insurance Paid To

Seller has same responsibilities as with CPT, but also bears the cost for insurance with a high coverage ratio.

The point at which the cost and risk shifts to the buyer is once the cargo arrived to the agreed destination.

DAP – Delivered at Place

Seller bears the cost and risk of shipping to the agreed destination address. Goods are considered delivered as soon as they are ready to be unloaded.

The point at which the cost and risk shifts to the buyer is once the goods are ready for unloading.

DPU – Delivered at Place Unloaded

Seller has the same responsibilities as with DAP, but also bears the cost and risk for unloading the cargo at the agreed destination address. The buyer is responsible for the import customs clearance including duties and taxes.

The point at which the cost and risk shifts to the buyer is once the goods are unloaded at the agreed location.

DDP – Delivered Duty Paid

Seller bears all cost and risk during the shipping process until goods are ready for unloading at the agreed destination address. Selling party is responsible for the export- as well as import customs formalities and pays the import duties.

The point at which the cost and risk shifts to the buyer is when the goods are ready for unloading at the agreed address.

The four most common Incoterms for Sea and Inland Waterway Transport are:

FAS – Free Alongside Ship

The seller bears all costs and risk until the goods are delivered alongside the ship. From there, the buyer is responsible for the further transportation including export and import clearance.

The point at which the cost and risk shifts to the buyer is when the goods are delivered/positioned alongside the ship.

FOB – Free on Board

Seller bears all costs and risk until the goods are delivered/loaded on board the vessel. They also handle export customs clearance.

The point at which the risk shifts to the buyer is when the goods have been loaded on board.

CFR – Cost and Freight

Buyer has the same responsibilities as with FOB but for this incoterm they also bear the cost of transporting the goods to the agreed destination port.

Although the seller bears the cost for the transportation to the destination port, the point where the risk shifts to the buyer is when the goods have been loaded on board the vessel.

CIF – Cost Insurance and Freight

Seller has the same obligations as with CFR, but is also responsible for the insurance costs. Seller is required to purchase a minimum insurance policy covering 110% of the goods value.

The point where the risk shifts to the buyer is when the goods have been loaded on board.