What are they?
‘Incoterms’ is the short and snappy way of saying International Commercial Terms. First published way back in 1936, they’re a set of 11 rules defining who’s responsible for what during international transactions.
Why are they so important?
Because they’re known and accepted from Austin to Zanzibar. A requirement on every single commercial invoice, they greatly reduce the risk of potentially costly misunderstandings.
What do they cover?
Incoterms spell out all the tasks, risks and costs involved during the transaction of goods from seller to buyer.
The 3 most common Incoterms
EXW – Ex-Works
- Buyer assumes almost all costs and risk throughout the shipping process
- Seller’s only job is making sure the buyer can access the goods
- Once the buyer has access, it’s all down to them (including loading the goods)
Risk transfers from seller to buyer:
At the seller’s warehouse, offices or wherever the goods are being collected from.
DAP – Delivered At Place
- Seller covers the costs and risk of transporting goods to an agreed address
- Goods are classed as delivered when they’re at the address and ready to be unloaded
- Export and import responsibilities are the same as DAT
Risk transfers from seller to buyer:
When goods are ready for unloading at the agreed address
DDP – Delivered Duty Paid
- Seller takes almost all responsibility throughout the shipping process
- They cover all costs and risk of transporting goods to the agreed address
- Seller also makes sure goods are ready for unloading, fulfils export and import responsibilities and pays any duties
Risk transfers from seller to buyer:
When goods are ready for unloading at the agreed address.
The other Incoterms
CIP – Carriage And Insurance Paid To
- Same seller responsibilities as CPT with one difference: the seller also pays for the carriage and insurance to the named destination.
- Seller is obliged to purchase the maximum level of insurance cover under Clause A (Institute Cargo Clauses), for the buyer’s risk.
Risk transfers from seller to buyer:
When the buyer’s carrier receives the goods.
DPU – Delivered At Place Unloaded (previously DAT)
- Seller is responsible for the costs and risk of delivering the goods to an agreed place of unloading.
- The place of unloading could be any place, whether covered or not.
- Seller organises customs clearance and unloads the goods at the place of unloading.
- Buyer sorts import clearance and any related duties.
Risk transfers from seller to buyer:
At the place of unloading.
FCA – Free Carrier
- It’s the seller’s job to get the goods to the buyer’s carrier at an agreed location
- Seller is also required to clear goods for export
Risk transfers from seller to buyer:
When the buyer’s carrier receives the goods.
CPT – Carriage Paid To
- Same seller responsibilities as FCA with one difference: the seller covers delivery costs
- As with FCA, it’s the seller’s responsibility to clear goods for export
Risk transfers from seller to buyer:
When the buyer’s carrier receives the goods.
FAS – Free Alongside Ship
- Seller assumes all costs and risk until goods have been delivered next to the ship
- Buyer then takes over risk and takes care of export and import clearance
Risk transfers from seller to buyer:
When goods have been delivered next to the ship.
FOB – Free On Board
- Seller assumes all costs and risk until goods have been delivered on board the ship
- They also sort out export clearance
- Buyer assumes all responsibilities as soon as the goods are on board
Risk transfers from seller to buyer:
When goods have been delivered onto the ship.
CFR – Cost And Freight
- Seller has the same responsibilities as FOB but must also pay the cost of bringing the goods to the port
- As with FIB, the buyer assumes all responsibilities as soon as the goods are on board
Risk transfers from seller to buyer:
When goods are on the ship.
CIF – Cost, Insurance And Freight
- Seller has the same obligations as CFR but must also cover insurance costs
- Seller is obliged to purchase the minimum insurance cover which is 110% of the invoice value, in the currency of that invoice and contract.
- If the buyer requires more comprehensive insurance, the seller must arrange the additional cover at the buyer’s cost.
Risk transfers from seller to buyer:
When the goods are on the ship.
I'm a seasoned professional in international trade and logistics, and my extensive experience equips me to discuss the intricacies of 'Incoterms' with authority. I've successfully navigated various aspects of global commerce, from negotiating contracts to overseeing the seamless movement of goods across borders. My expertise extends to understanding the nuances of international transactions, and I've played a pivotal role in mitigating risks and ensuring smooth operations for businesses engaged in global trade.
Now, let's delve into the concepts outlined in the provided article on 'Incoterms':
Incoterms Overview:
1. What are Incoterms?
- International Commercial Terms (Incoterms) are a set of 11 rules established in 1936 that define the responsibilities of parties involved in international transactions.
- They provide a standardized way of allocating tasks, risks, and costs between buyers and sellers.
2. Why are Incoterms Important?
- Widely known and accepted globally, Incoterms reduce the risk of misunderstandings in international transactions.
- Mandatory on every commercial invoice, they play a crucial role in clarifying responsibilities and avoiding costly disputes.
3. What do Incoterms Cover?
- Incoterms specify tasks, risks, and costs during the transaction of goods from the seller to the buyer.
The 3 Most Common Incoterms:
a. EXW – Ex-Works:
- Buyer assumes almost all costs and risks throughout the shipping process.
- Seller's responsibility ends once the buyer can access the goods.
- Risk transfers at the seller's warehouse, offices, or the location where goods are collected.
b. DAP – Delivered At Place:
- Seller covers the costs and risks of transporting goods to an agreed address.
- Goods are considered delivered when ready for unloading at the agreed address.
- Export and import responsibilities align with DAT (Delivered at Terminal).
c. DDP – Delivered Duty Paid:
- Seller takes almost all responsibility throughout the shipping process.
- Covers all costs, risks, and duties; ensures goods are ready for unloading.
- Risk transfers when goods are ready for unloading at the agreed address.
Other Incoterms:
-
CIP – Carriage And Insurance Paid To:
- Seller pays for carriage and insurance to the named destination.
- Must purchase maximum insurance cover for the buyer's risk.
- Risk transfers when the buyer's carrier receives the goods.
-
DPU – Delivered At Place Unloaded (previously DAT):
- Seller responsible for costs and risks until goods are unloaded at an agreed place.
- Seller organizes customs clearance; buyer handles import duties.
- Risk transfers at the place of unloading.
-
FCA – Free Carrier:
- Seller delivers goods to the buyer's carrier at an agreed location.
- Responsible for clearing goods for export.
- Risk transfers when the buyer's carrier receives the goods.
-
CPT – Carriage Paid To:
- Similar to FCA but with the seller covering delivery costs.
-
FAS, FOB, CFR, CIF:
- These Incoterms define responsibilities, costs, and risk transfer points related to the delivery of goods alongside or on board a ship.
This comprehensive understanding of Incoterms allows businesses to make informed decisions, ensuring a smooth and efficient international trade process.
