What are Incoterms?
INCOTERMS are a set of three-letter 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.
EXW (EX Works)
Buyer will pay all freight charges from the seller door to the door at destination. The seller needs to ensure the freight is ready for shipping and provide all the correct documents i.e. commercial invoice and packing declaration. The buyer will have full control of the freight.
FCA (Free Carrier)
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.
CPT (Carriage Paid To)
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 & Insurance Paid)
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 under at least the minimum cover of the ICC.
DDP (Delivered Duty Paid)
The seller will arrange and pay for all freight charges to the buyer’s door including customs clearance, duty and taxes at destination. The seller has full control of the shipment.
FAS (Free Alongside Ship)
The seller delivers when the goods are placed alongside the buyer’s vessel at the named port of shipment. This means that the buyer has to bear all costs and risks of loss of or damage to the goods from that moment.
DAT (Delivered at Terminal)
All charges up to the nominated terminal will be paid for by the shipper. Delivery, Customs Clearance and Customs import charges will be paid for by the buyer. The seller will arrange freight to the terminal through their freight forwarder, the buyer can have their own customs and delivery agent takeover from the terminal.
DAP (Delivered at Place)
All charges as well as delivery to the buyer facilities will be arranged by the seller. Customs clearance cost can be arranged by either the seller or the buyer depending on the agreement at the time of the freight booking. Import Duty and Taxes will be paid by the buyer at destination.
CIF (Cost Insurance & Freight)
Similar to CFR but the maritime insurance cost will be paid by the seller. Insurance cover will up to the destination port only.
CFR (Cost & Freight)
Costs from the seller’s door to the destination port will be paid by the seller. Given the seller is responsible for transportation, they also nominate the forwarder. The buyer will take care of the destination charges.
FOB (FREE ON BOARD)
Seller will arrange through their freight forwarder the movement of the goods up to the origin port. The goods will then be the buyer’s responsibility. Their nominated forwarder will take control from here. Freight and destination costs will be charged to the buyer.
Each option has its own benefits and risks for both the buyer and the seller.
BENEFITS
- Freight Control – Working on tight time frames or stock control it is essential to know where your freight is the majority time
- Buyer – EXW, FOB, CFR/CIF Seller – DAT, DAP, DDP
- Cost Control – Knowing the cost of the freight will help you work out the true cost of your products
- Buyer – EXW, FOB, CFR/CIF Seller – DAT, DAP, DDP
RISKS
- Lack of visibility – Stock control
- Buyer – DAT, DAP, DDP Seller –EXW, FOB, CFR/CIF
- Unexpected costs – Not having the ability you nominate your forwarder can incur additional costs that you haven’t taken into account, resulting in loss of profit
- Buyer – CFR/CIF, DAT Seller – FOB
INCO Terms get updated periodically. The full current list of INCO Terms (2010) is available for purchase on the ICC website.