If you’re looking to import goods from overseas (including goods you’ve sourced from a supplier), it’s critical to understand the impact of the Incoterms on your shipment.
Below, we’ve put together the entire guide to the Incoterms 2020, so you can fully understand each of the different types of terms and how they impact your consignment.
What are Incoterms?
Incoterms stands for ‘international commercial terms’. They are the commercial terms of trade that allocate the different costs and risks between the buyer and seller of goods when shipping worldwide.
Precisely what incoterm agreed upon will depend on the outcome of each commercial negotiation, and it’s important you’re aware which term governs you.
Who created the Incoterms?
‘Incoterms’ were created by the International Chamber of Commerce (ICC). “Incoterms®” is also registered trademark of the ICC.
The terms are updated every ten years by the ICC, the most recent being Incoterms® 2020.
The ICC Academy have put together an online course to learn more about the latest changes to the Incoterms.
Why are the Incoterms used?
Incoterms are used in international trade because they provide a uniform, common and predictable set of terms harmonising business around the world.
What are the different Incoterms?
There are 11 types of Incoterms® in the new 2020 edition, which was recently updated in 2019. These are:
- EXW (Ex Works)
- FCA (Free Carrier)
- CPT (Carriage Paid To)
- CIP (Carriage and Insurance Paid To)
- DPU (Delivered at Place Unloaded)
- DAP (Delivered at Place)
- DDP (Delivered Duty Paid)
- FAS (Free Alongside Ship)
- FOB (Free on Board)
- CFR (Cost and Freight)
- CIF (Cost, Insurance, and Freight)
Four of them (FAS, FOB, CFR and CIF) can only be used when transporting via the ocean or inland waterways.
What do the different Incoterms mean?
Below, we’ve outlined the different types of Incoterms, what they mean and how they’ll impact your international shipment as a seller or buyer.
EXW | Ex Works
Ex Words provides the buyer with most responsibilities out of all the Incoterms, as they are responsible for virtually the entire shipment from origin to destination.
Under EXW, the seller is responsible for making the goods available for collection at their premises and the buyer is responsible for everything from that point onwards. The buyer also must pay all costs to get their goods to the final destination.
FCA | Free Carrier
Under FCA, the seller must make the goods available to the buyer at a particular location that is operated by the carrier (i.e. the party who will actually ship the goods).
The seller is responsible for arranging customs clearance for export, but also responsible for paying any charges at the port of shipment such as terminal charges or loading fees.
From that point onwards, all costs and responsibilities shift to the buyer.
FAS | Free Alongside Ship
Under the FAS Incoterm, the seller is obligated to make the goods available to the buyer ‘alongside’ the ship at the port. The seller is also responsible for customs clearance.
Once the seller has done everything they have to do to get the goods at this point, that’s their job done. The buyer is then responsible for terminal handling at the port of shipment (including paying the costs of loading goods onto the carrier’s ship).
FAS only applies to maritime shipments.
FOB | Free on Board
FOB is one of the most common Incoterms used across the world, as it effectively distributes the risks in a shipment equally between the seller and buyer.
The seller is responsible for ensuring the goods are loaded onto the vessel at the port, and the buyer is then obligated to pay freight costs and every other cost required for the goods to reach the end location.
Recall that FOB only applies to maritime shipments.
CFR | Cost and Freight
Under CFR, the seller is responsible for almost all costs including paying for the freight until the port of destination.
The buyer, however, takes the risks at the point that the goods are loaded onto the ship. They must also start paying costs when the goods reach the port of destination.
CFR applies to maritime shipments only.
CPT | Carriage Paid To
CPT is very much like CFR. But when shipping under CPT, the buyer is responsible for duties, taxes and transportation charges.
CIP | Carriage and Insurance Paid To
CIP is then similar to CPT, but it includes marine insurance. The buyer will need to take out marine insurance, hence the name ‘carriage and insurance’ paid to.
CIF | Cost, Insurance and Freight
CIF is virtually the same as shipping under CFR. The buyer is responsible for getting the goods to the destination port and pay all associated costs. They also must pay customs clearance and the costs of delivery in the end country.
CIF applies to maritime shipments only.
DPU | Delivered at Place Unloaded
DPU is a new term introduced in Incoterms® 2020.
When shipping under DPU, the seller is responsible for delivering the goods at the buyer’s disposal after unloading (hence delivered at place ‘unloaded’). The seller is therefore responsible for unloading the goods at the place of the destination.
Note that DAT (Delivered at Terminal) is no longer in use.
DAP | Delivered at Place
When shipping under DAP, the seller must pay and take responsibility for pretty much everything. They have to pay all charges right up until the goods are delivered to the final destination. The buyer just has to pay for regular taxes and import duties.
DAP is considered quite a buyer-friendly term.
DDP | Delivered Duty Paid
Under the DDP Incoterm, the seller is responsible for getting the goods to the final destination (and pay all associated costs, even including duties and taxes in the country of delivery).
All the buyer really has to do is unload the goods from the truck outside of their premises.
DDP is considered the most buyer-friendly term out of all the Incoterms.
Final thought
The Incoterms can get fairly complicated, so we strongly recommend discussing with an expert freight forwarder which Incoterm is the most appropriate for your international shipment.
Here at The Sourcing Co, our specialist shipping & logistics team have one goal: to make your shipment as easy as possible. We’ll handle all the work related to your shipment and discuss which Incoterm is most suitable for your consignment.
Please get in touch with us today to start discussing your next shipment.