Understanding Incoterms

No tags available

Here's a handy guide to Incoterms, a set of international rules for the interpretation of the most commonly used trade terms. Applying Incoterms to sale and purchase contracts makes global trade easier and helps partners in different countries understand one another.

When global companies enter into contracts to buy and sell goods they are free to negotiate specific terms. These terms include the price, quantity, and characteristics of the goods. Every international contract also contains what is referred to as an Incoterm, or international commercial term.

There are 13 main terms and several secondary terms that denote the points at which shipper, carrier, and consignee risk and responsibility start and end.

The parties to the transaction select the Incoterms, which determine who pays the cost of each transportation segment, who is responsible for loading and unloading of goods, and who bears the risk of loss at any given point during an international shipment. Incoterms also influence customs valuation basis of imported merchandise.

The International Chamber of Commerce in Paris oversees and administers Incoterms, and they are adhered to by the major trading nations of the world. The ICC first published this set of international rules in 1936 as "INCOTERMS 1936." Incoterms are amended every 10 years.

There are currently 13 Incoterms in use, and they are described below. Ex-works, Free on Board, Cost Insurance Freight, and Delivery Duty Paid are the most frequently used Incoterms.

Incoterms are recognized globally by courts and other authorities. Frequently, parties to a contract are unaware of the different trading practices in their respective countries. This lack of knowledge can lead to misunderstandings and disputes between customer and supplier. The incorporation of Incoterms in international sales contracts reduces this risk.

Group E (Departure)

EXW: Ex-Works

The seller, or exporter, makes the goods available to the buyer, or importer at the seller's premises. The buyer is responsible for all transportation costs, duties, and insurance, and accepts risk of loss of goods immediately after the goods are purchased and placed outside the factory door.

The Ex-Works price does not include loading goods onto a truck or vessel, and no allowance is made for clearing customs.

If FOB is the customs valuation basis of the goods in the country of destination, the transportation and insurance costs from the seller's premises to the port of export must be added to the Ex-Works price.

Under EXW, sellers minimize their risk by making the goods available at their factory or place of business.

Group F (Main Carriage Not Paid By Seller)

FAS: Free Alongside Ship

Sellers transport the goods from their place of business, clear the goods for export, and place them alongside the vessel at the port of export, where the risk of loss shifts to the buyer. The buyer is responsible for loading the goods onto the vessel, unless specified otherwise, and for paying all costs involved in shipping goods to the final destination.

FCA: Free Carrier

The seller, or exporter, clears the goods for export and delivers them to the carrier and place specified by the buyer.

If the place chosen is the seller's place of business, the seller must load the goods onto the transport vehicle; otherwise, the buyer is responsible for loading the goods. The buyer assumes risk of loss from that point forward and must pay for all costs associated with transporting the goods to the final destination.

FOB: Free On Board

The seller, or exporter, is responsible for delivering the goods from its place of business and loading them onto the vessel at the port of export, as well as clearing customs in the country of export.

As soon as the goods cross the "ships-rails" (the ship's threshold) the risk of loss transfers to the buyer, or importer. The buyer must pay for all transportation and insurance costs from that point, and must clear customs in the country of import.

An FOB transaction will read "FOB, port of export." For example, assuming the port of export is Boston, an FOB transaction would read "FOB Boston." If CIF is the customs valuation basis, international freight and insurance must be added to the FOB value.

Group C (Main Carriage Paid By Seller)

CFR: Cost and Freight

The seller, or exporter, is responsible for clearing the goods for export, delivering the goods past the ships rail at the port of shipment, and paying international freight charges. The buyer assumes risk of loss once the goods cross the ship's rail, and must purchase insurance, unload the goods, clear customs, and pay for transport to deliver the goods to their final destination.

If FOB is the customs valuation basis, the international freight costs must be deducted from the CFR price.

CIF: Cost, Insurance and Freight

The seller, or exporter, is responsible for delivering the goods onto the vessel of transport and clearing customs in the country of export. The exporter also is responsible for purchasing insurance, with the buyer (importer) named as the beneficiary.

Risk of loss transfers to buyer as the goods cross the ship's rail. If these goods are damaged or stolen during international transport, the buyer owns the goods and must file a claim based on insurance procured by the seller. The buyer must clear customs in the country of import and pay for all other transport and insurance in the country of import.

CIF can be used as an Incoterm only when the international transport of goods is at least partially by water. If FOB is the customs valuation basis, the international insurance and freight costs must be deducted from the CIF price. A CIF transaction will read CIF, port of destination.

For example, assuming that goods are exported to the Port of Los Angeles, a CIF transaction would read "CIF Los Angeles."

CPT: Carriage Paid To

The seller, or exporter, clears the goods for export, delivers them to the carrier, and is responsible for carriage costs to the named place of destination. Risk of loss transfers to the buyer once the goods are transferred to the carrier and the buyer must insure the goods from that time on.

If FOB is the customs valuation basis, the international freight cost must be deducted from the CPT price.

CIP: Carriage and Insurance Paid To

The seller transports the goods to the port of export, clears customs, and delivers them to the carrier. From that point, risk of loss shifts to the buyer. The seller is responsible for carriage and insurance costs to the named place of destination. The buyer is responsible for all costs, and bears risk of loss from that point forward.

If FOB is the customs valuation basis, international freight and insurance costs need to be deducted from the CIP price.

Group D (Arrival)

DAF: Delivered At Frontier

The seller, or exporter, is responsible for all costs involved in delivering the goods to the named point and place at the frontier (the border between the two countries). Risk of loss transfers at the frontier. The buyer must pay the costs and bear the risk of unloading the goods, clearing customs, and transporting the goods to the final destination.

If FOB is the customs valuation basis, the international insurance and freight costs must be deducted from the DAF price.

DES: Delivered Ex-Ship

The seller, or exporter, is responsible for all costs involved in delivering the goods to a named port of destination. Upon arrival, the goods are made available to the buyer, or importer, on board the vessel. The seller is responsible for all costs and risk of loss prior to unloading at the port of destination.

The buyer, or importer, must have the goods unloaded, pay duties, clear customs and provide inland transportation and insurance to the final destination.

DEQ: Delivered Ex-Quay

The seller, or exporter, is responsible for all costs involved in transporting the goods to the wharf (quay) at the port of destination. The buyer must pay duties, clear customs, and pay the cost and bear the risk of loss from that point forward.

If FOB is the customs valuation basis, the international insurance and freight costs, in addition to unloading costs, must be deducted from the DEQ price.

DDU: Delivered Duty Unpaid

The seller, or exporter, is responsible for all costs involved in delivering the goods to a named place of destination where the goods are placed at the disposal of the buyer. The buyer, or importer, assumes risk of loss at that point and must clear customs, pay duties, and provide inland transportation and insurance to the final destination.

DDP: Delivered Duty Paid

The seller, or exporter, is responsible for all costs involved in delivering the goods to a named place of destination and for clearing customs in the country of import.

Under a DDP Incoterm, the seller provides literally door-to-door delivery, including customs clearance in the port of export and the port of destination. Thus the seller bears the entire risk of loss until goods are delivered to the buyer's premises.

A DDP transaction will read "DDP named place of destination." For example, assuming goods imported through Baltimore are delivered to Silver Spring, the Incoterm would read "DDP, Silver Spring."

If CIF is the customs valuation basis, the costs of unloading the vessel, clearing customs, and delivery to the buyer's premises in the country of destination—including inland insurance—must be deducted to arrive at the CIF value.

Rules of the Road

A) It is the seller's primary duty to deliver the goods on board the vessel named by the buyer at the named port of shipment on the date or within the period stipulated and in "the manner customary at the port." The parties in these circumstances have to follow the custom of the port regarding the actual measures to be taken in delivering the goods onboard. Usually the task is performed by stevedoring companies, and the practical problem normally lies in deciding who should bear the costs of their services.

B) A special agreement has to be made to establish who is responsible for "trimming" or "lashing and securing."

C) A special agreement has to be made to establish who actually pays import duty and/or other import taxes.

Digital Editions

June 2014 Cover

Full Digital Issue

June 2014

(140 pages • 20.21 MB PDF)

2014 Logistics Planner Cover

Digital Edition

2014 Logistics Planner

(162 pages • 23.2 MB PDF)

G75: Inbound Logistics' 75 Green Supply Chain Partners Cover

Digital Edition

G75: Inbound Logistics' 75 Green Supply Chain Partners

(17 pages • 1.57 MB PDF)

Latin American Logistics: The View to the South Cover

Digital Edition

Latin American Logistics: The View to the South

(6 pages • 0.8 MB PDF)

Chemical Logistics: Delivering Solutions for a Complex Industry Cover

Digital Edition

Chemical Logistics: Delivering Solutions for a Complex Industry

(21 pages • 3.9 MB PDF)