Choosing the best term to use isn’t a straightforward decision. Still, it is of utmost importance for buyers and sellers to agree on the Incoterm that will be used for their transaction.
Incoterms, short for International Commercial Terms, are a series of standard trade terms widely used in international trade transactions established by the International Chamber of Commerce (ICC). As a business, the type of Incoterm you choose defines the payment responsibilities and amount of risks buyers and sellers take during the shipment and journey of your goods.
Choosing the best term to use isn’t a straightforward decision. Still, it is of utmost importance for buyers and sellers to agree on the Incoterm that will be used for their transaction, as these terms determine which party is responsible for the cost of transportation, shipment risk, insurance, and customs clearance in the international supply chain.
Let’s look at each term and what it means for you as a buyer. The 11 Incoterms used in international logistics are:
1) EXW Incoterm
Under EXW (Ex-Works) Incoterm, the seller’s obligation is limited to making the goods available at their premises. The buyer holds the sole responsibility for all costs and risks involved in the transportation of the goods from the seller’s premises to the final destination—which include delivery to the shipping port or terminal, transportation to the port of destination or terminal of destination, up to final delivery point. The buyer’s responsibilities also include custom clearance, insurance, and duties.
This Incoterm can be used by buyers who have already shipped goods from a particular seller before, work with trusted freight brokers, and are well-versed in transporting and clearing goods at the destination port. As a result, the buyer must have the right resources and expertise to manage a shipment under this Incoterm.
EXW is mainly used when buyers want to have greater control over the transport, delivery process, and overall transportation costs.
Seller’s responsibilities:
Freight Cost: None
Risk: None (within the seller’s premises)
Buyer’s responsibilities:
Freight Cost: From seller’s premises to final destination
Risk: From seller’s premises to final destination
Applicable to all modes of transport
2) FCA Incoterm
When option for FCA (Free Carrier) Incoterm, the seller is responsible for delivering the goods to the carrier nominated by the buyer at a specified place other than the seller’s premises (for example, at the carrier’s warehouse). The buyer is responsible for all costs and risks involved in the transportation of the goods from the agreed point onwards. The seller is also responsible for any export formalities (duty, taxes, and customs clearance) while the buyer is responsible for any import formalities.
This Incoterm is often used when the buyer has a preferred shipping carrier or a logistics provider to manage the goods’ transportation.
Seller’s responsibilities:
Freight Cost: From the seller’s premises to carrier nominated by buyer
Risk: From the seller’s premises to carrier
Buyer’s responsibilities:
Freight Cost: From carrier’s custody to final destination
Risk: From carrier’s custody to final destination
Applicable to all modes of transport
3) FAS Incoterm
Under FAS (Free Alongside Ship) Incoterm, the seller is responsible for delivering the goods alongside the ship at a specified port of departure. The buyer is responsible for all costs and risks involved in loading the goods onto the ship, in addition to expenses related to transportation and customs clearance of the goods from that point onwards.
FAS is preferred when the buyer has a strong logistics network at the port and wants to control the transportation process and costs, while the seller is responsible for delivering the goods to the agreed-upon port, alongside the vessel. This Incoterm is suitable for sea and inland waterway transportation and for bulk cargo.
Seller’s responsibilities:
Freight Cost: From seller’s premises to shipside in port of departure
Risk: From seller’s premises to shipside in port of departure
Buyer’s responsibilities:
Freight Cost: From shipside in port of departure to final destination
Risk: From shipside in port of departure to final destination
Applicable to sea and inland waterway transportation
4) FOB Incoterm
When opting for FOB (Free on Board) Incoterm, the seller is responsible for delivering the goods on board the ship nominated by the buyer at a specified port of shipment. The buyer assumes responsibility from that point onwards, including the costs and risks associated with transportation from the port of departure, customs clearance, and import duties.
The advantage of using FOB is that the buyer can take advantage of low shipping costs if they have a good relationship with a forwarder, giving them the option to control the delivery process. On the other hand, the seller is responsible for delivering the goods to the port of shipment and ensuring the goods are adequately packaged and loaded onto the shipping vessel.
Seller’s responsibilities:
Freight Cost: From seller’s premises to loading goods on board the ship
Risk: From seller’s premises to loading goods on board the ship
Buyer’s responsibilities:
Freight Cost: From goods on board the ship to final destination
Risk: From goods on board the ship to final destination
Applicable to sea and inland waterway transportation
5) CFR Incoterm
Under CFR (Cost and Freight) Incoterm, the seller is responsible for delivering the goods on board a ship at a specified port of shipment, and for arranging and paying for the cost of transportation to the port of destination. The seller is also responsible for export customs and charges. The buyer is responsible for all risks involved as soon as the goods are loaded onto the ship in the departure port to the final destination, including customs clearance, import duties, and cargo insurance.
CFR terms usually come with a higher price tag – since the seller is responsible for most of the transport leg, they have little incentive to keep costs low. On the other hand, the buyer bears the risks for goods loss and damage as soon as they are loaded onto the ship in the shipping port in the country of origin.
Seller’s responsibilities:
Freight Cost: From seller’s premises to port of destination, including export customs
Risk: From seller’s premises to loading goods on board the ship
Buyer’s responsibilities:
Freight Cost: From port of destination to final destination, including import customs and duties
Risk: From goods on board the ship to final destination
Applicable to sea and inland waterway transportation
6) CIF Incoterm
Similar to CFR, under CIF (Cost, Insurance, and Freight) Incoterm the seller is responsible for delivering the goods on board a ship at a specified port of departure, and for arranging and paying for the cost of transportation and insurance to the port of destination. The buyer is responsible for all risks involved in the transportation of goods from the point of shipment to the final destination. The buyer is also responsible for destination charges, including customs handling fees, duties and taxes, and inland transport fees at the destination.
CIF simplifies the shipping process for the buyer as the seller is contractually obliged to arrange and pay for the insurance coverage of the goods during transportation, reducing the risk for the buyer. Since the insurance cost is included in the goods’ price, the buyer does not have to pay for insurance separately. However, the insurance coverage provided by the seller may not meet the buyer’s requirements which can lead to disputes.
If shipping under CIF, be sure to clarify your insurance needs with the seller to ensure all parties agree on the terms.
Seller’s responsibilities:
Freight Cost: From seller’s premises to port of destination
Risk: From seller’s premises to loading goods on board the ship
Buyer’s responsibilities:
Freight Cost: From port of destination to final destination
Risk: From goods on board the ship to final destination
Applicable to sea and inland waterway transportation
7) CPT Incoterm
Under CPT (Carriage Paid To) Incoterm, the seller is responsible for arranging and paying for the cost of transportation of the goods to a specified place at destination, including export clearance. The buyer is responsible for the costs of transportation from the specified destination to the final destination. Therefore, identifying the precise location and time of delivery is of utmost importance when choosing this Incoterm.
The risk, however, is transferred from the seller to the buyer at the point of delivery to the carrier in the point of shipment. The buyer is also responsible for arranging and paying for insurance coverage during transportation.
Seller’s responsibilities:
Freight Cost: From seller’s premises to specified place at destination
Risk: From seller’s premises to carrier in port of origin
Buyer’s responsibilities:
Freight Cost: From specified place at destination to final destination
Risk: From carrier in port of origin to final destination
Applicable to all modes of transport
8) CIP Incoterm
The CIP (Carriage and Insurance Paid to) Incoterm defines the seller as the responsible party for arranging and paying for the cost of transportation and insurance of goods to an agreed place of delivery at destination. Insurance for this Incoterm is mandatory, it being the seller’s responsibility to arrange it.
The buyer is responsible for all risks involved in the transportation of the goods from the point of delivery to the carrier at origin to the final destination.
CIP simplifies the logistics process for the buyer – as the seller is responsible for arranging insurance coverage for the goods during transport. Since the cost of insurance is included in the price of the goods, the buyer need not pay for insurance separately.
It also means reduced risk for the seller since they are only responsible for delivering the goods to a specified place and arranging for insurance coverage for the transportation. Since the seller bears the insurance cost, this can increase the overall cost of the transaction.
If a buyer prefers a different insurance arrangement due to the cost or policy, CPT Incoterm, in this case, would be preferable.
Seller’s responsibilities:
Freight Cost: From seller’s premises to specified place at destination
Risk: From seller’s premises to carrier in port of origin
Buyer’s responsibilities:
Freight Cost: From specified place at destination to final destination
Risk: From carrier in port of origin to final destination
Applicable to all modes of transport
9) DPU Incoterm
The DPU (Delivered at Place Unloaded) Incoterm replaces DAT Incoterm 2010 and states that the seller is responsible for the costs and risks from the premises to an agreed place of delivery at destination, including unloading. The seller is also responsible for export formalities and costs.
The buyer is responsible for all risks and costs involved in the transportation of the goods from the specific point where the goods were unloaded to the final destination. The buyer is also responsible for import formalities and duties.
Seller’s responsibilities:
Freight Cost: From seller’s premises to specified place at destination, including unloading
Risk: From seller’s premises to specified place at destination, including unloading
Buyer’s responsibilities:
Freight Cost: From specified place at destination to final destination
Risk: From specified place at destination to final destination
Applicable to all modes of transport
10) DAP Incoterm
The DAP (Delivered at Place) Incoterm defines the seller as responsible for delivering the goods to the agreed place of destination and placing them at the disposal of the buyer. The seller bears all costs involved in transporting the goods to the place of destination – this can be a port, buyers premises, or a 3rd party storage facility. The buyer is responsible for the costs and risks of unloading the goods at the agreed-upon place of destination. The buyer is also responsible for all costs and risks associated with clearing customs to successfully import the goods at the destination.
Under this incoterm, the seller assumes most of the responsibilities, risks, and costs of shipment. The seller is responsible for providing pertinent import documentation, cost of shipping and any losses, as well as transporting goods to the shipping port, ocean freight, as well as delivery from the port of destination to the final unloading location of the goods.
The main risks under this incoterm for the buyer have to do with the customs clearance process. If the buyer is not well-versed in the import process, and is not working with an experienced customs broker, there is a risk of the shipment getting detained for secondary investigation. If this happens, the buyer must bear all costs associated with this, including hefty demurrage charges since the import process falls under the buyer’s court.
Seller’s responsibilities:
Freight Cost: From seller’s premises to ready-for-unloading at agreed final destination
Risk: From seller’s premises to ready-for-unloading at agreed final destination
Buyer’s responsibilities:
Freight Cost: None, though responsible for unloading at agreed final destination
Risk: Unloading (including) at agreed final destination
Applicable to all modes of transport
11) DDP Incoterm
Under the DDP Incoterm, or Delivery Duty Paid, the seller is responsible for delivering the goods to the final destination, including paying for all costs and arranging all necessary transportation and customs clearance. The buyer is only responsible for unloading the goods at the final destination, usually their facility or warehouse. The seller, however, is not obliged to insure goods
Under DDP, the seller is essentially responsible for almost the entire process. Even though it could mean higher prices for importers, it would remove most risk from the buyer. Cargo insurance is not obligatory in this case, though as sellers have significantly more responsibilities, they mostly likely prefer to arrange insurance.
Seller’s responsibilities:
Freight Cost: From seller’s premises to ready-for-unloading at agreed final destination
Risk: From seller’s premises to ready-for-unloading at agreed final destination
Buyer’s responsibilities:
Freight Cost: None, though responsible for unloading at agreed final destination
Risk: Unloading (including) at agreed final destination
Applicable to all modes of transport
Buyers should choose incoterms that they are most comfortable with given their relationship with the supplier and freight forwarder, and how extensive their logistics network is. If they have a strong and reliable freight forwarder, buyers can save on total shipping costs by opting for terms like EXW, FCA and FAS.
In the end, it is important to note that the responsibilities and obligations specified can vary depending on the specific terms of the trade agreement between the buyer and seller, so always ensure that the terms are outlined clearly and perhaps also leverage your freight forwarder to ensure that the terms are bullet proof.
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