The Complete Guide to Understanding Incoterms

Incoterms or International Commercial Terms as it is often referred to in the logistics and shipping industry are used to facilitate and standardize trade processes. To date, there are 11 different Incoterms that assign different responsibilities to the parties to a transaction.

What is Incoterms

Incoterms, or International Commercial Terms, are industry standards used to regulate international trade. They provide the legal framework for business transactions and procurement processes and define the responsibilities and obligations of buyers and sellers, mainly during the logistics and transport phases of transactions.

Today there are 11 Incoterms, which define certain aspects and processes of transactions so that roles, costs, risks and responsibilities are well understood by both parties. Some terms defined in Incoterms are:

• deliver goods. This represents the point in time at which the legal risk of loss or damage is transferred from the seller to the buyer.
• transportation fee. This determines which party is responsible for the shipping costs required to deliver the goods.
• Export/import documents. This specifies which party is responsible for the formalities and documents related to import and export.
• insurance fee. This indicates that the party involved is responsible for taking care of the insurance.

However, they do not contain any information about products, delivery times, prices or payment terms, nor do they provide a dispute resolution mechanism.

Therefore, Incoterms need to be supplemented with separate clauses dealing with other conditions of sale, which should be managed in the procurement software.

The first Incoterms were published by the International Chamber of Commerce in 1936 and have been regularly reviewed and revised since then.

The current edition – Incoterms 2020 – is the ninth edition of Incoterms, published on September 10, 2019.

Incoterms Classification
There are two basic methods of categorizing Incoterms: the first is based on the type of term, and the other is based on the shipping method used.

For the latter, there is a distinction between Incoterms for all modes of transport and Incoterms for sea and inland waterway transport only.

Another distinction divides Incoterms into four categories:

• Class E contains only one term: EXW (Ex Works).
• Category F contains three terms: FCA (free carrier), FAS (free on board) and FOB (free on board).
• Category C includes four terms: CPT (cost paid), CIP (cost and insurance paid), CFR (cost and freight), CIF (cost, insurance and freight).
• Category D includes three terms: DAP (Delivered to Place), DPU (Delivered to Unloaded Place), DDP (Delivered Duty Paid).

These categories refer to the distribution of responsibility and risk between the two parties to the transaction.

Class E imposes minimal obligations on the supplier, while Class D indicates the opposite: most of the responsibility and risk remains with the supplier, while the buyer has little to worry about.

Main features of Incoterms

As mentioned before, one of the general differences between different types of Incoterms is related to the mode of transport. Let’s look at Incoterms, dividing them into two groups.

Incoterms are used in all modes of transport:

EXW Incoterm EXW or Ex Works Incoterm makes the buyer responsible for the entire journey. The seller must make it available only at the agreed place (usually the seller’s place of business or warehouse) at the agreed time.

The ExWorks incoterm means that responsibility transfers to the buyer at the supplier’s warehouse and not on board the vessel.

This means the buyer pays for and is responsible for goods’ transport every step of the way, from door to door. All the supplier needs to do is prepare the goods for pick up.

If the location is not agreed upon in the contract, the seller can choose a suitable location himself. If necessary, the buyer must organize the loading of the goods and formalization of the export.

The buyer also assumes all risks of loss or damage and costs immediately after the goods are delivered, i.e. made available at the seller’s office. Insurance is not required under EXW.

A good example of using the EXW Incoterm is a courier shipment, where the buyer pays the courier company to pick up the goods from the seller. EXW is mostly used in domestic trade.

FCA Incoterm

FCA, or Free Carrier Incoterm, obliges the seller to either load the goods for transport by the buyer or transport the goods to a predetermined delivery point, where the goods are handed over to a carrier organized by the buyer.

In the latter case, the seller must load the goods into his vehicle and take them to the agreed place, but he is not responsible for unloading the goods there.

However, FCA Incoterm requires an export declaration from the seller, if necessary. Import clearance is the buyer’s responsibility. Insurance is not required for FCA Incoterm.

CPT and CIP Incoterms

CPT or Carriage Paid To Incoterm specifies that the seller must pay for the delivery of the goods to a specific place, usually the place of business of the buyer or the port of destination.

However, the buyer assumes all risk of loss or damage as soon as the goods are loaded onto the first carrier’s means of transport at the seller’s location.

The CPT Incoterm also requires the seller to clear the goods for export, while the buyer must do so for import.

According to CPT, an insurance contract is not required.Transport and insurance paid to CIP or Incoterm maintains the characteristics of CPT, but with additional insurance.

After the 2020 review, the insurance must cover the contract price plus 10%, unless otherwise agreed. The seller must take out insurance.

DAP, DPU and DDP Incoterms

The DAP or Delivered At Place Incoterm is most often used in situations where the parties do not want the seller to be responsible for unloading the goods at the destination. In this case, the goods are considered delivered when the vehicle arrives in the possession of the buyer. Until then, the seller assumes the risk of loss or damage.

However, the DPU or Delivered At Place Unloaded Incoterm specifies that the seller is also responsible for unloading the goods at the destination. In both cases, the seller is responsible for the export formalities and the buyer for the import formalities.

DDP or Delivered Duty Paid Incoterm, however, specifies that the buyer is obliged to unload the goods, but the seller must unload the goods for export and 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.

Insurance is not required for any of the three Class D incoterms. Incoterms in Sea and Inland Water Transport:

FAS and FOB Incoterms

FAS or Free Alongside Ship specifies that the buyer must arrange and pay for port-to-port transportation.

The goods are considered delivered when they are placed alongside the buyer’s ship in port.

From this point, the buyer must bear all costs and risks. In the FAS Incoterm framework, the seller must make an export declaration and the buyer must make an import declaration for the goods, unless otherwise agreed.

FAS should only be used for non-container transport by sea and inland waterways. According to FOB or Free On Board Incoterm, the seller must also load the goods on the buyer’s vessel.

This means that the risk of loss or damage passes to the buyer only when the goods are on board.

As in FAS, the seller must clear the goods for export and the buyer for import. Neither party requires insurance under either Incoterm.

CFR and CIF Incoterms

CFR or Cost and Freight Incoterm defines that the responsibility of the seller must load the goods on the ship, after which the risk of loss or damage passes to the buyer. However, the seller still has to arrange and pay for the transport to the destination port.

The seller must formalize the goods for export and the buyer for import. Insurance is not required for CFR Incoterm.

CIF or Cost, Insurance and Freight Incoterm retains the basic features of the CFR Incoterm, but adds an insurance requirement for the journey from the cargo port to at least the destination port.

The most important

Incoterms, or International Trade Terms, is an industry standard used to regulate international trade, which defines the responsibilities and obligations of sellers and buyers mainly in the logistics and delivery phase of trade.

Today there are 11 Incoterms that define a number of aspects and processes of the transaction, including delivery, transport costs, import/export formalities and insurance costs.

Incoterms do not contain information about products, their prices or payment terms, nor do they provide mechanisms for dispute resolution. Therefore, they must be supplemented by separate conditions that also apply to other sales conditions.

Incoterms are classified either by the nature of the terms or by the mode of transport used (all modes of transport vs. sea ​​and inland water transport).

Ex Works (EXW) Incoterm, the buyer collects the goods from the seller’s office and is responsible for all transport costs and risk of loss or damage.

Free Carrier (FCA) Incoterm specifies that the seller loads the goods onto the carrier’s vehicle, with the risk and costs passing to the buyer.

Carriage Paid (CPT) According to Incoterm, the seller must pay for the carriage and the buyer assumes the risk of possible loss or damage.

In the Carrier and Insurance Paid (CIP) Incoterm, the seller must also pay the insurance.

Delivered At Place (DAP)

According to the Incoterm, the seller is responsible for delivering the goods to the buyer’s place of business without unloading the goods.

Delivered at Place Unloaded (DPU)

Incoterm also requires the seller to unload the goods, so the risk passes to the buyer after the goods are unloaded.

Delivered Duty Paid (DDP)

Incoterm places the customs clearance of goods for both export and import on the seller, who must also arrange for delivery to the buyer’s possession without unloading the goods.

Free Alongside Ship (FAS)

According to the Incoterm, the seller must place the goods alongside the transport vessel, after which the risk and costs are transferred to the buyer.

Free On Board (FOB)

This Incoterm specifies that the seller is also responsible for loading the goods on the cargo ship.

Cost and Freight (CFR)

In this Incoterm, the seller must deliver the goods to the port of destination, while the risk of loss or damage passes to the buyer when the goods are loaded onto the ship.

The Cost, Insurance and Freight (CIF)

This Incoterm adds an insurance requirement that is paid by the seller.

BWBMart Managed Service

At BWBMart, we offer a managed service that covers an end-to-end service from sourcing of products to delivery for our International clients. The following is how Incoterms applies to us with regards logistics and delivery:

• Airfreight
  • Pickup (DAT): Indianapolis
  • Doorstep Delivery (DAP): Every other state in the USA
• Seafreight
  • Pickup (DAT): New York (only with a full pallete) and Indianapolis
  • Doorstep Delivery (DAP): Every other state in the USA

Please note Doorstep Delivery comes with an additional cost.