Incoterms® 101: A Beginner’s Guide
What Are Incoterms®?
International Commercial Terms, otherwise known as Incoterms®, are a set of rules established by the ICC (International Chamber of Commerce) to standardize international trade agreements. They define the obligations, costs, and risks involved in transporting goods from the seller to the buyer. The latest edition, Incoterms® 2020, includes 11 terms categorized based on different modes of transport.
Incoterms® are divided into two main categories:
- Rules for Any Mode of Transport: EXW, FCA, CPT, CIP, DAP, DPU, and DDP.
- Rules for Sea and Inland Waterway Transport: FAS, FOB, CFR, and CIF.
Let’s examine each of these options in detail.
Incoterms® for Any Mode of Transport
1. EXW (Ex Works)
- The seller makes goods available at their premises (factory, warehouse, etc.).
- The buyer is responsible for all transportation, insurance, and customs duties.
This term places the maximum obligation on the buyer and minimum obligations on the seller. The Ex Works term is often used when making an initial quotation for the sale of goods without any costs included. EXW means that a seller has the goods ready for collection at their premises (works, factory, warehouse, plant) on the date agreed upon. The buyer pays all transportation costs and also bears the risks of bringing the goods to their final destination. The seller does not load the goods on collecting vehicles and does not clear them for export. If the seller does load the goods, it’s done at the buyer’s risk and cost. If both parties want the seller to be responsible for the loading of the goods on departure and to bear the risk and all costs of such loading, this must be made clear by adding explicit wording to this effect in the contract of sale.
2. FCA (Free Carrier)
- The seller delivers goods to a carrier determined by the buyer at a specified location.
- The seller covers export clearance while the buyer assumes all further costs and risks.
The seller is responsible for export clearance and ensuring goods make it to a predetermined location, often a terminal or warehouse, for a carrier, named and paid for by the buyer, to pick up. Risk passes over to the buyer once the goods are handed over to the first carrier.
3. CPT (Carriage Paid To)
- The seller covers transportation costs to an agreed-upon destination.
- Risk transfers to the buyer once the goods are delivered to this destination.
The seller arranges and pays for transport to a destination agreed upon by the buyer. This may be a significant distance from where the goods first arrived at the country of destination. Risk transfers from the seller to the buyer once the goods reach this location. The buyer is then responsible for unloading and any and all future transport.
4. CIP (Carriage and Insurance Paid To)
- CIP is similar to CPT but includes insurance coverage arranged by the seller.
- The seller is responsible for transport and insurance costs up to the destination.
Like CPT, CIP requires the seller to arrange and pay for transport to the predetermined destination. Unlike CPT, the seller also provides insurance up to this point, through the first leg of the journey. The buyer gets the benefit of the seller-provided insurance coverage and assumes risk once the goods arrive.
5. DAP (Delivered at Place)
- The seller delivers goods to a named location, ready for unloading.
- The buyer handles import clearance and unloading.
The seller pays for the transport of goods to the named destination, while the buyer covers the costs related to import clearance, such as customs duties, fees, and taxes. The seller assumes all risks until the goods arrive at the destination, at which point the buyer takes over the risk.
6. DPU (Delivered at Place Unloaded)
- The seller delivers goods to a specified destination and unloads them.
- The buyer handles import clearance and further transportation.
The buyer is responsible for import clearance and costs such as customs duties, fees, and taxes. The seller covers transportation costs and risks until the goods are fully unloaded at the agreed-upon destination. From here, the buyer assumes future transportation costs and risk. The difference between DAP and DPU is the seller’s responsibility for unloading.
7. DDP (Delivered Duty Paid)
- The seller handles all transportation, insurance, and import duties.
- The buyer only needs to receive the goods.
This term places the maximum obligations on the seller and minimum obligations on the buyer. The seller handles all costs, including shipping, import duties, and taxes, ensuring delivery at the buyer’s location. The buyer only needs to receive the goods at the agreed-upon destination.
Incoterms® for Sea and Inland Waterway Transport
8. FAS (Free Alongside Ship)
- The seller delivers goods next to the vessel at the port.
- The buyer handles loading, ocean freight, and subsequent costs.
The seller is responsible for getting the goods alongside the ship at the named port. Beyond this, the goods are the buyer’s responsibility, with the buyer assuming the risk and costs of loading the goods on the ship and any and all future transportation. This term is typically used for bulk cargo.
9. FOB (Free on Board)
- The seller delivers goods onto the vessel at the port of shipment.
- The buyer assumes responsibility once the goods are on board.
The seller is responsible for clearing the goods for export and having them delivered and loaded onto the vessel at the named port. Once the goods are onboard, risk transfers to the buyer, who assumes responsibility for shipping and any future transportation.
10. CFR (Cost and Freight)
- The seller covers transport costs to the destination port.
- Risk transfers to the buyer once the goods are loaded onto the ship.
The seller arranges and pays for transport to the named port of destination, while the risk is transferred to the buyer not at the port of destination but at the point when goods are loaded onto the ship. The buyer is responsible for unloading and future transport beyond the arrival port.
11. CIF (Cost, Insurance, and Freight)
- The seller is responsible for transport to the port of destination.
- CIF is similar to CFR but includes insurance coverage arranged by the seller.
Like CFR, the seller arranges for the transportation of goods to the port of destination, and the buyer assumes risk once the goods are on board the ship. CIF, however, also requires the seller to arrange and pay for limited insurance for an added layer of protection between the port of shipment and the port of destination.
For further guidance, consult an international trade expert or refer to the ICC’s official Incoterms® publication.
The Incoterms® Rules are protected by copyright owned by ICC. Further information on the Incoterm® Rules may be obtained from the ICC website iccwbo.org. Incoterms® and the Incoterms® 2020 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above.