Whether you’re shipping or receiving goods, the Incoterms you agree to can either make or break your bottom line. By defining who’s responsible for shipping, insurance and tariffs, the Incoterms rules ultimately determine your final costs as either a buyer or a seller.
To help you understand the intricacies of these terms—and what they mean for you—we’ll walk you through all eleven of the 2010 Incoterms Rules.
We’ll also show you why Incoterms are only half the story when negotiating your contract. There’s one additional element you need to include, and ignoring it can cost you big. We’ll show you why.
But first, let’s start with a quick review of Incoterms and what’s in store for them in the coming years.
What Are the Incoterms Rules?
Incoterms are a set of rules published by the International Chamber of Commerce (ICC) that define the responsibilities between buyers and sellers. Ultimately, Incoterms offer buyers and sellers a simple three-letter shorthand to quickly negotiate all the costs of getting goods from origin to destination.
Although these rules were first published in 1936, they’ve been updated regularly since.
The ICC updated the Incoterms rules most recently in 2010, and it made a few notable changes. Make sure you and the other party you’re working with use the same version to avoid any confusion.
Additionally, the ICC has announced they will issue a new set of Incoterms in 2020, so you’ll want to keep your eyes out for this revision.
Now, let’s explore those eleven Incoterms rules in detail.
Two “Bare Bones” Incoterms That Apply to All Modes of Transport
The first two Incoterms we’ll discuss ask the seller to cover very little of the transport process:
#1: EXW (Ex Works)
When you agree to this Incoterm, the buyer is responsible for absolutely everything from:
- Picking up the goods from the seller’s warehouse,
- Running the goods through any export procedures and paying any associated costs,
- Delivering those goods to the appropriate terminal,
- Getting the goods loaded onboard the intended truck, plane or ship
- And so on, until the goods reach the final destination.
Some buyers choose EXW because it offers them the lowest cost from the seller. However, this Incoterm may end up costing buyers more in the end, especially if the buyer doesn’t have experience negotiating in the origin country. We’ll show you why when we examine the next Incoterm.
#2: FCA (Free Carrier)
This Incoterm may offer buyers a distinct advantage over EXW. Unlike EXW, FCA requires the seller to deliver goods to a named location, often a terminal or port. The buyer is then responsible for arranging all transportation from that point forward.
Although it seems like a small difference, this one provision can often save buyers some money. Under the EXW Incoterm, the buyer has to arrange for a dedicated delivery. However, if the seller often delivers goods to the port, for example, he or she may be able to consolidate several shipments into a single delivery and offer the buyer a lower price. That’s the advantage of the FCA incoterm.
However, once goods get to the named location, the buyer is responsible for everything past that point.
Now, although these first two Incoterms were very closely related, we’re going to discuss a second set of Incoterms that offer buyers a more complete package from the seller.
5 More Inclusive Incoterms for All Modes of Transport
#3: DAT (Delivered at Terminal)
Unlike EXW and FCA, the DAT Incoterm requires the sellers to pay for all the costs to deliver a shipment all the way through to the destination terminal.
From the destination port, the buyer has to arrange for loading, delivery and any associated customs fees for the import.
One important note for this Incoterm: Although they’re not technically obligated to insure goods in transit, under the DAT Incoterm, sellers are responsible for the goods until they get unloaded at the destination terminal. If they go missing or get damaged, the seller is obligated to replace them. While this isn’t technically insurance coverage, it does offer the buyer some protection until the goods reach the destination terminal.
#4: DAP (Delivered at Place)
Like DAT, the DAP Incoterm dictates that the seller pays for all costs to get goods from their origin all the way through to the destination terminal. However, the DAP incoterm also includes:
- Loading the goods on a truck at the destination terminal.
- Delivery to the final destination.
Additionally, any customs import fees and taxes must be paid by the buyer.
Although the DAP Incoterm doesn’t require insurance, the seller takes responsibility for making sure the goods get all the way to the final destination. Whether sellers opt for insurance coverage is ultimately their decision. However, if goods are lost or damaged in transit, the seller is responsible for making it right with the buyer.
#5: CPT (Carriage Paid to)
CPT is almost identical to DAP, in that the seller pays to get the goods to the destination of the buyer’s choosing.
However, unlike DAP, under the CPT Incoterm, risk transfers to the buyer as soon as the goods are under control of the carrier at the origin. So, for example, if the goods somehow get lost or damaged while onboard an ocean vessel, the seller is not responsible. If the buyer wishes to cover the goods for loss or damage, the buyer is responsible for that cost, as well as the cost for customs import fees and taxes.
#6: CIP (Carriage And Insurance Paid To)
Under the CIP Incoterm, the seller is responsible for all costs to get goods to a final destination agreed upon by both parties.
However, unlike CPT or DAT, the seller is required to purchase insurance against loss or damage to the goods until they arrive at the final destination. Although insurance is included, only minimal coverage is required, so the seller may want to purchase additional insurance to ensure the full value is accounted for.
Finally, like the previous three Incoterms we’ve discussed, customs fees and import taxes are not included.
#7: DDP (Delivered Duty Paid)
Under this Incoterm, the seller is responsible for just about everything:
- All transport costs to get the goods to the named delivery point.
- All responsibility in case of loss or damage along the way.
- Plus, any customs fees or import duties.
Although this likely will be the most expensive Incoterm for a buyer, it’s also an all-inclusive solution that takes care of just about everything. However, as the seller, this Incoterm can be tricky to navigate, unless you are familiar with the customs and import procedures of the destination country.
Although all of the Incoterms we’ve discussed up to this point can be used for any form of transportation, there are four Incoterms that are restricted to ocean freight. Let’s dive into their details.
4 Incoterms Used ONLY for Marine Transportation
#8: FAS (Free Alongside Ship)
Under the FAS Incoterm, the seller is responsible only for transporting goods to the origin port. However, from there on out, the buyer is responsible for:
- Paying for the goods to get loaded on the ship,
- Ocean freight costs to the destination and
- Everything else needed to get the shipment to its destination.
#9: FOB (Free On Board)
The FOB Incoterm is very similar to the FAS Incoterm, but it takes it one step further. This Incoterm dictates that the seller pays to get the goods to the origin port and gets them loaded onto a ship of the buyer’s choosing.
The buyer pays for everything from there, including ocean freight and any subsequent costs to get the goods to their final destination.
Similar to the FCA Incoterm, this option can often be the most cost-effective one for buyers since the seller can take care of much of the transport and negotiation in their origin country.
#10: CFR (Cost and Freight)
When you select the CFR Incoterm, the seller is responsible for the costs associated with:
- Transporting the goods to the origin port,
- Loading them on the right vessel and
- Ocean freight to the destination port.
However, the buyer has to pay for unloading, as well as any subsequent charges to get the goods to their final destination.
Unlike CIF, which we’ll cover next, this Incoterm does not include insurance, so the buyer assumes the risk for the shipment as soon as it’s loaded on board the vessel. If you’re the buyer, to protect against loss or damage in transit, you may want to consider marine cargo insurance.
#11: CIF (Cost, Insurance and Freight)
CIF is a common Incoterm used in both B2B and B2C transactions. It’s very similar to its sister Incoterm, CFR.
Under the CIF Incoterm, the seller pays for all the costs to get the goods to the destination terminal. However, unlike CFR, the buyer is also responsible for purchasing insurance that covers loss or damage up to this point.
The buyer is responsible for the unloading of the goods and its transportation to the final destination, including any associated risks.
Quick Bonus: Why Incoterms Are Only Half the Story
Now that you’ve got a clear understanding of the eleven Incoterms, there’s just one more element you need to be aware of: the named place that the buyer and seller agree on.
If that part of your contract isn’t crystal clear—and there’s a mistake in terms of the named location that the seller will take over the process—you can see how it would cause big problems.
So as you negotiate your contract, be sure to lock down the following two provisions:
- The Incoterm rule you wish to use. (By now, you should be an expert!)
- The named place for the final destination. For example, on DDP, this will be the final delivery destination for the shipment. For FAS, this will be the port where the seller will deliver the goods.
Note: In cities with multiple ports and terminals, make sure your contract is extremely specific to eliminate any confusion (and extra costs for re-routing or tracking down lost shipments)!
This might seem like overkill, but, trust us, errors in this arena can end up blowing up your budget.
Buy, Sell and Ship with Confidence
Now that you’ve got a good grasp of all eleven Incoterms, you’ll have a better sense of which one will work best for your business. Plus, armed with this knowledge, you’ll discover a new level of confidence when negotiating future agreements to position yourself for favorable terms—and costs.
If you need help decoding the logistics side of your contracts—or arranging for transportation in foreign countries under specific Incoterms—reach out to us. We’d be happy to leverage our experience to simplify your shipping process.
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