What Are Incoterms?

Shipping contracts for any mode of transport have predefined terms, which are determined by the International Chamber of Commerce (ICC). These terms are commonly referred to as Incoterms, and create consistency for international and domestic trade. They cover three basic areas:

  1. The point at which responsibility for costs transfers from seller to buyer
  2. The point at which responsibility for risks transfers from seller to buyer
  3. The point at which responsibility for processing and cost of duties are assumed

Why Are Incoterms Examples?

Incoterms determine when specific responsibilities as an importer-exporter begin and end. The most recent Incoterms were updated in 2010. These are common Incoterms:

  • EXW (Ex Works): the seller has the goods available for the buyer to pick up at a named place (i.e. factory, warehouse, etc.) and the seller has no obligation to load the goods or clear them for export
  • FCA (Free Carrier): the seller delivers the goods at a named placed cleared for export and the buyer assumes all risks and costs associated with delivery of goods to final destination including any customs fees for importing the product into the destination country
  • CPT (Carriage Paid To): seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller at a named place, but is not responsible for procuring insurance
  • CIP (Carriage and Insurance Paid To): seller clears the goods for export and delivers them to the seller at a named place of with at least minimal insurance coverage
  • DAT (Delivered at Terminal): seller clears the goods for export and bears all risks and costs associated with delivering the goods and unloading them at the terminal at the named port or destination, but the buyer must clear goods for import
  • DAP (Delivered at Place): seller clears the goods for export and bears all risks and costs associated with delivering the goods to the destination, but buyer is responsible for unloading and clearing customs
  • DDP (Delivered Duty Paid): seller bears all risks and costs associated with delivering the goods to the named place of destination, ready for unloading and cleared for import.
  • FAS (Free Alongside Ship): seller shipping by ocean clears the goods for export and delivers them alongside the vessel at the named port
  • FOB (Free on Board): seller clears the goods for export and delivers them onboard the cargo ship at the named port
  • CFR (Cost and Freight): seller clears the goods for export and delivers them onboard the ship at the port of origin and bears the cost of freight to the port of destination, but the buyer assumes all risks for the goods once they are onboard
  • CIF (Cost, Insurance, and Freight): seller clears the goods for export and delivers them  onboard the vessel at the port of origin, bearing the cost of freight and insurance to the named port of destination

For a more complete defintion, visit the ICC website.

Why Do Incoterms Matter?

Incoterms represent definitions of different terms used in international trade and help to assure that words used in contracts mean the same thing from country to country. They regulate who is responsible for documentation, packing costs, loading and unloading costs, transport costs, insurance costs, etc. and so have a direct impact on profitability.

When choosing an Incoterm, you must take into account a variety of factors.

  1. For example, regulations in the buyer’s country may limit what Incoterms you can use when exporting specific goods.
  2. You must also be certain that your Incoterm clause is consistent with your overall trade contract.
  3. Incoterms can also affect letters of credit arrangements and insurance arrangements
  4. Incoterms can affect other freight arrangements. For example, if you have a CFR contract, you must present a bill of lading to the seller when delivering goods. This means you can only use an ocean carrier for your entire logistics, not intermodal shipping.

As a seller, you do not want to extend your responsibility for loss or damage to goods beyond the shipment. As a buyer, you do not want to assumer responsibility for loss or damage prior to arrival at the destination with the correct documentation.

How Can You Choose The Right Incoterm?

An experienced freight forwarder can save you untold thousands of dollars as well as time by helping you choose the right Incoterm.

In general, most freight forwarding customers  use one of the following Incoterms:

U.S. Exports:

  • CIF or CFR Incoterms: Specify prices for exports from the U.S. generally include all services needed to delver your goods to the port of destination, except for port of destination charges, customs clearance charges, and local delivery.
  • FOB Incoterms: In this case, the shipper covers all costs until the goods have been loads at the port of origin; the consignee bears the cost of shipping overseas
  • Door-to-door service: We are happy to provide you with a quote for full door-to-door transport services between U.S. and anywhere in the world through our network of overseas agents

U.S. Imports:

  •  FOB Incoterms: This is port-to-door shipment including all necessary services from the vessel to your warehouse or production facility
  • CIF or CFR Incoterms: Similar to exporting goods, but in reverse