Incoterms are terms of trade that clarify the responsibilities of all parties when shipping products from seller to buyer. These rules relate to international trade law and provide clarity on all international transactions. In addition, the costs, risks, division of tasks, etc. are additionally clarified by the Incoterms. The Incoterms are accepted worldwide by governments and legal authorities and are of great importance when drawing up sales contracts.
The ICC, which stands for International Chamber of Commerce, has published these Incoterms. The ICC was founded in 1919 and the first Incoterms followed soon after. The first incoterms were published in 1936. The most recent version of Incoterms are those from 2020.
Table of contents
The different types of Incoterms
There are 11 Incoterms, these Incoterms are divided into different categories. The categories are based on costs, risks, and delivery location. Different situations are also examined per category, for example when freight is transported by sea. The categories are E, F, C and D.
Category E (EXW)
The buyer bears the responsibility within category E (EXW). The seller’s sole responsibility is to ensure that the products arrive at the agreed delivery address.
Category F (FCA, FAS and FOB)
In category F, the method of delivery and shipment agreed in advance with the customer, is the responsibility of the seller. After that, the buyer takes over the responsibility.
Category C (CFR, CIF, CPT, and CIP)
The seller is responsible for all costs until the goods arrive at an agreed destination, within category C. When the goods are ready to be transported, the buyer bears the responsibility for the risks.
Category D (DPU, DAP and DDP)
All obligations within category D depend on the destination(s).
EXW – Ex Works
With the iIncoterms EXW, the buyer bears almost all costs and risks of the entire shipping process. That the buyer has access to the goods is the main task of the seller. Once the buyer has access to goods, the buyer is responsible for transporting the goods.
FCA – Free Carrier
FCA is a very flexible condition. With FCA, it is the buyer’s responsibility to arrange the main transport. The seller only needs to deliver the goods to the buyer’s carrier.
CPT – Carriage Paid To
The same buyer responsibilities apply to CPT as to FCA. However, there is one difference; the seller pays the delivery costs. However, it is still the seller’s responsibility to deliver the goods to the buyer’s carrier.
CIP – Carriage and Insurance Paid To
CIP again has the same seller responsibilities as CPT, with one difference. With CIP, in addition to the delivery costs of the goods, the seller also pays for the insurance. This only needs to be the minimum coverage, however. Does the buyer want an extensive insurance? Then the buyer must pay for this themself.
DAP – Delivered at Place
With DAP, the seller bears the costs and risks of transporting the goods. The goods must be transported to a pre-agreed address. When the goods have arrived at the address and are ready for unloading, the goods will be classified as delivered.
DPU – Delivered at Place Unloaded
The Incoterm Delivered at Place states that all costs and risks are the responsibility of the seller. The unloading of the goods is also the responsibility of the seller, in contrast to the Incoterm DAP.
DDP – Delivery Duty Paid
In addition to being responsible for the transport of the goods, the seller must also ensure that the goods are cleared for shipment and that import duties have been paid. The seller is not responsible for unloading the goods, the buyer is.
Incoterms for sea transport
FAS – Free Alongside Ship
With the Incoterm Free Alongside Ship, the seller delivers the goods to the ship’s quay at the port. The goods must be cleared for export. Until the goods are delivered to the quay next to the ship, the seller bears all costs and risks of transport. Loading the ship is the buyer’s responsibility, who then bears the risk. The buyer is also responsible for the import clearance and export clearance of the goods.
FOB – Free on Board
Free On Board is an Incoterm that states that the seller is responsible for transporting and loading the goods onto the ship. Until all goods are on board the ship, the seller bears all costs and risks of transport. The seller must also arrange the export clearance under this Incoterm. Once the goods are on board of the ship, the buyer bears all responsibilities.
CFR – Cost and Freight
Under the Incoterm CFR, the seller is responsible for transporting the goods and for loading these goods onto the ship. Responsibility is transferred to the buyer once all goods have been loaded onto the ship, the seller is only responsible for transporting the goods to the port of destination. As with FOB, the responsibilities are for the buyer once the goods are on board of the ship. The seller essentially has the same responsibilities as with FOB but must also pay the costs for the transport.
CIF – Cost Insurance and Freight
Cost Insurance and Freight works the same as CFR, the difference is that with CIF the seller must also insure the goods and must therefore also pay these costs. However, the seller is again only obliged to pay the minimum coverage, just as with the Incoterm CIP. Does the buyer want a more extensive insurance with maximum coverage? Then the buyer has to pay for this themself.
What is the difference between all Incoterms?
The distinction between the above circumstances is based on who is responsible for the expenditure and who bears the risk. Export papers, transport to and from the port, loading and unloading trucks or ships and import costs are all examples of this.
As you move lower in the list of Incoterms, the costs slowly shift from the buyer to the seller. For example, in category E, the buyer is fully responsible for all costs and in category D, under Incoterm DDP, the seller is. This also applies to the risk of transporting the goods. With category E the full risk of transport lies with the buyer and with Incoterm DDP the risk again lies entirely with the seller.
If you want to know which Incoterm best suits your situation, it is useful to answer these questions for yourself:
- Which method is used to deliver the goods? Will the cargo be transported by land, air, or sea?
- What is the nature of my relationship with the other party or customer? For one-off or incidental transactions, it is recommended to use category F Incoterms.
- What level of control do you want to maintain yourself? If you don’t find control that important, go for category E.