Incoterms, or International Commercial Terms, play a hugely significant role in international logistics. The terms a deal is completed on can have a big impact on the margins of the shipper and consignee.
But they are also some of the most confusing aspects of trade and take a while to get your head around.In this article, WTA will explain the latest version of the Incoterm codes in detail, deciphering all the key terms you need to understand and explaining the obligations on each business.
What are Incoterms?
Put simply, Incoterms are used to outline the logistical obligations on the buyer and the seller when trading internationally.
They are vital to the international shipping process, being used to specify which party will organise and pay for various stages of the journey.
More specifically, Incoterms are used to:
- Explain the costs and obligations incurred between the buyer and seller. The shared nature of Incoterms allows for a clear, straightforward understanding between the two respective parties.
- Allow for a clear understanding of who carries the risk involved with cargo, allowing both buyer and seller to be on the same page.
- Make it easier for communication between the numerous parties involved in the shipping process, such as customs brokers, financiers, carriers, and freight forwarders.
Key Incoterms Across All Forms of Transport
The most popular Incoterms are typically:
EXW means that the goods have been delivered to the buyer once they've been placed at an agreed location. Which could be their own warehouse.
The seller is under no obligation to load the delivery onto any collecting vehicle or clear them for export. This rule places very few obligations on the seller.
Free Carrier (CA):
FCA means that the goods are considered to be delivered to the buyer in two different ways:
- In the case of the named delivery point being the seller's premises, the goods are considered to be delivered once they're loaded onto the buyer's transport.
- In the case of the named delivery point being another location, the goods are considered to be delivered once they have been loaded into the seller's transport and reach the other named delivery location.
The place of delivery identifies the point at which risk transfers to the buyer. In both scenarios, the seller is responsible for export clearance, the buyer takes responsibility after delivery.
Carriage Paid To (CPT):
CPT means that the risk is transferred to the buyer once the seller hands the goods over to the carrier. The seller doesn't have to guarantee the goods will reach the buyer, as risk transfers from the seller to the buyer once they have been handed over to the carrier.
Carriage and Insurance Paid To (CIP):
CIP means that the risk is transferred to the buyer, and the goods are considered delivered, when the goods are handed over to the carrier. The seller is also responsible for insuring the goods being transported.
Delivered at Place (DAP):
DAP means that the goods are delivered, and risk has been transferred to the buyer, once the goods have arrived at the agreed-upon destination and are ready for unloading.
The seller bears all risk when transporting the cargo to the agreed-upon destination. For this rule, delivery and arrival at destination are identical.
For more information on the DAP incoterm, we have a separate article here.
Delivered at Place Unloaded (DPU):
DPU means that the risk has been transferred to the buyer once goods have been unloaded from the transport and brought to an agreed-upon destination. This rule requires the seller to unload the goods at the destination, so any seller should ensure they have the facilities to unload the goods.
If the parties don't want the seller to bear that risk, the above DAP rule should be used.
Delivered Duty Paid (DDP):
DDP means that the goods are considered to be delivered once the goods have been cleared by customs and are ready for unloading. The seller is responsible for bringing the goods to the destination and bears all risk up to this point.
As a result, this places great responsibility on the seller, making them responsible for clearing customs and paying taxes.
Incoterms for Sea Freight
While there are Incoterms that apply more generally, there are also some Incoterms that relate specifically to sea freight:
Free on Board (FOB):
This rule is generally used when a seller has straightforward access to a ship or vessel.
FOB means that the goods are delivered to the buyer via a vessel that has been chosen by the buyer. After the goods are on the ship, the buyer bears all costs.
Cost and Freight (CFR):
CFR means that the goods are delivered to the buyer on board the ship. Once the seller has completed their duty to deliver the goods to a port, risk of loss or damage transfers to the buyer.
The CFR holds no obligation on the seller to buy purchase insurance. As a result, the buyer should purchase cover themselves.
Cost, Insurance and Freight (CIF):
CIF means that the goods are delivered to the buyer on board the ship. The risk of damage transfers to the buyer once the goods are on board the ship.
The seller is also responsible for arranging insurance for the goods’ transport to an agreed port.
Free Alongside Ship (FAS):
FAS means that goods have been delivered to the buyer when they are left next to the ship.
As a result, the risk of damages transfers to the buyer when these goods have been placed next to the ship.
With these key terms explained in one place, you should be able to clarify which Incoterms are suitable to your business. If you are struggling to decide which Incoterms are most suitable for your business you can reach out to our compliance specialist Andrew Jessop.
To discover more about the services WTA Group has on offer and how we can help simplify your logistics, check out our services pages here.