If you’re a business involved in international trade, you’ve probably heard of Incoterms — the international standard for determining responsibility among buyers and sellers.
They are an essential part of international supply chain management. If you’re looking to expand your business by shipping goods across borders, understanding the meaning and implications of the different Incoterms rules is crucial.
The latest version, Incoterms 2020, has been in place since the beginning of this decade and is still in use today.
In this blog post, we’ll break down everything you need to know, including a complete list, all the rules, and examples of Incoterms.
Incoterms (International Commercial Terms) are a set of rules published by the International Chamber of Commerce (ICC) that define the responsibilities of the parties involved in global trade.
Incoterms define how shipments should be delivered, who pays for shipping costs, what happens if something goes wrong during shipment, and who bears responsibility for any damage caused during transport. However, while Incoterms are internationally accepted definitions, they are not generic terms for international trade practices. Instead, it is a trademark used to identify the rules devised by the International Chamber of Commerce (ICC).
While Incoterms provide guidance on how to organize international shipping, the Incoterms rules do not cover:
It's also important to note that Incoterms do not replace the need for contracts between buyers and sellers. It's therefore of utmost importance that businesses always enter into a contract prior to any transaction to ensure that terms are clearly defined and understood before goods are exchanged.
Note: Insurance is color-coded in this article. However, it is negotiable with your trading partners in all Incoterms except CIF and CIP.
We'll cover the Incoterms rules for all 11 of the official Incoterms 2020, including the modes of transport, when the risk passes from the seller to the buyer, the responsibilities of both parties, and a price calculation for each of the Incoterms.
The incoterm Ex Works (EXW) means that the seller delivers the goods at the buyer's disposal at the place of destination, such as a factory, warehouse, or workplace.
Ex-works delivery term determines the maximum obligation on the buyer (the importer) and the minimum responsiblity on the seller (the exporter). The term Ex Works is often used by exporters when making an initial bid, as it does not include any expense items other than the price of the goods and the cost of packaging. All other incoterms prices are obtained by adding other expenses on the ex-works price.
Shipping Method or Modes of Transport: All modes of transport (road, rail, air, and sea)
Transfer of Risk: At Buyer's Disposal
Seller Obligations: The seller's sole responsibility is to prepare the goods to be loaded into the vehicle or container. It is the risk-free shipping type for the seller since they're not responsible for loading the goods on any collecting vehicle or clearing them for export, where such clearance is applicable.
Buyer Obligations: The buyer is responsible for all costs and risks, including transportation, insurance, and customs clearance, until the goods loaded from the seller's warehouse or factory reach their destination.
EXW Price Calculation: Product cost + packaging + profit share
In the Free Carrier (FCA) delivery method, the seller delivers the cargo at a point requested by the buyer. An FCA point can be, for example, a train station or a port of shipment.
At the FCA point, the buyer (importer) is responsible for loading and arranging transportation to its destination. The seller must ensure that the goods are ready for collection at a designated place of destination on time and in good condition.
The main difference between FCA and FOB in container shipments is that the costs incurred at the loading port belong to the buyer in the form of FCA delivery and the seller in FOB delivery. According to the Free Carrier delivery method, the seller's responsibility ends when the buyer delivers the cargo or the loaded container to the point requested in the sale contract.
Shipping Method or Modes of Transport: All modes of transport (road, rail, air, and sea)
Transfer of Risk: On Buyer's transport
Seller Obligations: The seller's obligations are to deliver the products or the container to a warehouse, station, or port requested by the buyer and clear the customs.
Buyer Obligations: The buyer receives the cargo or container at a previously requested point. The buyer is responsible for all processes except domestic shipping and customs clearance in the export country. All costs and risks of loss or damage, including overseas shipping, insurance, and customs clearance, belong to the buyer.
FCA Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + profit share
In the form of Free Alongside Ship (FAS) delivery, the seller is obliged to deliver the goods at the port of shipment where the ship is located to the vessel's side. From this point onwards, the seller's obligation ends and the buyer must take care of all costs and risks associated with the transportation of the goods.
Shipping Method or Mode of Transport: Sea and inland waterway transport
Transfer of Risk: Alongside Ship
Seller Obligations: The seller bears limited responsibility. They must deliver the container with the product at the port requested by the buyer, next to the ship, and carry out the customs clearance. Unlike FOB, the seller is not responsible for loading the container onto the ship.
Buyer Obligations: The buyer is responsible for loading the cargo or container delivered at the port by the seller, overseas shipping, insurance, and all costs incurred after the ship reaches the buyer's country.
FAS Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + profit share
In the form of Free on Board (FOB) delivery, the seller, the exporter, must deliver the cargo to the port requested by the buyer, i.e., the importer, according to the ship loading date. When determining the FOB Incoterms, the selling company must anticipate the inland shipping cost and the inland shipping time if a port is requested in a different location where the seller company is based.
FOB is a popular choice for many businesses, so we've made a comparison between FOB and CIF, FOB and DAP, and FOB and FAS Incoterms to help you make an informed decision.
Shipping Method or Mode of Transport: Sea and inland waterway transport
Transfer of Risk: On-Board Vessel
Seller Obligations: The seller prepares the goods following the contractual conditions. The exporter loads the ship the buyer has booked at the designated port on the specified date. The buyer's responsibility ends with the completion of customs clearance.
Buyer Obligations: The buyer is responsible for overseas shipping, insurance, and processes after the ship arrives in its home country.
FOB Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + profit share
Cost and Freight (CFR) is when the supplier assumes all the risk for the shipment until the consignee collects the cargo at its final destination. The supplier must arrange and pay for the freight costs up to the port of delivery.
Shipping Method or Modes of Transport: Sea and inland waterway transport
Transfer of Risk: On-Board Vessel
Seller Obligations: The exporter organizes the transportation process without insurance to be delivered at a port requested by the importer. The responsibility of the exporter ends when the ship arrives at the port.
Buyer Obligations: The buyer's responsibility begins at the delivery port. After unloading the cargo from the ship, the port costs, inland transport, and import customs costs are the buyer's responsibility.
CFR Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges + profit share
The exporting company is responsible for the overseas shipment in the form of Carriage Paid To (CPT) delivery. The seller delivers the goods to the buyer at the place of destination in the importer's country.
Shipping Method or Modes of Transport: All modes of transport (road, rail, air, and sea)
Transfer of Risk: At Carrier
Seller Obligations: The exporter is responsible for organizing the shimpent of the goods to the named address but is not responsible for insurance and customs costs in the importer's country.
Buyer Obligations: The importer must ensure the cargo is protected against possible damage on the way. After the delivery vehicle arrives at the delivery point, the importer carries out the customs procedures and pulls the goods.
CPT Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges +profit share
In the form of Cost Insurance Freight (CIF) delivery, the seller organizes the international shipment process by undertaking the freight and insurance costs to be delivered to the buyer at a port in the importer's country. It is commonly used for containerized and bulk cargo.
Shipping Method or Mode of Transport: Sea and inland waterway transport
Transfer of Risk: On-Board Vessel
Seller Obligations: The seller organizes the shipment, pays for the freight cost, and also the necessary mode of transport to bring the goods to the named port of destination.
Buyer Obligations: The importer company is responsible for the import process and the costs associated with shipment through customs and port of delivery.
CIF Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges + insurance + profit share
According to the Carriage and Insurance Paid to (CIP) mode of transport, the exporter is responsible for all processes, except import customs clearance, until the goods are delivered to the importer's country. CIP mode of transportation is widely used in road vehicle transportation, and it is also a suitable incoterm for multimodal shipments.
Shipping Method or Modes of Transport: All modes of transport (road, rail, air, and sea)
Transfer of Risk: At Carrier
Seller Obligations: The seller bears responsibility for the goods till the delivery is addressed. The exporter company finalizes all steps, excluding import customs charges.
Buyer Obligations: The buyer, i.e., the importer company, is responsible for the costs of import formalities: customs, taxes, import and transit permits
CIP Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges +insurance + profit share
The Delivered at Place Unloaded (DPU) mode of transport entered into force with Incoterms 2020 rules instead of the DAT transport form in Incoterms 2010. As a result, the buyer bears all risks involved in bringing the goods to and unloading them at the place of destination.
Shipping Method or Modes of Transport: All modes of transport (road, rail, air, and sea)
Transfer of Risk: At Named Place, Unloaded
Seller Obligations: The seller delivers the goods and takes on all risks and costs until the final port of delivery. The seller is responsible for all steps, excluding import customs fees.
Buyer Obligations: The importer company is only responsible for import duties, taxes, and customs clearance.
DPU Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges +insurance (if its seller side) + destination terminal charges + delivery to destination + profit share
Disclaimer: The information provided here is not intended as legal advice. It is merely meant to provide general guidance on Incoterms.
Delivered At Place (DAP) is the delivery term describing a deal where the seller is responsible for all costs and responsibilities, excluding insurance and import customs. If the DAP has been accepted, the parties must specify who will obtain insurance and add it to the contract.
Shipping Method or Modes of Transport: All modes of transport (road, rail, air, and sea)
Transfer of Risk: At Named Place of Destination
Seller Obligations: The seller delivers goods up to the destination mentioned in the contract. The DAP delivery location may differ from the buyer's address; the seller should clarify the delivery point and who is responsible for insurance by negotiating with the buyer.
Buyer Obligations: The importer/buyer is responsible for the customs clearance process and the payment of the duties & taxes.
DAP Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges +insurance (if its seller side) + destination terminal charges + delivery to destination + profit share
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DDP (Delivered Duty Paid) is the only Incoterms that require the seller covers all duties and taxes at the time of delivery. Therefore, the seller must bear all the costs and risks associated with delivering the goods. At first glance, it may seem similar to CIF, but they have their differences.
Shipping Method or Modes of Transport: All modes of transport (road, rail, air, and sea)
Transfer of Risk: At Named Place of Destination
Seller Obligations: DDP means that the seller bears all of the risk and costs to deliver cargo to a pre-decided location. The seller's obligation is also to unload the goods from the arriving means of transport.
Buyer Obligations: The DDP product price includes shipping, insurance, customs clearance costs, customs duties, and local taxes in the importer's country.
DDP Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges +insurance + destination terminal charges + delivery to destination + import duty, taxes, security clearance + profit share
Disclaimer: The information provided here is not intended as legal advice. It is merely meant to provide general guidance on Incoterms.
To help you better understand the Incoterms rules, let’s look at some examples of how they are used in international trade.
Company "A" in Canada buys garden equipment from company "B" in China. The sales contract includes the phrase "EXW Guangzhou." Accordingly, the Chinese company "B" is responsible for delivering the loads to its factory. All costs, including inland shipping of goods in China, customs formalities, shipping costs, insurance costs, and customs costs in Canada, are borne by the buyer company "A."
The French company"A" buys furniture from Canadian company "B." The sales contract includes the phrase "FCA Montreal Port." Accordingly, the Canadian company "B" is responsible for delivering the cargo to a warehouse at the specified port and customs clearance. If it is a sea shipment, all costs, including port costs, international shipping costs, insurance, and customs fees in France, are borne by the buyer company "A."
Italian company"A" buys machine parts from the German company "B."According to their contracts, German company B should deliver the goods alongside the ship in the port of Hamburg. From this point on, the Italian company "A" is responsible for shipping goods to Italy by ship, insurance costs, port costs in Italy, inland transport, and customs costs.
The UK food corporation agreed with the Canadian sugar beet producer with "FOB Vancouver CityPort." The UK corporation organizes the shipment and lets the Canadian producer know the shipment port and date. According to an agreement, the Canadian exporter company schedules the inland delivery and loads the bulk goods to a ship.
A Greek fruit producer, "A," agrees with Spanish company "B" to sell 20 tons of fruit. Incoterms are referred to as CFR Barcelona in the sales contract. Following the contract, company "A" ships the container loaded with 20 tons of fruit for delivery at the port of Barcelona. The difference between CFR from CIF is that the buyer is responsible for insurance.
Italian Garment producer company "A" sells a full truck of goods to French company "B." The shipment is made by truck to the warehouses of company "B" in France under the Carriage Paid To Incoterms. Shipping costs are borne by company A, but insurance is by company "B."
US company "A" contracts for game console imports from China so that the goods are delivered at the port of Los Angeles. Chinese company B organizes the transport. Exporter Company A is responsible for the process after the container lands in the port of Los Angeles.
British company"A" contracts with Austrian company "B" to buy one container of toys with "CIP London" incoterms. Austrian exporter company "A" plans multimodal shipments in trucks to Rotterdam, RoRo ship from Rotterdam to London, and trucks for delivery in London.
Brazilian company "A" agrees with Dutch company "B" to sell coffee. After company "A" completes the export operations in its own country, it delivers the container of coffee to the Netherlands by ship. After Company B completes the customs clearance, Company "A" pays the port charges and organizes the inland transport to deliver the goods to the address previously specified by Company "B."
Indian company "A" will import coal from Australian company "B." In the contract between the parties, it is also stated that the seller is obliged to insure. Exporter company "B" organizes all processes except import customs duties and tax payments. After the importer company "A" completes the customs clearance, the goods are delivered to a warehouse address specified by company "A."
US company A buys agricultural machinery from German company "B" with "DDP New York" incoterms. As per DDP incoterms, the German company "B" bears all costs, including shipping and insurance, customs clearance costs, and taxes in both countries. Company "B" is not responsible for any process and expense during this process.
The Incoterms 2020 were released in January 2020 to reflect the latest developments in international trade practices. The new version has incorporated many improvements and updates to the existing Incoterms 2010.
Some of the changes to the Incoterms rules include:
Incoterms represent an essential part of conducting business in today's global trade; they clarify who is responsible for what while conducting international trade transactions while helping ensure fair dealings among buyers and sellers alike.
The latest version—Incoterms 2020—has been updated with several key changes that make it even more effective than its predecessor while providing additional benefits like reduced paperwork via electronic document exchange software like Cargoflip.
If you're looking to stay ahead of the curve regarding international trade regulations, getting up-to-date on Incoterms 2020 rules should be a priority.
The main benefits of using Incoterms are that they provide a common language across borders, make it easy to compare prices from different suppliers, and enable you to calculate your freight charges. The disadvantages of using Incoterms are that they may not cover every possible scenario, and sellers and buyers may have different preferences for their business.
Most B2B sales contracts will be either EXW, CPT, or CIF, while most B2C sales will be CPT or CIF. However, some B2C sales may be made using DDP instead of CPT or CIF.
Seven Incoterms may be used for air freight: EXW, FCA, CPT, CIP, DAT, DPU, and DDP.
Yes. Incoterms can be used for domestic shipping as long as both parties agree to the terms and conditions of the shipment.
The Incoterms that are most successful with letters of credit are CIF, CIP, CFR, or CPT. With all of these rules, delivery occurs before the primary carriage.
Yes. Parties may add qualifications or variations to the Incoterms rules as long as they are not contrary to the terms of the Incoterms. However, any such qualification or variation should be clearly indicated in writing between both parties. Without an explicit agreement, it will be assumed that the applicable Incoterm is being used without any qualifications.
Exporters and importers who have included "Incoterms 2010 FOB" in the sales contracts have accepted the FOB delivery terms in "Incoterms 2010". They should be stated correctly and clearly on the relevant shipping documents for them to be effective as a contract of sale.
