Incoterms®
Intro
Incoterms (International Commercial Terms) are a set of standardised rules published by the International Chamber of Commerce (ICC) that are updated every 10 years.
They explicitly determine and attribute the risks and costs associated with international transport between buyers and sellers in international trade.
You may choose to attribute 100% of the risks and costs to be associated with the buyer (EXW) or the seller (DDP) and, broadly speaking, at different percentages as required.
We generally recommend against selecting EXW or DDP because there can be hidden risks involved for the party which would then have no control over the transport and potentially no access to the customs documentation.
Why Are Incoterms® Important?
Risk Management: Incoterms are incredibly effective at helping to determine clarity and therefore avoiding potential misunderstandings in relation who should be responsible for what at different stages of the shipment process.
International Standard: Whilst Incoterms can have internationally recognised legal standing when built into contracts between buyers and sellers the reality is that a lot of disputes are resolved commercially and the cost and time associated with pursuing a dispute internationally is generally unfeasible.
How to Incorporate Incoterms into Contract?
Specific wording should be used which should be “Incoterm + named place as per Incoterms® 2020″
Example: DAP Unity Logistics, 62 Market Street, Eckington, Sheffield, S21 4JH, UK as per Incoterms® 2020
Tip: The named place should be as specific as possible. The more specific, the better.
Tip: Understanding Incoterms is a lot easier when you always try to imagine them from the seller’s perspective
Key Incoterms® Categories
Incoterms® are divided into two main categories based on the mode of transport and are summarised below.
For Any Mode of Transport (Road, Rail, Air, Sea, or Multimodal)
- EXW (Ex Works): Seller makes goods available at their premises. Buyer handles all costs and risks from there.
- FCA (Free Carrier): Seller delivers goods to a named location which could be anywhere including the seller’s premises. Risk transfers to the buyer once delivered.
- CPT (Carriage Paid To): Seller arranges and pays for transport to a named destination. Risk passes to the buyer once the goods are handed to the carrier.
- CIP (Carriage and Insurance Paid To): Similar to CPT, but seller also covers minimum insurance. Risk transfers to the buyer once delivered to the carrier.
- DAP (Delivered at Place): Seller is responsible for delivery to a specified destination. Risk transfers when the goods are ready for unloading.
- DPU (Delivered at Place Unloaded): Seller covers costs and risks up to the point where goods are unloaded at the destination.
- DDP (Delivered Duty Paid): Seller is responsible for all costs, including customs duties, to the buyer’s location. Risk transfers upon delivery.
For Sea and Inland Waterway Transport
- CIF (Cost, Insurance, and Freight): Similar to CFR, but seller also arranges and pays for insurance. Risk passes to the buyer once goods are on the vessel.
- FAS (Free Alongside Ship): Seller places goods alongside the vessel at the port. Risk passes to the buyer once the goods are next to the ship.
- FOB (Free On Board): Seller loads goods onto the vessel. Risk passes to the buyer once on board.
- CFR (Cost and Freight): Seller pays for transport to the destination port. Risk transfers to the buyer once goods are on the ship.
Summary Table
How to Choose the Right Incoterm®
Know Your Responsibilities: Understand who is responsible for each stage of the shipping process, from packing and transport to insurance and customs clearance.
Evaluate Costs and Risks: Choose an Incoterm® that matches your logistical capabilities, risk tolerance and desired level of control. For example, buyers who want minimal responsibility might prefer DDP, while those managing their own logistics might opt for EXW, however, having no control over a shipment whatsoever can expose you to hidden risks which is why we generally advise avoiding Incoterms that attribute 100% to either party.
Consider Shipping Mode: Use the correct Incoterm® category based on your shipping method (e.g., sea-only terms like FOB or terms suitable for all modes like DAP).
Consult with your supplier/customs and your freight forwarder: A good freight forwarder will be able to discuss the pros and cons with you and be able to offer guidance on what might work better for you.
Common Mistakes to Avoid
Not Agreeing on an Incoterm® for your shipment: Without an Incoterm agreed between buyer and seller it can be difficult for shipping companies to understand and decipher who should be responsible for what costs and what services they are required to provide.
It can also make it extremely difficult to determine which party should be responsible in the event that something were to happen to the goods during transit, for example, if they get lost or damaged.
Incorrect Use of Incoterms®: Using Incoterms® that don’t match the mode of transport can lead to confusion. For example, FOB should only be used for sea shipments, not air freight. Incoterms can be confusing and interpreted differently and so communication is key to ensuring expectations are properly managed.
Ignoring Insurance Responsibilities: Most Incoterms do not mandatorily require either party to have insurance in place for a shipment, and generally speaking insurance is not mandatorily required for shipments at all. CIF and CIP are exceptions to the rule, which require the seller to insure the shipment during transit.
Ignoring Customs Responsibilities: For example, presuming you don’t have responsibilities for EXW or DDP Shipments. In all cases, sellers still have the responsibility of providing accurate commercial documentation and as the ‘exporter of record’ and that data they supply is accurate.
Buyers still have the responsibilities associated with being the ‘importer of record’ and ensuring that the data submitted to customs on their behalf is accurate, that they obtain any additional documentation they may be required to obtain to be able to import goods, that they are paying the right amount of taxes and that they are storing copies of their customs clearance documentation etc.
Misunderstanding Risk Transfer: Clarify at which point the risk of loss or damage transfers from seller to buyer. This is crucial for ensuring the right insurance coverage.
Diclaimer: The information provided on this website is for general informational purposes only and should not be considered professional advice. While we strive to ensure the accuracy and relevance of the information, Unity Logistics does not guarantee its completeness, reliability, or suitability for any specific purpose. Users should consult with qualified professionals before making decisions based on the content found on this website. Unity Logistics disclaims any liability for actions taken based on the information presented here.