Incoterms - the essential terms of trade
Incoterms (International commercial terms) are the world’s essential terms of trade for the sale of goods. They are used to clearly define the obligation of cost, risk and responsibility of the transportation of goods between a buyer and seller.
Incoterms are helpful because they mean you don’t have to spend all your time negotiating and agreeing every detail of risk and responsibility during a cargo’s journey.
Different Incoterms meet different needs for buyers and sellers – whether you’re taking control of your cargo straight from the seller’s warehouse, or at the final port of destination – there’s an Incoterm to suit your situation.
The definitions of Incoterms
So what are the different Incoterms? Well, there are some specific to sea and inland waterway transport – and others that apply to any mode of transport. Here’s an overview courtesy of the International Chamber of Commerce (ICC).
Rules for sea and inland waterway transport:
FAS – Free Alongside Ship – the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) chosen by the buyer. The risk of loss of or damage to the goods passes to the buyer when the goods are alongside the ship.
FOB – Free On Board – the seller delivers the goods on board the vessel chosen by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes to the buyer when the goods are on board the vessel.
CFR – Cost and Freight – follows the same procedure as “Free On Board” but the seller must contract for and pay the costs of freight necessary to bring the goods to the named port of destination.
CIF – Cost, Insurance and Freight – follows the same procedure as “Cost and Freight” but the seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.
Rules for any mode of transport:
EXW – Ex Works – seller delivers when it places goods at disposal of the buyer. They do not need to load goods or clear them for export.
FCA – Free Carrier – seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises or another specifically named place.
CPT – Carriage Paid To – seller delivers the goods to the carrier or another person nominated by the seller. The seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.
CIP – Carriage And Insurance Paid To – the same as “Carriage Paid To” but the seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.
DPU – Delivered At Place Unloaded – the seller bears all risk involved in bringing the goods to the place of destination and unloading them there. The risk is transferred to the buyer when this has been done and customs clearance has been completed.
DAP – Delivered At Place – the seller delivers when the goods are placed at the disposal of the buyer before being unloaded at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.
DDP – Delivered Duty Paid – the seller delivers when the goods are placed at the disposal of the buyer and cleared for import, before being unloaded at the destination. The seller has an obligation to clear the goods not only for export but also for import, to pay any duties and to carry out all customs formalities.
The risk factor
As you can see from the individual definitions, picking the right Incoterm depends on your product and the level of risk which you, or the seller, is willing to take on during its journey. If a seller decides the price they’ve agreed with you is profitable, they’ll be willing to take on more risk.
Equally, if you’re a buyer from a large company, for example, you may have your own teams who handle processes like customs – in which case you’ll be willing to take on more risk and responsibility. This will keep costs lower.
All of this means that the contracts you have with suppliers are very important – if you pay more, then you can take on less risk.
Twill is here to help
So how does Twill fit into the world of Incoterms? Well, as your freight forwarder we can guide, but not decide on your behalf! That means we can’t decide which Incoterm you should use, but we can offer advice on which might be best suitable for your specific needs.
Incoterms also help us in our job, because if an issue does occur – for example, if your cargo didn’t get on the vessel it was scheduled to board – then Incoterms let us know who takes responsibility for any risks or extra costs involved.
Our customer care team is award-winning and we pride ourselves on supporting customers and keeping you informed throughout all the shipping processes and stages. If you have any questions, Get in contact with our team today and see how we can help you!
Want to know more?
Check out our detailed Incoterms guide to keep on hand with you as a reference when you enter the world of ocean shipping. It features our special Incoterms infographic – as well as more information on different Incoterms, what to consider when selecting your Incoterms and our top tips.