International Commercial Terms - commonly known as Incoterms - are important in the shipping world. Companies that deal with importing and exporting use Incoterms to signify who will assume various responsibilities in the supply chain.
In this Incoterms guide, we will introduce the terminology and explain its relevance in shipping. We will then go on to list the main Incoterms, covering exactly what they mean, who they apply to, and when they are used.
What are Incoterms?
Incoterms is the abbreviated word for International Commercial Terms. They are part of standard freight terminology, and typically included in sales contracts for the import and export of goods. Incoterms essentially make it easier for buyers, sellers and service providers in the supply chain to clarify terms and rules in international trade.
While Incoterms are a form of shorthand, that doesn’t make them any less authoritative. Because Incoterms are internationally recognised, they are adhered to and accepted globally. Incoterms are issued by the International Chamber of Commerce (ICC), a global business organisation which promotes international trade.
Why are Incoterms important?
Incoterms are important for defining both the responsibility and liability for goods across the supply chain. They set out who is responsible for goods at specific stages of a shipment, leaving no room for ambiguity. Incoterms also clarify who is responsible for covering costs at various transit. An exporter or importer can look at Incoterms applied to freight and work out their shipping costs.
For the reasons outlined above, Incoterms can help to avoid costly mistakes and ensure a seamless export transaction. In defining responsibilities, they reduce risk and prevent confusion.
As we will see in the glossary below - while some Incoterms apply to any type of transportation, others are intended for a specific type of transportation.
Incoterms glossary
Below we outline the 11 Incoterms published by the ICC. Grouping the terms with the transportation mode they apply to, we will explain what they stand for and what they apply to:
Incoterms for any transportation mode
Full term: Carriage and Insurance Paid To
This Incoterm denotes that the seller is responsible for the transport costs for shipping goods to a specific destination, and must also cover insurance coverage costs. Insurance must be arranged and paid for by the seller in case of damage to, or loss of, the goods during transit. After the goods arrive at the agreed destination, responsibility for them will transfer to the buyer.
Full term: Carriage Paid To
This means the same as the term above (CPI), aside from the seller is not responsible for insurance coverage. CPT denotes that the seller is responsible for covering transport costs to the agreed destination and that responsibility will transfer to the buyer upon delivery.
Full term: Delivered at Place
DAP means that the seller is entirely responsible for the shipment up until the goods are delivered to a named place, and is also responsible for clearing the goods for export. Once the goods have been accepted at the specified place, risk will transfer to the buyer, who will also assume responsibility for taxes, fees and customs duties associated with importation.
Full term: Delivered Duty Paid
DDP means that the seller is responsible for the whole shipment; delivering the goods to the buyer’s address, as well as covering import customs duties, taxes and fees. In other words, DDP denotes that the seller has maximum responsibility for the shipment.
Full term: Delivered at Place Unloaded
DPU denotes that arranging the shipment and delivering the goods to a specified place - as well as unloading items - is the seller’s responsibility. After the goods have been unloaded, the risk transfers to the buyer.
Full term: Ex Works
Ex Works or EXW refers to the seller having the responsibility of making the goods available to be picked up at their factory or warehouse. After the goods have been picked up, responsibility for costs and risks associated with transit will lie with the buyer. In practice, EXW usually suggests that the importer or exporter has appointed a freight forwarder to manage the entire shipment; from the seller’s to the buyer’s premises.
Full term: Free carrier
This term shows that the seller is responsible for delivering the items to the carrier at a specified place (usually a warehouse or terminal). Risk transfers to the buyer when the goods have been passed on to the carrier.
Incoterms for sea and inland waterway transport
Full term: Cost and Freight
CFR denotes that the seller is responsible for transporting goods to the port of origin, the loading of items onto the vessel, and the transportation to the destination port. However, they are not liable for the journey between the port of origin and the destination port - the risk is transferred to the buyer when goods are loaded onto the vessel at the port of origin.
Full term: Cost, Insurance, and Freight
CIF is the same as CFR, apart from that the seller also arranges insurance coverage and covers insurance costs for the items in transit to the destination port.
Full term: Free Alongside Ship
FAS places on the seller the responsibilities of picking up goods from the factory and clearing the items for export, before delivering goods to the departure location (typically a loading dock at the port). Once the goods are placed next to the ship, the risk transfers to the buyer, who is responsible for transit and all subsequent steps in delivery.
Full term: Free On Board
FOB shows that the seller is responsible for the packaging and pick up of the goods, as well as delivery onto a vessel at the port of origin. Only once the goods have been placed onto the vessel does liability transfer to the buyer, who is then responsible for all other steps on the journey.
Incoterms groups
Classed in groups according to their starting letter - from C to F - Incoterms provide an idea of whether the seller or the buyer is largely responsible costs and risks:
Group E (EXW)
The buyer is responsible for the majority of costs and risks attached to the shipment.
Group F (FCA, FAS, FOB)
The buyer has responsibility for all the costs and risks associated with the main transport.
Group C (CIF, CPT, CPI)
The seller has responsibility for all the costs and risks associated with the main transport.
Group D
The responsibility for all costs and risks is with the seller until the goods arrive at their final destination.
Freighting support
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