Incoterms are standards used in international sales. They are voluntary recommendations that can be applied by importers and exporters to define their obligations and responsibilities in an operation.
In a sales contract, it is necessary to specify which edition of the Incoterms is being used. The most common is the version published by the International Chamber of Commerce (ICC) in 2010.
The 11 Incoterms that exist, each consisting of three letters, determine four important aspects in an export or import operation. First, the precise place where the goods are delivered. Second, who processes each of the documents generated in the chain from origin to destination. Third, it determines at what point in the transaction the risk is transferred from the seller to the buyer. And fourth, it establishes which costs in the logistics chain are paid by the seller and which by the buyer.
“In a sales transaction, the Incoterm defines the place of delivery of the goods and how the costs, processing of documents and risks are shared between the seller and the buyer”
Incoterms are not laws, but they have legal recognition at the international level. In case of any controversy or litigation, the legal authorities can demand the fulfillment of the obligations and responsibilities assumed by the buyer and seller.
How to choose the most suitable Incoterms
It is important to know the Incoterms well in order to choose the most appropriate one depending on whether the company is buying or selling. As the interests of the seller are not the same as those of the buyer, before deciding which Incotermwe are going to use in one we must take into account certain aspects.
For example, to know if we are interested in controlling a part of the costs or to contract the main transport to be more competitive, to reduce risks or to have more security in the logistic chain.
Another factor to take into account is the degree of mutual knowledge between the parties and the trust we have with the seller if we are importers and with the buyer if we are exporters. It is also essential to know the characteristics of the country of origin/destination so as not to run unnecessary risks in aspects such as internal transport or customs procedures.
“Logisber’s experience in international transport allows us to offer advice to exporters and importers to choose the most convenient Incoterm”
As experts in international transport operations, at Logisber we advise exporters and importers to choose the most suitable Incoterm for their interests.
Most recommended Incoterms for export
For an international operation, the most advantageous Incoterm for the exporter is EXW (Ex Works), because he only has to deal with putting the goods in condition to be transported in his own facilities. EXW is ideal for companies with little export experience and little knowledge of the logistics chain. It is also suitable if there is little information about the buyer or if the destination is an unknown country or one that may hinder the entry of certain goods.
The Incoterm multimodal FCA (Free Carrier) and the maritime FAS (Free Alongside Ship) and FOB (Free On Board) can also be a good option for the seller because it only deals with loading the goods, transporting them to the agreed point (port, airport, terminal) and carrying out customs formalities.
It may be the case that the buyer asks the seller to take care of the formalities and costs until the arrival of the goods in the country of destination. In this case the most suitable Incoterms are CPT (Carriage Paid To) and CIP (Carriage and Insurance Paid To). The exporter controls the entire logistics chain of his goods until they arrive at the agreed point of unloading without assuming too many risks.
In case the main transport is by sea, the exporter can also choose the Incoterms CFR (Cost And Freight) and CIF (Cost Insurance And Freight). In both cases, the exporter takes care of the formalities and costs until the arrival of the goods at the port of destination. If he has the support of a good freight forwarder, he can obtain some cost savings because, for example, he can negotiate the freight with the shipping company.
“The choice of the most suitable Incoterm for an importer or an exporter will depend on whether they want to control costs, contract the main transport, reduce risks or have greater security in the logistics chain”
The Incoterms DAP (Delivered at Place) and DDP (Delivered Duty Paid) are less advisable for the exporter because they force him to take care of the whole logistic chain and to assume all the responsibility. In DAP (Delivered At Place), you process and pay the costs of unloading the goods at destination and in DDP you also take care of customs formalities and inland transport in the country of arrival. Both cases may present complications and complexities that the exporter may not be able to control and that may generate extra costs.
In Logisber we put our logistic experience at the service of international trade to solve the complexity that Incoterms can present for an exporter or importer.
Most recommended Incoterms for importing
For an international purchase operation, the most advantageous Incoterms for the importer will be DAT (Delivered At Terminal), DAP (Delivered At Place) and DDP (Delivered Duty Paid). The buyer is only responsible for customs formalities in the country of arrival, inland transport to his premises and unloading. This is a good option if the buyer has little import experience or does not know the country in which he is buying. The seller will take care of customs and logistics formalities at origin, main transport, insurance and unloading at the terminal in the country of arrival.
If the importer does not have sufficient knowledge of the seller and wants to ensure that the goods he has purchased arrive at destination with guarantees and conditions, you can opt for the Incoterms maritime FAS (Free Alongside Ship) and FOB (Free On Board) or multimodal FCA (Free Carrier). The seller will leave the goods prepared and take care of the formalities at origin. The importer will control the costs and the logistics chain from the point of loading until the arrival of the goods at its facilities. In this case, it is essential to have the support of a freight forwarder to have a good control of the main transport and the costs of the chain.
“Logisber puts its logistic experience at the service of international trade to solve the complexities that Incoterms can present in an import or export”
If in an import by sea the buyer wants to control the costs of the main transport, the maritime Incoterms CFR (Cost And Freight) and CIF (Cost Insurance And Freight) are not recommended. It is the seller who arranges the transport at origin and issues the bill of lading. Depending on the country or the agent that the seller has contracted with, costs and other obstacles may arise that make it difficult to deliver the goods.
The Incoterms CPT (Carriage Paid To) and CIP (Carriage and Insurance Paid To) also does not allow the importer to control the operations and costs until the arrival of the goods at the point of discharge in the country of destination.
The Incoterm EXW (Ex Works) is not recommended for the importer, unless he knows very well both the seller and the country where he is buying.
In Catalonia, there are business organisations, such as PIMEC or AMEC, that can also offer advice to those companies that are starting to make international sales operations.
FAQs
“The choice of the most suitable Incoterm for an importer or an exporter will depend on whether they want to control costs, contract the main transport, reduce risks or have greater security in the logistics chain”
How do I choose the right Incoterms? ›
“The choice of the most suitable Incoterm for an importer or an exporter will depend on whether they want to control costs, contract the main transport, reduce risks or have greater security in the logistics chain”
What is Incoterms used in export and import? ›
Incoterms are a set of internationally recognized rules which define the responsibilities of sellers and buyers in the export transaction.
How do you specify Incoterms in a contract? ›
In order to use Incoterms®, this must be clearly stated in the contract of sale by indicating: the Incoterms® rule chosen, the port, designated place or location, followed by "Incoterms® 2020". The choice of the Incoterm® is an integral part of a commercial transaction.
What are the four Incoterms used in export trade? ›
Incoterms for any mode of transport: EXW, FCA, CPT, CIP, DPU, DAP and DDP; Incoterms only for sea and inland waterway transport: FAS, FOB, CFR and CIF.
How do I choose a carrier for my shipment? ›
Make sure you pick the carrier that makes sense for your shipping process and standards, business size, and budget.
- Ask the Necessary Questions. ...
- Keep Your Products in Mind. ...
- Account for Location. ...
- Research Reputation. ...
- Take Customers' Desires into Account. ...
- Make it Easy on Yourself. ...
- Compare Cost.
Responsibility for import is with the seller/exporter
DDP is the only rule that requires the seller to take responsibility for import clearance and payment of taxes and/or import duty. In other words, the importer of record, the consignee, is not responsible for neither the export nor the import clearance.
What are the Incoterms used in import? ›
Incoterm (International Commercial Terms) is a trading agreement rule adopted by parties of different countries, for make agreements as well as shipping contracts easier. They help to clarify who holds the responsibility, cost, and risk.
What is the difference between FOB and EXW? ›
EXW stands for Ex Works, an incoterm whereby the buyer of a shipped product pays for the goods when they are delivered to a specified location. FOB, or Free on Board, instead shifts the responsibility of the goods to the buyer as soon as they are loaded onboard the ship.
What are the most commonly used Incoterm agreements? ›
The most commonly used Incoterms are DDP, EXW, FAS and CIF. You can read about the uses of these Incoterms and learn how to add them to your contract by reading our complete guides.
First published by ICC in 1936, Incoterms® rules are a set of eleven three-letter trade terms, reflecting business-to-business practice in contracts for the sale and purchase of goods. Incoterms® rules are a set of standards used in international and domestic contracts for the delivery of goods.
What is the difference between FOB and FCA? ›
With FOB, a designated port or place of shipment acts as the delivery point. On the other hand, FCA requires goods to be delivered at a chosen place or carrier accepted by both the buyer and the seller.
Does bill of lading have Incoterms? ›
The Bill of Lading is a Document of Title
The buyer and seller select freight terms (Incoterms) when putting the deal together. The Incoterm listed on the commercial invoice sets the point during transit when the goods change hands.
What does the Incoterm DAP mean? ›
What is Delivered at Place (DAP)? An Incoterms® rule, applicable to any form or forms of transport (air, ocean, ground, or multimodal), under which the seller is responsible for delivery of the goods, ready for unloading, at the named place of destination (often the buyer's place of business).
Which Incoterm is best for buyer and seller? ›
Cost and Freight (CFR) and Cost, Insurance and Freight (CIF)
These two Incoterms split the responsibilities between the buyer and seller right down the middle. Typically, buyers and sellers who have established a strong level of trust from previous international transactions will use these two Incoterms.
What is the most popular F term for Incoterms? ›
One of the most commonly used and misused terms, FOB means that the shipper/seller uses his freight forwarder to move the merchandise to the port or designated point of origin.
What does EXW mean in shipping? ›
EXW (Ex Works) means that the seller delivers when it places the goods at the disposal of the buyer at the seller's premises or at another named place (i.e., works, factory, warehouse, etc.). The seller does not need to load goods or clear them for export.
What is carrier vs shipper in logistics? ›
What is the difference between the shipper and the carrier? The shipper is the company that owns the goods being shipped. The carrier is the company that transports the goods on behalf of the shipper. Shipping carriers transport packages on behalf of senders, known as shippers, to recipients, known as consignees.
Who issues bill of lading? ›
A bill of lading (BL or BoL) is a legal document issued by a carrier (transportation company) to a shipper that details the type, quantity, and destination of the goods being carried. A bill of lading also serves as a shipment receipt when the carrier delivers the goods at a predetermined destination.
What are the three types of carriers that shippers can choose from? ›
What are the types of freight carriers in logistics?
- Common Carriers and Contract Carriers. Common carriers are the carriers who service the freight shipping needs of the public. ...
- Local, Regional and National Carriers. ...
- Private Carriers and For-Hire Carriers.
Under DDP, the Buyer is only responsible for unloading. The Seller is responsible for everything else including packing, labeling, freight, Customs clearance, duties, and taxes. Conversely, under DAP, the buyer is responsible for not only the unloading, but the Customs clearance, duties, and taxes as well.
What is the difference between DDP and FOB? ›
FOB term is when the goods pass the ship's rail, at the port of export (origin), and DDP term is when the goods are placed at the disposal of the buyer. Gap responsibilities between FOB and DDP term consists of: carriage charges, insurance, destination terminal charges, delivery to destination, and import duty & taxes.
What is the difference between CIF and DDP? ›
CIF (Cost, Insurance, and Freight) terms mean that the seller merely assumes responsibility for said goods until they reach the port of destination. DDP (Delivered Duty Paid) refers to the seller paying the duties and taxes of the shipment. These various acronyms are known as INCO terms.
Who decides Incoterms for a shipment? ›
The International Chamber of Commerce (ICC) developed Incoterms in 1936 and updates them periodically to conform to changing trade practices.1 The ICC's mission is to promote open markets and ensure global economic prosperity through trade.
What is CIF in export? ›
CIF stands for Cost, Insurance, and Freight. These are the fees a seller pays to cover the costs, insurance, and freight of a dealer's order when it's enroute. This sums up the CIF definition. Only commodities carried by water, sea, or ocean are subject to CIF.
What is the meaning of FCA Incoterm? ›
Free Carrier, or FCA Incoterms, is a commonly used trade term that signifies that the seller is required to drop off the shipment to a named destination or seller's premise, as outlined by the buyer. From here, it is transferred to the shipping carrier by the buyer.
Does FOB mean buyer pays freight? ›
Who Pays Freight for FOB Origin? If the terms include the phrase "FOB origin, freight collect," the buyer is responsible for freight charges. If the terms include "FOB origin, freight prepaid," the buyer assumes the responsibility for goods at the point of origin, but the seller pays the cost of shipping.
What are the two types of shipping FOB? ›
There are two types of FOB, which are FOB destination and FOB shipping point. The type of FOB to be used is typically designated in a customer's purchase order, and is also stated on the supplier's invoice to the customer.
Who pays freight on ex works? ›
Key Takeaways. Ex Works (EXW) is a shipping arrangement in which a seller makes a product available at a specific location, but the buyer has to pay the transport costs.
What is the difference between Incoterms and shipping terms? ›
Incoterms are international contracts of sale, often called trade terms or shipping terms. Incoterms are shot for International Commercial Terms EXW and FOB and are far from the two most common incoterms. Incoterms have two parties, 'the buyer and 'the seller.
For international shipments, it is common to hear the freight terms referred to as Incoterms (International Commercial Terms). The Incoterm® rules are the internationally recognized freight terms for international ships and are commonly, but not always, leveraged in domestic shipments.
Why are Incoterms used and why are they so important? ›
Incoterms ® are important because they provide a standardized set of rules that all buyers and sellers must follow when engaging in international trade. This sets clear guidelines of cost, insurance and ownership for each party.
Which Incoterm has the least responsibility for the seller? ›
Ex Works (EXW)
This rule places minimum responsibility on the seller, who merely has to make the goods available, suitably packaged, at the specified place, usually the seller's factory or depot.
Which Incoterm has the greatest responsibility on the seller? ›
Delivered Duty Paid (DDP)
Under this incoterm, it is the seller who is responsible for delivering the goods to the destination/buyer's door. This means that the seller has to deal with all the tasks involved in transferring the goods throughout the shipping process.
Which Incoterm is best for containers? ›
Even though an exporter takes care of formalities, it is the buyer who chooses the route, time of shipment, and price negotiation with the freight forwarder. FOB is not recommended for container transport. In that case, FCA or CIP should be applied.
Can a shipment have multiple Incoterms rules? ›
A question that has come up in terms of Incoterms® is whether “a shipment can have multiple Incoterms rules”.. The simple answer is NO.. A shipment cannot have multiple Incoterms ® rules..
What is improper use of Incoterms? ›
The use of an incorrect version of the Incoterms® rules
The application and communication of the proper version of Incoterms in the sales contract is important to avoid extra costs and delays in the transaction. If the year and version of the proper incoterms version is left out, it could be open to exploitation.
What two types of transfer take place when dealing with Incoterms? ›
What two types of transfer occur when dealing with incoterms? The two types of transfer that take place are transfer of costs and transfer of risk.
Which is better CFR or FOB? ›
On CFR (Cost and Freight) terms the supplier gives the goods to a shipping agent to get them to the destination country before the buyer receives an invoice for the destination charges. FOB terms allow the buyer to better control their costs than on CFR terms.
Who pays freight with FCA? ›
Under the Free Carrier, or FCA Incoterm, the buyer is responsible for all freight costs. Find more information about Incoterms here.
Free on Board means the seller is responsible for the product only until it is loaded on board a shipping a vessel, at which point the buyer is responsible. With CFR, the seller must arrange and pay all costs to ship the product to a destination port, at which point the buyer becomes responsible.
Is bill of lading for import or export? ›
First, a Bill of Lading is a the most important shipping document involved in the import export process. However, some shippers may not understand the bill of lading meaning or the types of bill of lading that are issued along the supply chain.
Which Incoterms used for export? ›
The seven Incoterms® 2020 rules for any mode(s) of transport are:
- EXW - Ex Works (insert place of delivery)
- FCA - Free Carrier (Insert named place of delivery)
- CPT - Carriage Paid to (insert place of destination)
- CIP - Carriage and Insurance Paid To (insert place of destination)
On the basis of costs
The seller pays for DAP freight as they are liable for carriage up to the destination port and the inland transit from the warehouse to the port.
What does CIF mean in shipping? ›
CIF (Cost, Insurance, & Freight) is an international shipping agreement and one of many important Incoterms®. It represents the charges a seller pays to cover the costs, insurance, and freight of a buyer's order while the cargo is in transit.
What does DDU mean in shipping? ›
Key Takeaways. Delivered Duty Unpaid (DDU) is an international trade term meaning the seller is responsible for ensuring goods arrive safely to a destination; the buyer is responsible for import duties. By contrast, Delivered Duty Paid (DDP) indicates that the seller must cover duties, import clearance, and any taxes.
Which Incoterm gives the buyer the least amount of responsibility? ›
There are 11 trade terms available under the Incoterms 2020 rules that range from Ex Works (EXW), which conveys the least amount of responsibility and risk on the seller, to Delivered Duty Paid (DDP), which places the most responsibility and risk on the seller.
What are the three main Incoterms? ›
Some common examples of Incoterms rules for any mode of transportation include Delivered Duty Paid (DDP), Delivered at Place (DAP), and Ex Works (EXW).
Which Incoterm is best for export? ›
Common Incoterms
- DDP – Delivered, Duty Paid: All charges are paid by the seller, including customs clearance charges at origin and destination, as well as any import duty & tax.
- DAP – Delivered At Place: All charges are paid by the seller, excluding destination customs clearance charges and duty & tax.
Risk, cost, country of destination, time, product and payment conditions influence the Incoterms® rule choice, which respectively, have a huge impact on international trade.
In addition, the Incoterms are divided into four groups: E, F, C and D. The E clause states that the seller or manufacturer only provides his goods and the buyer has to take care of the transport on his own ex works or ex warehouse of the seller. This is the most seller-friendly clause.
What is difference between FCA and DAP? ›
What is the difference between FCA and DAP? DAP (delivered at place) is an Incoterms rule that sits at the opposite end of the buyer-seller responsibility spectrum. Under FCA, the buyer will handle many of the aspects of the shipment, while under DAP the seller will handle all except import duties and taxes.
What Incoterms should I use for domestic shipments? ›
For truckload shipments, buyers and sellers should look to the Incoterms that cover all modes of transport such as:
- FCA.
- EXW.
- CPT.
- DPU (DAT if 2010 Incoterms are agreed to)
- DDP.
- DDP.
- CIP.
