Know Your Incoterms (2024)

FAQs

Know Your 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”

“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”

Incoterms, widely-used terms of sale, are a set of 11 internationally recognized rules which define the responsibilities of sellers and buyers. Incoterms specify who is responsible for paying for and managing the shipment, insurance, documentation, customs clearance, and other logistical activities.

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.

There are 11 types of incoterms, FCA, FAB, FOB, EXW, CIPT CIP, CFR, CIF, DAP, DDT, and PDF. International commercial terms are also mentioned on shipping documents.

The use of Incoterms eliminates inconsistencies in language by giving all parties the same definition of specific terms within a trade agreement. As a result, the risk of problems during shipment is reduced since all parties clearly understand their responsibilities in performing trade under the given contract.

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.

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.

Some common examples of Incoterms rules for any mode of transportation include Delivered Duty Paid (DDP), Delivered at Place (DAP), and Ex Works (EXW).

What are the 1st Incoterms? ›

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.

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.

Even if it is not meant for containerized cargo, CIF is the most used Incoterm in the world. The reason is that it is a maritime Incoterm which is beneficial to both the seller and the buyer. The seller can provide transportation up to destination and include this additional service in the price of the goods.

When are Incoterms used? Incoterms are used to agree on the most important contractual terms and obligations for global trade. This includes the export, import, and transit of goods.

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.

It is made by the seller for 10% more than the price of the goods by the seller. Seller's responsibilities : The seller prepares the goods compatible with the contract conditions. It prepares the necessary documents which the buyer will use in its country. It completes the custom procedures.

In conclusion, Incoterms can make international trade easier but one should consider a number of issues when choosing an Incoterm. Incoterms should be used only for sales of goods and not for services.

Incoterms 2020 formally defines the delivery point in the transaction where 'the risk of loss or damage to the goods passes from the seller to the buyer'. In contrast, previously, the term had a more informal explanation. Knowing the point of risk transfer eases the transaction for different trade finance parties.

Incoterms®, or International Commercial Terms, are a set of globally-recognised rules of international trade for the sale of goods. The International Chamber of Commerce (ICC), Incoterms® outline the roles and responsibilities of the seller (exporter) and buyer (importer).

FOB means Free On Board and is when the seller takes care of all shipping documentation and delivers the goods to the ship. Once aboard, the transportation risk passes from the seller to the buyer. You then pay for the freight to get to your destination, but the seller pays for the export customs clearance.

What is the full name of Incoterm? ›

The Incoterms or International Commercial Terms are a series of pre-defined commercial terms published by the International Chamber of Commerce (ICC) relating to international commercial law.

The Incoterms rules are not mandatory. They are not laws enacted by governments, but rather, guidelines agreed to by parties to a contract. Ultimately, it's up to the buyer and the seller to agree to each party's responsibilities, as well as the cost and risk of a shipment before it takes place.

Free on Board, or FOB is an Incoterm, which means the seller is responsible for loading the purchased cargo onto the ship, and all costs associated. The point the goods are safe aboard the vessel, the risk transfers to the buyer, who assumes the responsibility of the remainder of the transport.

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.

Generally, EXW is the cheapest, CIF is the most expensive, and FOB is somewhere in between. If two suppliers give you nearly identical prices but one quotes EXW shipping incoterms and the other quotes you FOB, the second quote will cost you significantly less.

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 is the incoterm for door-to-door? The most commonly used incoterm for door-to-door shipments is Delivered Duty Paid (DDP). In DDP, the seller is responsible for delivering the goods to the buyer at the place of destination, cleared for import and ready for unloading.

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.

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 Incoterms in sales order? ›

The International Chamber of Commerce formulated a set of rules for several international sales contracts called Incoterms. It specifies the person responsible for managing insurance, payment, documentation, shipping, and customs clearances.

The first carrier means the first person, in the contract of carriage, take the goods which are transferred from the seller. If subsequent carriers are used for carriage to the agreed destination, the risk passes when the goods have been delivered to the first carrier.

The delivery terms define the agreements with the business partner concerning the way the goods are delivered. The delivery terms can include the point of title passage. The point of title passage is the point at which the legal ownership changes. At this point, the risk passes from the seller to the buyer.

FOB is a shipping term that stands for “free on board.” If a shipment is designated FOB (the seller's location), then as soon as the shipment of goods leaves the seller's warehouse, the seller records the sale as complete. The buyer owns the product en route to its warehouse and must pay any delivery charges.

The abbreviation CIF stands for "cost, insurance and freight," and FOB means "free on board." These are terms are used in international trade in relation to shipping, where goods have to be delivered from one destination to another through maritime shipping. The terms are also used for inland and air shipments.

On an invoice, FOB means 'Free on board' or 'Freight on board'. The FOB term refers to the moment where a business that is shipping products is no longer responsible for the items.

Also, Incoterms do not deal with price or payment and therefore it is really important in a contract that the price of the goods and how they are going to be paid for is set out.

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.

Using the wrong Incoterms® rule means that the contract between the buyer and seller might not be adhered to, which could result in delivery and payment problems, and unanticipated costs and disputes. It might also mean that customs declarations are incorrect, which can have some serious legal ramifications.

Exporters in the services sector cannot use incoterms, as there is no physical product that has to be shipped. Therefore, when you are negotiating contracts for service provision it is important to define exactly what services you are providing and to what standards.

Who pays freight under FOB? ›

In FOB shipping point agreements, the seller pays all transportation costs and fees to get the goods to the port of origin. Once the goods are at the point of origin and on the transportation vessel, the buyer is financially responsible for costs to transport the goods such as customs, taxes, and fees.

Indicating "FOB port" means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays the cost of marine freight transport, insurance, unloading, and transportation from the arrival port to the final destination.

The disadvantage for buyers under EXW terms is that they need to cover the full risk and cost of shipping. Under EXW agreements, the buyer is responsible for hiring a transport company, managing export clearance, obtaining insurance coverage, and more.

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.

Delivered Duty Paid (DDP) – This Incoterm places the most responsibility on the seller, who is responsible for all transportation, costs, and risk to a named place, typically the buyer's warehouse.

CPT Incoterm (Carriage Paid to)

The existence of the contract of carriage has no impact on the transfer of risk from the seller to the buyer which occurs at the point of delivery, i.e., by handing over the goods to the carrier.

Freight terms

The seller pays for DAP freight as he is liable for carriage till the destination port as well as the inland transit from the warehouse to the port.

It imposes the highest risk of loss on sellers because they have to assume all charges to the point of delivery. This does give the seller control over the shipment, but it also means they are responsible for the goods from the time of purchase until they reach their port of destination and are ready for unloading.

Is it mandatory to use Incoterms? ›

Are Incoterms mandatory? The use of Incoterms is entirely voluntary, although they are common practice in international trading agreements as they are internationally recognised.

Globally recognized, Incoterms prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers. Parties involved in domestic and international trade commonly use Incoterms as a kind of shorthand to help understand one another and the exact terms of their business arrangements.

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.