What Are INCOTERMS?
INCOTERMS (International Commercial Terms) are standardized rules created by the International Chamber of Commerce (ICC) to define the responsibilities of buyers and sellers in international trade. They clarify who is responsible for shipping, insurance, customs clearance, and other logistics tasks at different stages of the shipping process.
How to Use INCOTERMS:
Choose Based on Responsibilities: Select an INCOTERM that aligns with your preferred division of costs and risks between buyer and seller.
Example: Use FOB if the buyer wants to control the shipping process after goods are loaded onto the ship.
Include in Contracts: Specify the chosen INCOTERM in the sales agreement to avoid misunderstandings.
Adapt to Transport Mode: Ensure the INCOTERM matches the type of transport:
FAS, FOB, CFR, CIF: For sea or inland waterway transport.
EXW, FCA, DAP, DDP, etc.: For multimodal or land-based transport.
When to Use INCOTERMS:
Managing Risk: To decide who bears the risks during transport (e.g., damage, theft).
Cost Allocation: To clearly define who pays for freight, insurance, and customs duties.
Streamlining Trade: To ensure all parties understand their roles and reduce disputes.
INCOTERM | Type of Transport | Buyer Responsibilities | Seller Responsibilities | When to Use |
EXW (Ex Works) | All Transport Modes | Full responsibility for transport and risks from the seller’s location onward. | Makes goods available at their premises. | When the buyer has logistics expertise and wants full control of the shipping process. |
FCA (Free Carrier) | All Transport Modes | Risks and costs transfer when goods are handed over to the carrier. | Delivers goods to the buyer’s nominated carrier at a specified location. | When the buyer organizes international transport but needs the seller to handle export formalities. |
FAS (Free Alongside Ship) | Sea and Inland Waterways | Costs and risks transfer when goods are placed alongside the ship. | Places goods next to the vessel at the port of shipment. | When bulk cargo or goods are being shipped via sea, and the buyer handles the main transport. |
FOB (Free On Board) | Sea and Inland Waterways | Risks transfer when goods are loaded onto the ship. | Loads goods onto the ship chosen by the buyer. | When the buyer handles sea freight but requires the seller to deliver goods onboard. |
CFR (Cost and Freight) | Sea and Inland Waterways | Takes risk once goods are loaded but seller pays freight to the destination port. | Arranges transport to the destination port and pays freight. | When the seller arranges sea transport but the buyer takes over insurance and risks. |
CIF (Cost, Insurance, and Freight) | Sea and Inland Waterways | Risks transfer at loading; insurance provided by the seller until destination. | Covers cost, freight, and minimum insurance to the destination port. | When the buyer wants limited risk coverage, and the seller organizes sea transport and insurance. |
CPT (Carriage Paid To) | All Transport Modes | Takes risks from the point the carrier receives goods. | Arranges transport to a specified location and pays freight. | When the seller covers transport costs but not risks beyond the carrier. |
CIP (Carriage and Insurance Paid To) | All Transport Modes | Takes risks from the carrier but gets insurance coverage from the seller. | Arranges transport, freight, and insurance to a specified location. | When the buyer wants insurance coverage during transport and the seller handles logistics. |
DAP (Delivered At Place) | All Transport Modes | Takes over at the destination place, covering import clearance. | Delivers goods to a named place, covering all risks and costs until arrival. | When the buyer wants a convenient delivery at their location but manages customs clearance. |
DPU (Delivered at Place Unloaded) | All Transport Modes | Responsible for customs import and further transport after unloading. | Delivers goods, including unloading, at a named place. | When the buyer wants goods delivered and unloaded at their facility. |
DDP (Delivered Duty Paid) | All Transport Modes | No responsibilities until goods arrive at the destination fully cleared. | Handles all risks, costs, and import duties until delivery to the buyer’s location. | When the seller wants to offer a full-service delivery solution, including customs clearance. |