INCOTERMS
are the abbreviated terms for international commercial terms in shipping and transportation, used globally in sales contracts. INCOTERMS were first introduced in 1936 by the International Chamber of Commerce (ICC), and at Badr International, we consider these rules a key entry point into the science of transport and logistics.
Why do we need INCOTERMS?
A shipment can take several months before reaching its destination. Although shipping has become safer in recent years, some shipments still do not arrive at their destination or arrive in good condition. When this happens, it is important to know who bears the loss of the goods. For this reason, it is crucial for the seller and buyer to pre-determine the obligations and responsibilities that must be agreed upon. International commercial terms represent all possible ways to distribute obligations and responsibilities between two parties.
These obligations and responsibilities include:
- Point of Delivery: International trade defines the terms of delivery of goods from the seller to the buyer. INCOTERMS specify the point of transfer of risk and responsibility from the seller to the buyer.
- Transport Costs: International trade specifies which party pays for transportation costs. INCOTERMS determine who pays for any part of the transportation, with more than one shipping method available, particularly in maritime transport.
- Export and Import Procedures: International trade specifies which party arranges the import and export procedures.
- Insurance Costs: International trade terms (INCOTERMS) determine who bears the cost of insurance. All these points are important to highlight before proceeding with the purchase and shipping process.
Arranging for the main transport does not mean that the risk falls on the arranging party. The seller may arrange the main transport even when the shipment has already been delivered (the risk has transferred to the buyer). In this case, the risk transfers to the buyer while the seller acts as the shipper without any risk to themselves.
Arranging for insurance does not mean that the risk falls on the party arranging the insurance. In some INCOTERMS, the seller arranges insurance to cover the buyer’s risks. In these cases, the seller is only required to cover the minimum risks as specified in the relevant international trade terms. The buyer must obtain additional insurance to cover any extra risks they wish to insure against.
There are a total of 11 INCOTERMS defined by the ICC, arranged according to the seller’s least responsibility to the buyer’s most responsibility. For example:
- EXW (Ex Works) represents the least responsibility for the seller.
- DDP (Delivered Duty Paid)represents the least responsibility for the buyer, meaning the goods are delivered at the buyer’s location, cleared of all duties and transport costs.
The other nine INCOTERMS fall between these two.
Grouping INCOTERMS
Before we delve into the individual INCOTERMS, let’s categorize all of them. First based on the mode of transport used, and second based on the point of delivery.
First Group:Seven commercial terms that can be used for any mode of transport, even when maritime transport is not used. The INCOTERMS EXW, FCA, CPT, CIP, DAT, DAP, and DDP belong to this group.
Second Group: Four commercial terms used only for maritime transport or inland waterways. This is because, in these terms, both the point of delivery and the destination are maritime ports. The INCOTERMS FAS, FOB, CFR, and CIF belong to this second group.
Further Grouping Based on Delivery Point
The INCOTERMS can also be grouped into four categories based on the point of delivery:
- Group “E” (EXW) has the delivery point at the seller’s premises.
- Group “F” (FOB, FAS & FCA) has the delivery point before or at the main carrier, with the main carriage unpaid by the seller.
- Group “C” (CFR, CIF, CPT, CIP) has the delivery point above the main carrier with the carrier paid by the seller.
- Finally, Group “D” (DAP, DAT, DDP) has the delivery point at the final destination.
Now let’s go through each INCOTERM in detail:
-
EXW (Ex Works):
- Transport Method: Sea, air, or land.
- The seller has the least responsibility, delivering the goods to the buyer at the seller’s premises or another agreed location. All responsibilities and risks thereafter fall on the buyer.
- DDP (Delivered Duty Paid):
- Transport Method: Multiple.
- The seller bears the most responsibility, delivering the goods to the buyer’s location and handling export and import duties.
- FCA (Free Carrier):
- Transport Method: Multiple.
- The seller delivers the goods to a carrier or another person appointed by the buyer at the seller’s premises or another agreed location.
- FOB (Free on Board):
- Transport Method: Sea.
- The seller delivers the goods on board the vessel, and risk transfers to the buyer once the shipment crosses the ship’s rail.
- CFR (Cost and Freight):
- Transport Method: Sea.
- The seller pays for the cost and freight to transport the goods to the destination, but the risk transfers to the buyer once the goods are on board the vessel.
- CIF (Cost, Insurance, and Freight):
- Transport Method: Sea.
- Similar to CFR, but the seller also arranges and pays for insurance covering the buyer’s risk during transit.
- FAS (Free Alongside Ship):
- Transport Method: Sea.
- The seller delivers the goods alongside the ship, and risk transfers to the buyer at that point.
- CPT (Carriage Paid To):
- Transport Method: Multiple.
- The seller pays for the main transport to the agreed place, but risk transfers to the buyer upon delivery to the carrier.
- CIP (Carriage and Insurance Paid To):
- Transport Method: Multiple.
- The seller delivers the goods to the carrier and pays for transport and insurance, transferring risk at the same point as CPT.
- DAP (Delivered at Place):
- Transport Method: Multiple.
- The seller delivers when the goods arrive at the destination, ready for unloading.
- DAT (Delivered at Terminal):
- Transport Method: Multiple.
- Similar to DAP, but the seller is responsible for unloading the goods at the final destination.
Common Mistakes in Using International Commercial Terms:
- Not Including the Exact Location with the Destination: It is essential to specify the exact location. For instance, simply stating FCA Durban may not suffice; the exact place must be indicated.
- Using DDP without Considering Seller’s Knowledge: Sellers should have local knowledge and expertise to handle customs clearance in the buyer’s country.
- Using EXW without Considering Buyer’s Knowledge: Buyers should have local knowledge to handle export clearance in the seller’s country.
- Using Maritime Terms for Containerized Goods: These terms are generally for bulk and unpackaged goods and should not be used for containerized goods.
Finally, since these are standard terms, we’ll provide their abbreviations here:
- 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)
- DAP – Delivered at Place (insert named place of destination)
- DPU – Delivered at Place Unloaded (insert place of destination)
- DDP – Delivered Duty Paid (Insert place of destination)
- CIF – Cost, Insurance and Freight
- FOB – Free on Board
Feel free to contact us at Bader International for any inquiries at info@bcargob.com or via our contact form above or reach our marketing representative at 0543101190.
