Incoterms (International Commercial Terms) are a standard set of terminology, created by the International Chamber of Commerce (ICC), used universally, defining the key parts of freight forwarding.
The latest set of Incoterms was published in 2010, and this is currently under consortium to be revised for 2020.
A three-letter code incoterm that specifies at which stage the cargo is transferred from the seller to the freight forwarder (appointed by the buyer), and finally, from the freight forwarder to the buyer.
Incoterms differ, primarily, on the following factors:
- Who pays for the main transport?
- Where does the delivery take place?
- Where and when the risk is transferred from the Seller to the Buyer?
- Who bears all the fees arising from transport i.e. issue of documents, unloading of goods at destination, customs clearance when necessary, insurance of goods etc.
EXW (Ex Works)
In EXW term the seller does not take the responsibility to load products onto a truck or ship, the buyer is responsible for everything following product production.
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.
The buyer is responsible for loading the goods onto a vehicle (even though the seller may be better placed to do this); for all export procedures; for onward transport and for all costs arising after collection of the goods.
In many cross-border transactions, this rule can present practical difficulties.
Specifically, the exporter may still need to be involved in export reporting and clearance processes, and cannot realistically leave these to the buyer. Consider Free Carrier (seller’s premises) instead.
Other things to watch for. Although the seller is not obliged to load the goods, if the seller does so, this is at the buyer’s risk!
FOB (Free on Board)
This is when the cost of delivering the goods to the nearest port is included in the price and it is the suppliers duty to ensure that all goods arrive their safely. From there it is your responsibility as the buyer to ensure that the shipping from there to your desired location is organised and paid for. This will include you arranging payment of all the necessary freight and shipping fees and tariffs.
The seller needs to deliver the goods to the port of loading which means the cost of product being delivered to the port of loading is included in the contract price. The buyer is in charge the rest of process once goods are unloaded onto a vessel. In this case, if the goods are damaged when on board the vessel, it’s already the responsibility of the buyer.
It is always good as a rule of thumb to buy goods (FOB) when you are importing and to sell (CIF) when you are exporting.
Buying Free On Board (FOB) has three main benefits when compared to CIF.
Firstly, you will have maximum control and flexibility to decide your freight provider and negotiate the cost.
Secondly, as you will be using your chosen freight forwarder you will be able to track and trace your delivery far more accurately.
Thirdly, your chosen provider will be able to assist you should any problems arise, as they are your logistic partner they will be looking out for your best interest rather than those of your supplier.
FOB will cover:
- Product cost
- Local exporting fees/customs
- Delivery of your goods to the suppliers nearest port
Note: The quoted price will not include shipping from China to the destination country, insurance costs, local customs fees including tariffs or import duties, customs clearance charges, destination port fees or delivery to your home, office or warehouse.
CFR (Cost and Freight)
Cost and freight (CFR) and cost, insurance, and freight (CIF) are terms used in international trade for the shipping of goods by sea.
Cost and freight (CFR) is a trade term that requires the seller to transport goods by sea to a required port.
It requires the seller to transport goods by sea to the buyer’s (required) destination and cover all costs in doing so. Under CFR, the seller is also required to give the buyer the documentation necessary to pick up the goods from the carrier.
With CFR agreements, the shipping party has a greater amount of responsibility in arranging and paying for transportation than with minimal free on board (FOB) shipping, where the shipper is only responsible for delivering goods to the port of origin for shipping.
The agreement does not, however, require the seller to purchase marine insurance against the loss, destruction, or damage to the goods during transit. The risk to the goods passes once they reach the vessel, so the seller is not liable.
The buyer/receiver is responsible for everything following the ship docking in the destination port. All remaining costs including unloading and any further transportation costs borne by them.
CIF (Cost, Freight and Insurance)
Like CFR, CIF is restricted for use between parties who deal in goods that are transported by sea.
CIF agreements are also nearly the same as CFR agreements. The seller is still responsible for all arrangement and transport costs for shipping goods to the agreed-upon destination port. The receiver then assumes all cost responsibilities once the ship has reached port.
The difference between the two agreements, though, lies in one additional responsibility that falls on the shipper (seller), who must also provide a minimum amount of marine insurance on the goods being shipped.
The amount of insurance is typically agreed upon between the buyer and seller. The seller is also responsible for any additional costs that come with transporting the goods. This includes any extra paperwork required for customs or inspections or any rerouting that must be done during transport.
The goods are the responsibility of the buyer or receiver once the goods arrive at the required port and are taken off the vessel.
The terms of the contract will outline the exact nature of the responsibilities of the seller prior to transport. Most CIF contracts will stipulate the following for the seller:
The purchase of export licenses for the product as required
Covering the cost and contracts of transporting the goods
The requirement of insurance to protect the order
Providing the necessary inspections for the products
If required, paying for any damage or destruction to the order
DAT (Delivery at Terminal)
DAT term means the seller needs to clear goods for export and is fully responsible for the goods until they have arrived at a named terminal at the end destination.
The risks and responsibility of goods are transferred to the buyer as soon as the goods arrive at the “terminal” and have been unloaded.
‘Terminal’ can be any place – a quay, container yard, warehouse or transport hub.
For the buyer, choosing DAT means less hassle and organization of goods.
The buyer is responsible for import clearance and any applicable local taxes or import duties.
Things to watch for:
The place for delivery should be specified as precisely as possible, as many ports and transport hubs are very large.
This is extremely useful where the seller bears responsibility for the main carriage.
DAP (Delivered at Place)
Can be used for any transport mode, or where there is more than one transport mode.
The seller is responsible for arranging carriage and for delivering the goods, ready for unloading from the arriving conveyance, at the named place. (An important difference from Delivered At Terminal DAT, where the seller is responsible for unloading.)
Risk transfers from seller to buyer when the goods are available for unloading; so unloading is at the buyer’s risk.
It is the responsibility of the buyer to arrange the import clearance and all local taxes or import duties that apply.
This rule can often be used to replace the Incoterms 2000 rules Delivered At Frontier (DAF), Delivered Ex Ship (DES) and Delivered Duty Unpaid (DDU)
How incoterms impact your shipping cost
You can use the following freight rate calculator to help you decide how different incoterms will impact your freight cost.
For example, when shipping EXW, you will take responsibility for the any charges incurred in transporting your goods from supplier to the seaport or airport. Simply choose container, box, or pallet shipping, enter your dimensions and weight, and you’ll get an instant estimate of freight shipping costs.