Incoterms Explained In Detail ｜ Boost Import and Export Business | Definition, Examples, Rules, Pros & Cons

What are Incoterms?

Have you ever tried to talk to a supplier about shipping, only for them to throw a bunch of strange acronyms (like DDP and CIF) at you? You're not alone. These acronyms, known as incoterms, significantly impact your shipping process – but they're notoriously confusing to buyers.

However, incoterms exist to reduce confusion between buyers and suppliers, not cause it. An incoterm provides one universal definition for a series of tasks, responsibilities, and decisions; when you and your supplier both understand the terms, your shipping discussions will be more efficient. By familiarizing yourself with the details of each incoterm, you can choose the one that makes the most sense for your next order.

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First, all incoterms define:

Cost: who pays for each part of the delivery?

Responsibility: who handles the operations for each part of the delivery?

Risk: when does risk of cargo loss or damage transfer from the supplier to the buyer?

Instructions: what information do forwarders, brokers, or other parties involved in the shipment need to know?

We can also group incoterms into three buckets:

E and F type: the supplier bears little cost and responsibility. Includes Ex Works (EXW), Free Carrier (FCA), Free Alongside Ship (FAS), Free Onboard (FOB)

C type: the supplier bears the cost and risks until the order is delivered at the destination port. Includes Cost and Freight (CFR), Cost Insurance and Freight (CIF), Carriage and Insurance Paid To (CIP), and Carriage Paid To (CPT)

D type: the supplier bears maximum responsibility for cost and risks. Includes Delivered at Terminal (DAT), Delivered at Place (DAP), and Delivery Duty Paid (DDP)

As you move from E to D types, the buyer's risk, knowledge required, and time commitment decreases (sounds good, right?). However, the buyer's level of control and visibility into costs also decreases (maybe not so good).

How should you decide which is right for you?

11 Incoterms：

EXW（Ex Works）

FOB（Free On Board）

FAS（Free Alongside Ship）

FCA（Free Carrier）

CFR（Cost and Freight）

CIF（Cost Insurance and Freight）

CPT（Carriage Paid To）

CIP（Carriage and Insurance Paid To）

DAP（Delivered at Place）

DPU（Delivered at Place Unloaded）

DDP（Delivered Duty Paid）

1.EXW

The full name of EXW is Ex Works (.... . named place), Chinese meaning factory delivery (named place). It means that the seller delivers the goods from the factory (or warehouse) to the buyer, and unless otherwise specified, the seller is not responsible for loading the goods onto the car or ship arranged by the buyer, and does not handle the export customs clearance procedures. The buyer bears all costs and risks from delivery at the seller's factory to the final destination.

*When the transaction is concluded on EXW terms, the seller bears the least risk, liability and expense. On delivery, the seller is only required to provide commercial invoices or electronic data and, if required by the contract, documents proving that the goods delivered are in conformity with the contract.

2.FCA

The full name of FCA is Free Carrier (...named place), i.e. cargo to carrier (named place). . named place), i.e. goods to the carrier (named place). It means that the seller delivers the goods that have been cleared for export to the carrier designated by the buyer at the designated place to complete the delivery. According to commercial practice, when the seller is required to collaborate with the carrier through the signing of the contract, the buyer assumes the risk and expense, the seller can do so.

Adding a Loaded Vessel Endorsement under the FCA Cargo to Carrier Terminology

In the old version, the delivery of the goods was done before loading on board the ship and the carrier was obliged to issue a "shipped" bill of lading or a "received" bill of lading with a shipboard endorsement only when the goods were actually loaded on board the ship.

To solve this problem, FCA Incoterms? 2020 offers a new option: the parties can agree that the buyer will instruct its carrier to issue and deliver a Bill of Lading to the seller before loading the goods on board the vessel.

The shipping company and the seller are obliged to transmit the Bill of Lading to the buyer through banking channels.ICC recognized the market demand, while noting the theoretical inconsistency between the point of delivery envisaged by the FCA provisions and the requirements of the Bill of Lading on board the vessel.

3.CPT

The CPT term Carriage Paid to (.... . named place of destination) in Chinese means cost plus freight paid to (named place of destination), means that the seller will give the goods to its designated carrier, and must pay the freight to the named place of destination of the goods, the buyer bears the delivery of all risks and other costs. The term applies to all modes of transportation, including multimodal transportation.

Comparison of CFR and CPT

The similarities between the two are: the seller to arrange for the transportation of goods, pay the freight, and export formalities, submit the relevant documents; are the goods to the carrier after the transfer of risk, the goods in transit by the buyer to bear the risk; belong to the contract of shipment.

The difference between the two lies in: first of all, the applicable mode of transport is different, CFR applies only to maritime transport, is a port to port transportation; CPT applies to a variety of modes of transport (including container transport, multimodal transport, sea, land and air), belongs to the door-to-door transportation. Secondly, delivery and risk transfer of different places, CFR risk division to the port of shipment of goods on board as the boundary, CPT to the goods to the carrier as the boundary. Finally, the submission of different documents, CFR provides a maritime bill of lading, belongs to the property right certificate, can be transferred, can be sold; CPT is usually provided by the intermodal transport documents, just handing over the goods, can not be transferred, can not be sold. From the perspective of development trend, CPT has the tendency to replace CFR.

4.CIP

The full name of CIP is Carriage and Insurance Paid to (.... . named place of destination) Chinese is freight, insurance paid to (named place of destination), refers to the seller will give the goods to its designated carrier, pay the freight to the designated destination of the goods, for the buyer to handle the goods in transit freight insurance, the buyer bears the delivery of all the risks and other costs. It is written in the form of "CIP named place of destination". CIP terminology is applicable to all modes of transportation, including multimodal transportation.

Incoterms2020 CIP insurance insurance changes:

CIP belongs to the buyer to insure the highest level of insurance (such as CIC all risks and ICC (A) insurance), while CIF terminology under the insurance requirements remain unchanged, still the lowest level of insurance can be.

5.DPU

DPU full name is Delivered at Place Unloaded, the Chinese meaning is transportation terminal delivery, is the seller in the designated destination or the destination port of collection and distribution station unloading of goods to the buyer to dispose of the goods that is to complete the delivery of the goods, the seller bears the goods to the seller in the designated destination or the destination port of collection and distribution station of all the risks and costs in addition to the cost of importation.

*In Incoterms 2020, DAT is changed to DPU, and the place of delivery in DPU terminology is still the place of destination, but this place of destination is no longer limited to the end point of transportation, but can be anywhere.

6.DAP

DAP is known as Delivered At Place (named place of destination), that is, the destination of delivery (named place of destination), when the use of DAP terminology transaction, the seller is responsible for the contractual goods in accordance with the usual routes and customary way, in the specified period of time will be loaded with the means of transportation ready to unload the goods to the buyer at his disposal, that is, to complete the delivery of the seller bears the goods transported to the specified place until the end of all the risks.

7.DDP

The full name of DDP is Delivered Duty Paid (...named place of destination) i.e. Delivered Duty Paid (...named place of destination). (...named place of destination), the seller in the designated destination to do customs clearance procedures will be in the delivery of the means of transport has not yet been unloaded to the buyer disposal, that is, to complete the delivery of goods. The seller bears all risks and costs of transportation of the goods to the place of destination, including any import duties and taxes payable at the place of destination when customs formalities are required.

*The DDP term is one of the 11 trade terms in which the seller assumes the greatest responsibility and bears the greatest expense. It means that the seller completes the delivery of the goods by placing them at the disposal of the buyer at the designated destination, going through the import customs clearance procedures, and handing over to the buyer the goods that have not yet been unloaded from the means of transportation at the place of delivery. The seller must bear all the risks and costs of bringing the goods to the named place of destination, including any "duties" payable at the place of destination in the event that customs formalities are required (including the responsibility and risk of customs formalities, as well as the payment of fees, duties, taxes and other charges). This term should not be used if the seller cannot directly or indirectly obtain an import license. However, if the parties wish to exclude from the seller's obligations all charges to be paid for importation (e.g. VAT), this should be expressly stated in the contract of sale. The term applies to all modes of transportation.

8.FAS

The full name of FAS is Free alongside Ship (...named port of shipment). . named port of shipment), that is, Free alongside Ship (named port of shipment) is usually called the port of shipment ship side delivery, is the seller will be transported to the named port of shipment ship side or barge delivery, and in the need for customs formalities, for the export of the goods required for all customs formalities, the buyer bears the port of shipment ship side (or barge) since the beginning of all the costs and risks.

*This term is usually used by exporters in the trade of bulk goods, especially in the trade of primary products such as wheat, cotton, soybeans and ores.

9.FOB

The full name of FOB is Free on Board (.... . named port of shipment), that is, the port of shipment on board (...... designated port of shipment), FOB is one of the commonly used trade terms in international trade. It means that the seller must deliver the goods to the port of shipment specified in the contract within the date or period specified in the contract and hand them over to the ship of the vessel assigned by the buyer, that is to say, to complete its delivery obligation. According to the provisions of General Conditions 2010, the FOB terminology is only applicable to sea and inland waterway transportation, and if the goods are loaded in containers and delivered at container terminals, the FCA trade terminology should be used.

10.CFR

The full name of CFR is Cost and Freight (.... . named port of destination), i.e. Cost and Freight (...... named port of destination), according to the interpretation of General Conditions 2010, the buyer shall load the goods on board the vessel at the port of shipment specified in the contract and within the stipulated period of time and notify the buyer in time. The risk of loss of or damage to the goods occurring after they have been loaded on board the vessel, as well as any additional costs incurred as a result of events occurring after the delivery of the goods, shall pass from the seller to the buyer as of the date of delivery.

11.CIF

The full name of CIF is Cost, Insurance and Freight (.... . port of destination), Chinese meaning cost plus insurance and freight (...... designated port of destination), CIF is one of the most commonly used trade terms in international trade. CIF is one of the most commonly used trade terms in international trade. When a transaction is concluded using the CIF term, the seller also loads the goods onto the ship at the port of shipment to complete its delivery obligations. The seller is responsible for chartering and booking the ship on usual terms, paying the costs of transporting the goods to the named port of destination and the freight charges, but the risk of loss of or damage to the goods after delivery, as well as any additional costs arising from events occurring after the delivery of the goods are transferred from the seller to the buyer from the time of delivery. The seller is to notify the buyer promptly after loading the goods on board the vessel at the specified port of shipment and within the specified period.

Changes in CIF insurance coverage in Incoterms2020

In CIF price terms, the seller's responsibility remains "to insure at his own expense the goods in accordance with Clause (C) of the Institute's Cargo Insurance Clauses (LMA / IUA) or any similar clause".