What are Incoterms, and what do they mean?

Incoterms are a set of generally accepted phrases produced by the International Business group (ICC) that define the fundamental components of freight forwarding.

The ICC initially created the International Commerce Terminology (INCO Terms) in 1936, and we’ve summarized the 11 Incoterms that the ICC Incoterms Drafting Committee recently amended for 2020.

Incoterms® are extremely relevant to the world of world commerce.

 In 2022, it will be critical for buyers and sellers to grasp Incoterms® 2010 and Incoterms® 2020, as well as each party’s responsibilities across the supply chain.

We’ll talk about why Incoterms 2022 is significant and what “Incoterms®” means on this blog.

Table of Content

Chapter 1: What are Incoterms®? What does “Incoterms®” stand for?

Chapter 2: Ten Incoterms for all modes of transport

Chapter 3: Four Incoterms for Ocean Freight Usage

Chapter 4:  7 Key Changes and Updates in Incoterms 2020

Chapter 5: Frequently Asked Questions About Incoterms

Chapter 1: What are Incoterms®? What does “Incoterms®” stand for?

INCOTERM 2020

1. Why are Incoterms® vital in International Trade?

Incoterms® are indispensable in International Trade. They are the set of rules for international sales that are accepted worldwide.

They provide common commercial terms that are interpreted the same all across the world whenever a contract for the sale of goods is made.

 In short, it has standardized the international trade which makes it easy to understand the terminologies used in contract papers among the companies.

 In this way, no confusion related to responsibilities and price management is created among the interested parties. They are asserted clearly on anent export documents.

2. How to utilize Incoterms® 2020 on Sales and Purchasing Contracts?

The Incoterms® 2020 came into effect on 1st January 2020. But it did not nullify the use of Incoterms® 2010.

 If trading partners prefer to use Incoterms® 2010, they can do so to confirm complex commercial agreements.

It is required by all the parties to clearly state the version of Incoterms® in sales and purchasing contracts to avoid any confusion.

The contract should be counter-signed by all the parties. If the Incoterms® version is not mentioned on the contracts then the following versions will be applicable:

  • Incoterms® 2010 — Up to December 31st, 2019
  • Incoterms® 2020 – From January 1st , 2020
  • In the case of a different year, for instance, Incoterms® 1990, the respective terms will be applicable

Structure to be used on Sales Contract

The following structure should be used on Sales Contracts:

[Incoterm® rule] [Named port/place/point] Incoterms® 2020

Here are a few examples

CIF Zhuang Road Incoterms® 2020

BFT 5800 Geneva, Switzerland Incoterms® 2020

3. Important things to remember about incoterms

What is meant by CIP shipping incoterm

A few of the important things about incoterms are

  1. The incoterm rules are set by the International Chamber of Commerce.
  2. Incoterms 2010 and 2020 are currently used in trade.
  3. The incoterms 2020 are also undergoing revisions.
  4. The incoterms 2017, 2018, 2019, etc. are not in use now.

4. Where can I buy Incoterms®2020 and related products?

The International Chamber of Commerce (ICC) has launched a new platform known as ICC Knowledge 2 GO. The Incoterms® 2020 is accessible on this platform in almost 29 languages in both digital and print formats.

Moreover, The ICC national committees worldwide had organized beyond 250 launch events and training seminars. In addition to it, The ICC Academy also provides online courses and certificate programs.

Chapter 2: Ten Incoterms for all modes of transport

1. EXW Incoterms – Ex Works

In EXW Incoterms, the buyer is bound to transport the goods from the point of manufacturing i.e. factory to their final destination. It means that he has to pay all the loading, shipping, and export clearance charges.

During this whole process, if any of the goods get damaged, only the buyer will be solely responsible for it.

For exporting goods to other countries, EXW Incoterms is not a good option because if the buyer is not registered in any country, he cannot arrange the exports. A part of this incoterms is that the buyer has full control of the shipping of the goods.

2. FCA Intersec – Free Carrier Incoterms

FCA Incoterms provides two product delivery options.

  • In the first option, the seller tells the delivery location to the buyer. The delivery is made at that location when the transport provided by the buyer, is loaded with the goods.
  • In the second delivery option, sellers clear the transport that the buyer has provided for delivering the goods to the told destination.

In both these delivery options, all the charges and damages to the goods during delivery are borne by the buyer.

Once the goods are on board, the buyer needs to give the bill of lading (BOL) to the seller.

It is usually recommended for the containerized freight to opt for FCA because here the commodities go directly to the port mentioned by the buyer, from the seller’s warehouses.

3. CPT Incoterms – Carriage Paid To Incoterms

Under the 2020 rules of Incoterms, the CPT transactions involve multiple carriers. The seller is responsible only to hand over the goods to the first carrier that is cleared for export.

The chosen first carrier pays for the transfer of the commodity to the named port. From then onwards, the risk of damage or any other loss is transferred to the buyer. Arranging the freight is the seller’s responsibility only not of the shipment of the goods to the destination.

You might have noticed that on commodities, CPT and the final destination are written for instance “CPT Nepal”.

4. DDP (Delivered Duty Paid) Incoterms

incoterm-ddp

Under the 2020 rules of Incoterms, the maximum risk and the responsibility of the commodities are put by DDP on the seller’s shoulders.

Export clearance, all the delivery charges, bearing the cost of damages, unloading the commodities at the named destination, import clearance and payment, and bringing the commodities to the destination, all is the seller’s responsibility.

It is the only rule that places import clearance and duty on the seller’s shoulders.

Furthermore, once the goods reach the destination, the risk transfers to the buyer. But some countries have prohibited this rule because only the registered local business firms can pay some taxes like VAT.

They do not have any process for sellers to pay the taxes.

5. C&F stands for Cost and Freight

Under the light of Incoterms 2020 CFR rules, the seller is responsible for exporting goods, pre-carriage, delivering the commodities on board at the point of departure, loading alongside the vessel, and paying the transportation cost of the commodities to the named port of destination.

When the sellers deliver the goods on board the ship, the risk passes from the seller to the buyer. From the port of destination onwards, all the fees are paid by the seller, for instance, import duties and clearance.

CFR is used only for two types of transport i.e. ocean transport and inland waterway transport. In the case of containerized freight and the freight is delivered at the terminal only, CPT is a preferable choice.

6. Cost, Insurance, and Freight (CIF)

Under the CIF Incoterms 2020, the seller is responsible for delivering the goods to the buyer on board the vessel. The goods have to be cleared for export to the named port or terminal.

Once the commodities are on board, the buyer has to bear all the damage or risk of loss. However, it is the responsibility of the seller to buy the cargo insurance for the named port.

CIF is a good option for such conditions where different transportation modes are used. For instance, when the goods or the products are delivered to a carrier at a container terminal.

7. Free on Board (FOB)

Under FOB, the buyer nominates a vessel and the commodities are delivered to the buyer on it at a seaport or wharf that has been already selected as the place of shipment. Up to this point, the seller bears all the costs and from here onwards it becomes the buyer’s responsibility.

Under FOB, the price of freight equals the sum of the factory price and FOB local charge.

8. Carriage & Insurance Paid (CIP) To Incoterms

incoterm fob cif

Under CIP Incoterms rule, the supplier, after export clearance, delivers the commodities to its own chosen carrier. The first carrier pays for moving the commodities to the named port. From this point onwards, the buyer will bear the risk of loss or damage.

However, the supplier buys the cargo insurance for the named port. Like CIF, CIP also requires cargo insurance. It requires the supplier/seller to ensure that the maximum cargo insurance complies with Institute Cargo Clause (ICC). The Institute of London Underwriters introduced these clauses in the early 1980s.

They are a part of the UK Marine Insurance policy.

9. Incoterms DPU – Delivered At Specified Location, Unloaded

Under DPU Incoterms rule, the merchant delivers the commodity to the place of destination. Once unloaded from the arriving transport, the goods are now at the buyer’s disposal.

The merchant has to pay for any loss or damages during the transport and unloading of the goods at the named port.

DPU Incoterm is important in a way that only it bounds the seller to pay for unloading as well. No other rules have this clause.

DPU replaced one of the 2010 Incoterm, DAT, because it was confusing, debatable, and the language used in it was also weak. The seller could deliver the commodities at any location that is considered a “terminal” under DAT.

But in DPU, the seller cannot do this. He has to deliver the goods at the terminal chosen by the purchaser itself and is also responsible to pay for damages during transport and unloading of the goods.

10. DAP (Delivered At Place) Incoterms

DAP Incoterms makes the supplier responsible for arranging for transport and delivering the commodities to the chosen point of destination.

Unloading is now the buyer’s responsibility unlike DPU where bearing the loss during unloading is the seller’s responsibility.

Chapter 3: Four Incoterms for Ocean Freight Usage

shipping-incoterms

1. FAS Incoterms – Free Alongside Ship

In FAS Incoterms, the seller is responsible for the export clearance of the goods. He places the goods alongside the export vessel at the port.

The location of the port is chosen by the buyer. Loading, handling local carriage, import duties, and delivery to the final location is the responsibility of the buyer.

FAS Incoterms are applicable on transport via ocean or inland waterway with massive cargo like oil or grain.

FAS impose certain responsibilities on both, the seller as well as the buyer. These are discussed below:

  • Seller’s Responsibilities
  • Buyer’s Responsibilities
  • Products, commercial invoices, and documentation
  • Packaging of export products and their labeling
  • Custom duties and export licenses
  • Carrying the export goods to the terminal
  • Delivering the products at the port for shipment
  • Evidence of timely delivery
  • The seller has to pay for the inspection of products before delivery
  • The buyer has to pay for the goods as per the sales contract
  • Loading cost of the goods on the shipment vessel
  • The main location to take the export goods
  • Discharge of the goods and further delivery to the destination
  • All the import duties and documentation
  • The cost buyer pays for import clearance

2. FOB Incoterms – Free On Board

FOB Incoterms apply to all the modes of transport, including the transport through the ocean. As aforementioned a place of shipment, usually, a seaport is already selected.

fob incoterm freight on bord

The seller delivers the merchandise to the buyer on a transport vessel that has already been chosen by the buyer at the selected port.

From the port onwards, all the risk of loss or damage and other payables are the buyer’s responsibility. They have to bear all the expenses. The sellers are now not responsible for any kind of payments, duties, or taxes.

One more thing is that the cost of freight, under FOB is the total of the business unit price and FOB local fee.

Below is a list of sellers’ and buyers’ responsibilities in FOB Incoterms.

  • Seller’s responsibilities
  • Buyer’s responsibilities
Column 2
  • Payment on all the charges from the shipment of cargo from the port to the final destination
  • Some buyers, for their shipment, purchase insurance. It is not a requirement under FOB but just a choice.
  • Just like sellers pay for OTHC, the buyers have to pay for destination terminal handling charges (DTHC).
  • The buyer has to pay for the delivery of cargo to the destination
  • He has to bear the expenses of unloading the goods at warehouses.
  • All the taxes and
  • fees regarding the customs clearance are the buyer’s headache. In case of delays or penalties, only the buyer has to look after the charges and risks related to it.
  • Packaging of the export commodities to ensure safe shipping.
  • A seller has to pay for loading the commodities at the warehouses.
  • The seller has to pay for transporting the cargo from the warehouse to the point of shipping i.e. seaport.
  • It is the seller’s responsibility to ensure the export clearance of the cargo and to pay all the required taxes.
  • The cost of loading the commodities on the carriage is the seller’s responsibility.
  • The seller has to pay origin terminal handling charges (OTHC).

The origin terminal handling charges are the fees that are paid to the terminal authorities for handling the cargo during the loading and departure of the cargo.

3. CFR Incoterms – Cost and Freight

In the list of most commonly used trade terms, CFR is number second and FOB is number one. The CFR Incoterm bounds the seller to load the goods on board the vessel. He has to carry out the export clearance.

Whereas, the buyer’s responsibility starts the moment when the commodities are on board the vessel. He has to pay for the import formalities just like the seller does for the export formalities.

Let’s dig deep into the seller’s and buyer’s responsibilities in CFR Incoterms.

  • Seller’s responsibilities
  • Buyer’s responsibilities
  • The sellers pay for keeping the goods in warehouses.
  • They pay for loading the goods on the carriage and transporting them to the desired port.
  • Payment of the deportation charges is also their responsibility.
  • They pay for all the documents required for export.
  • All the export customs and duties are their responsibilities.
  • They pay for freight charges. It means they have to pay for moving the goods to the exporting nation’s port.
  • The buyers pay for unloading the goods at the import country’s port.
  • From the port of unloading to the final destination in the importing country, the buyers pay for the transportation.
  • As the commodities are loaded on board by the seller at the export country’s port, the risk of loss or damage shifts to the buyers.
  • In CFR, the buyers pay for insurance.
  • The buyers are responsible for preparing import documents, custom and duty clearance, and all other taxes applicable in the country of import.

4. CIF Incoterms – Cost Insurance and Freight

It holds sellers responsible for delivering the commodities on board the vessel from the exporting country’s port to the importing country’s port. The sellers clear the goods for export.

They also pay for the minimum insurance coverage on the commodities as they are transported to the chosen port of destination.

The risk transfers to the buyers when the goods are on board the vessel for the final carriage.

There are some responsibilities that CIF Incoterms puts on both the parties i.e. the seller and the buyer. These are discussed below:

  • Seller’s responsibilities
  • Commercial invoices and documentation are the seller’s responsibility
  • The seller is responsible for packaging and marking export commodities
  • The seller pays for all the export formalities.
  • Pre-carriage and loading charges are paid by him.
  • Delivery charges from the warehouses to the port of shipment come under the seller’s responsibilities.
  • The seller has to pay pre-shipment inspection fees
  • Cost of the minimum insurance coverage
  • Buyer’s responsibilities
  • The buyer pays for all the import formalities.
  • The transport of goods from the import country’s port to the final destination comes under the buyer’s responsibility.
  • The cost of inspection of goods before shipment to the destination

Chapter 4:  7 Key Changes and Updates in Incoterms 2020

Seven of the key changes made by the Drafting Group in incoterms that have a massive impact on international trade are highlighted below.

1. DAT Incoterm changed to DPU (Delivery at Place Unloaded)

Dat incoterm

DAT stands for delivery at the terminal. As a part of Incoterms 2010, DAT put the responsibility of exporting the merchandise on the sellers until it reaches the chosen terminal at the final destination.

DAT has now been changed to DPU. The Drafting Group, after discussing it many times, removed the word “terminal” from DAT and replaced it with “place”.

It can be any place. As the word “terminal” was creating confusion so to make the rule clearer and understandable this substitution was made.

The responsibilities of sellers and buyers are the same in DPU as they were in DAT. They have not changed at all.

2. Insurance cover differs between CIF and CIP

In both CIF and CIP, the seller has to purchase insurance for the buyer. In incoterms 2010, under clause C, the insurance is required.

 Whereas the CIP Incoterms 2020 requires insurance per the Institute Cargo Clause A, and the CIF Incoterms 2020 requires insurance per clause C.

The clause for CIF and CIP is different because the clause for the former covers a lower level of insurance and the latter cover a higher level of insurance for instance for the fabricated commodities.

3. The Listing of Costs

In incoterms 2010, the listing of costs was a big problem. To deal with odd situations, the carriers used to change the fee structure which caused a problem for the sellers. To deal with this issue, changes were made.

In incoterms 2020, each rule has a special section named “Allocation of Costs” and appears in the A9/B9 section of each rule.

To avoid the confusions and problems that the sellers had to face previously, all the prices are listed in the allocation of costs section. It makes the costs clear to both the contracting parties.

4. Security Requirements

Incoterm rules have different sections. In sections A4 and A7 of each rule, security-related grants have been made. Similarly, cost-related security requirements have also been introduced to section A9/B9 of each rule.

These changes became more eminent since 9/11 and were made to ensure the security of the cargo and both, the seller and the buyer, are bound to observe them.

5. Own transport

According to the rules of Incoterms 2010, the goods were sent by the seller to the buyer through a third party but in Incoterms 2020, there is no such restriction. It permits the purchaser to arrange for its transport in the FCA rules and the supplier in the D rules.

6. FCA and Bills of lading

Part B4 of the FCA rules states that the buyer has to arrange for the carriage of goods on its expenses. There is a difference between FCA and FOB.

If you opt for FCA, the point of delivery will be different than FOB. The 2010 incoterm rules the sellers were encouraged using FCA for containerized goods but still, many of them were using FOB instead.

Even sophisticated sellers said they wanted to use FOB, because a standard Letter of Credit requires an onboard Bill of Lading to be presented.

Therefore the sellers were often taking the risk and using FOB instead, because they wanted to get paid under the LC.

The Incoterms® 2020 FCA extra provision now states that if the parties have so agreed, the buyer must instruct the carrier to issue to the seller, at the buyers cost and risk, a transport document stating that the goods have been loaded (such as a Bill of Lading with an on board notation)’

7. Presentation and design

Incoterms 2020 has a much better presentation and design. It has more explanations with relevant diagrams and flow charts that make understanding the rules easier.

It has made delivery and risks associated with the transport of cargo clear. However, no such change has been made in maritime rules.

Chapter 5: Frequently Asked Questions About Incoterms

faqs

1. What Incoterms Should I Use?

The choice of the right incoterm depends on whether you are a seller or a buyer. If you are a seller, DAP (Delivery At Place) is the best option for you.

If you are a buyer, along with DAP you can also go for FOB and EXW Incoterms. Remember that the incoterm which is best for you as a buyer can be worst for the seller. Therefore, finalize an incoterm after mutual discussion and make everything clear on time.

2. Why are Incoterms Important?

Incoterms are a set of rules that have significant importance in international trade. They clarify the sellers’ and buyers’ responsibilities and determine the distribution of costs and risk among both parties in international trade.

These rules aid in understanding the shipping and import/ export of commodities easily and understandable. Now they are a part of daily business contacts.

3. Incoterms for Air Freight

Seven incoterms can be used for air freight. These are EX Works (EXW), Free Carrier (FCA), Carriage Paid To (CPT), Carriage and Insurance Paid To (CIP), Delivered At Place (DAP), Delivered At Place Unloaded (DPU), and Delivered Duty Paid (DDP). If you want  to send goods by air choose any of the mentioned incoterms

4. How Incoterms Impact Your Shipping Cost

If freight is transported from the point oF origin to the named port, a seller is responsible for it and all the payments will be paid by him. From this point onwards, everything else is the buyers’ responsibility.

Incoterms make all such regulations and responsibilities very clear in contract papers. So, most of the rules divide the shipping costs. Making both the parties less burdened.

5. Who pays the freight on FOB?

The buyer pays the freight on FOB. The supplier assumes the transportation payments unless the commodities reach the port of origin.

Once the goods are on board, it is the buyers’ responsibility to pay for all the customs duties, taxes, and all other fees.

The Bottom Line

Incoterms are the sets of rules formulated by the ICC. There are a number of them that are used for air, sea, and land transport of the cargo to other countries.

These rules are important in understanding international trade and the cost and risks associated with the transport of commodities. Every business owner who does trade on the international level should know all these rules.