Incoterms: Shipping Terms You Need To Know
There is a lot involved in transporting and shipping goods worldwide. Whether a small package or a large load, it doesn’t just arrive at its destination.
To know who carries what responsibilities between the actual shipper/supplier & receiver/buyer you need to make arrangements. After all, the shipper does not necessarily own the goods immediately. It is helpful to have agreements between the shipper and the customer/buyer to clarify who is responsible for the risks, costs, and liability during each shipping phase.
These agreements are called Incoterms and are established by the International Chamber of Commerce (ICC), which you can see as a set of rules and conditions agreed upon internationally. Read here all about what they mean.
In total, two groups of Incoterms can be divided into two groups:
- Group I is for each mode of transport (road, rail, air, and multimodal)
This group includes EXW, FCA, CPT, CIP, DAT, DAP, and DDP.
- Group 2 is for transport by sea and inland waterways.
This group comprises FAS, FOB, CFR, and CIF.
Let’s take a look at the first group.
Ex Works (EXW)
Delivering goods Ex Works means that all responsibilities, risks, and costs are for the buyer. The seller is only responsible for having the goods available at the time and location specified in the delivery terms.
According to this Incoterm, the delivery of goods means that the buyer arranges everything, such as packaging, loading, and transporting the goods from the collection point to the final destination. This also includes customs clearance in the country of origin and country of destination. The latter is one of the reasons why EXW is not recommended for international shipments.
Free Carrier (FCA)
The meaning of this Incoterm is -> freight free for the carrier. The seller is responsible for delivering and pre-transporting the goods to an agreed delivery point, including costs, export formalities, and any export documents.
Once the goods have been handed over and accepted, the risks and costs are transferred to the buyer.
Carriages Paid To (CPT)
The seller is liable for the transport costs to an agreed delivery point. The risks and responsibilities pass to the buyer when the goods are delivered to the first carrier.
Concerning customs matters;
- The seller takes care of the export and transit of the goods.
- The buyer is responsible for importing the goods.
When Terminal Handling Charges (THC) are levied, the buyer must contact the seller to check if the charges are included in the transport price.
Carriage and Insurance Paid to (CIP)
The seller delivers the goods to an agreed location chosen by the seller. The seller arranges the freight insurance and pays for it, and you can select possible additional insurance during consultation.
The risks and responsibilities pass from the seller to the buyer when the goods are transferred to the carrier.
Delivery At Terminal (DAT)
The seller ships and delivers the goods to a terminal (shipping port or agreed-on place) and is responsible for the costs and risks of bringing the goods.
The responsibility for the risks and costs is transferred to the buyer when the goods arrive at the agreed place or port.
The seller is obliged to take care of the export customs clearance. From the delivery point, the buyer must take care of the import customs clearance and all other costs.
Delivered At Place (DAP)
This Incoterm is very similar to DAT. The seller ships and delivers the goods to a terminal (shipping port or agreed-on place) and is responsible for the costs and risks of bringing the goods. The seller takes care of the export customs clearance.
Once the transport has arrived at the agreed destination, all responsibilities are passed to the buyer. This includes taking care of import clearance, taxes, and all other costs.
DAP entails an additional responsibility for the buyer because, with this Incoterm, the delivery ends when the means of transport come to a standstill before the goods are unloaded. The buyer is responsible for unloading the goods.
DAP is commonly applied to road transport or when several means of transport are used.
Delivered Duty Paid (DDP)
With DDP, the seller is responsible for transporting and delivering the goods until the buyer receives them at the agreed destination.
Those responsibilities include the risks and costs for pre-transport, export and import duties, customs and import/export documents, insurance, and all other costs associated with the shipment to the agreed destination.
The risk transfers to the buyer as soon as the unloaded goods are made available to the buyer.
As mentioned before, the above Incoterms are part of the first group, used for each mode of transport. The second group contains incoterms, which are used for transport by sea and inland waterways.
Let’s examine the Incoterms FAS, FOB, CFR, and CIF.
Free Alongside Ship (FAS)
When using this Incoterm, the seller takes care of the delivery of the goods, which must be placed next to the ship at the agreed port dock. The seller is responsible for all costs and risks until the goods are docked, including preparation for export. Once the goods have been anchored, the buyer bears the responsibilities, fees, and risks of the shipping.
Free On Board (FOB)
The seller delivers and loads the goods on board the transport vessel at the pre-arranged port of departure. The buyer assumes the responsibilities, risks, and costs as soon as the goods are loaded onto the transport vessel at the port of departure.
These responsibilities, risks, and costs include customs clearance and import duties.
FAB is used for container transport and inland waterway transport.
Cost and Freight (CFR)
The seller arranges and pays for transport to the agreed port. Once there, the seller ensures that the goods, cleared for export, are loaded on board the ship.
The risks are transferred to the buyer when the goods are loaded on board. This includes the insurance of the goods and before the main transport takes place.
CFR is only used for goods transported by sea or inland waterways. Good to know; the buyer has little control over the shipping process and associated costs.
Cost, Insurance, and Freight (CIF)
This Incoterm is similar to CIF, where the risk transfer occurs after the goods have been loaded onboard the ship at the port of shipment.
However, with CIF, there is an insurance obligation for the seller. The seller takes out insurance for the goods, which covers possible damage or loss from the port of shipment to at least the destination port.
Good to know; the goods only need to be covered as a minimum. Buyer and seller may negotiate coverage.
Are you looking for guidance in the Incoterms field or want your goods shipped under the right conditions?
Cargo Shipping International is a leading, international and specialized cargo freight forwarding company based in Rotterdam – the Netherlands. Having been in the industry for nearly three decades, we have the expertise, network, and resources to ship your goods under suitable conditions and with the proper coverage.
When you ship goods, it is helpful to know in advance where you stand and who is responsible for what. Therefore, it is beneficial to have agreements between the shipper and the customer/buyer to clarify who is accountable for the risks, costs, and liability during each phase of the shipping.
These agreements are called Incoterms, which you can see as a set of rules and conditions agreed upon internationally.
The Incoterms can be divided into two groups:
Group I is for each mode of transport (road, rail, air, and multimodal)
- This group includes EXW, FCA, CPT, CIP, DAT, DAP, and DDP.
Group 2 is for transport by sea and inland waterways.
- This group comprises FAS, FOB, CFR, and CIF.