Know your Incoterms for 2023

What are Incoterms?

When transporting goods in a business, it is necessary to have a clear idea of the responsibilities and liabilities of the buyers and sellers involved.

Incoterms are a set of regulations that define the roles and responsibilities of the buyers and sellers involved. These regulations help to understand who is liable for shipping expenses, tasks, and hazards involved in transactions. 

The name "Incoterms" stands for "International Commercial Terms."

There are 11 different incoterms, each with its own set of rules. The most commonly used ones are EXW (Ex Works), FOB (Free On Board), and CIF (Cost, Insurance, and Freight). 

To learn more about the different incoterms and what they mean for your business, read on!

How Do Incoterms Affect Your Business?

Incoterms can clarify the responsibilities of buyers and sellers in international trade. This can avoid costly misunderstandings later on.

For the seller, Incoterms are especially important as they help to understand who is liable for things like getting the cargo ready, transport, and insurance during the transaction. This is important because it eliminates the uncertainty and allows the seller to pick the best Incoterm and payment terms to suit their business needs.

For the buyer, Incoterms help understand who is responsible for unloading and paying for the delivery of the goods; and, more importantly, who is ultimately responsible if the goods become damaged or lost in transit. 

Knowing these responsibilities will help protect them from unnecessary losses.

What are the different types of incoterms?

There are seven for all modes of transport and four specifically for Sea and inland waterway transport.

1. EXW (Ex Works)

i) All modes of transportation 
ii) Minimum Cost and Risk to Seller 
iii) Buyer – responsible for export/import formalities

It means the buyer controls everything, including picking up the items, paying for shipping, and handling any export or import formalities. The seller merely needs to make the goods available on their premises. The buyer is responsible for covering all shipping-related expenses and risks.

EXW is often used in domestic transactions where the buyer and seller are in the same country, and the buyer can easily pick up the goods from the seller's premises. 

It can even be applied to international transactions where the buyer can manage shipping and customs clearance independently because of their logistics network. 
 
2. FCA (Free Carrier)

i) All modes of transportation 
ii) Minimum Cost and Risk to Seller 
iii) Seller -responsible for export formalities
iv) Buyer – accountable for import formalities

FCA mandates that the seller delivers the goods at his premises or to a designated location, like an airport or port. 

The seller has to take care of the export clearance of goods if required. The buyer is accountable for the rest, such as transportation, insurance, and import formalities. 

If the delivery is from the seller's premises, it is considered delivered when loaded to the buyer's transportation. If it is to a designated location, the goods are considered as delivered when they reach the site and are ready for unloading from the seller's vehicle.

3. CPT (Carriage Paid To)

i) All modes of transportation.
ii) Seller -responsible for the contract of carriage, cost incurred during unloading (if any), export formalities.
iii) Buyer – accountable for import formalities, expenses, and risks after that.
iv) No need for an insurance contract from the buyer/ seller.

CPT, or Carriage Paid To, is an international trade term that signifies the seller's responsibility for delivering goods to a specific destination, such as a port or airport. 
The seller has to cover the cost of transportation to the designated location. At the same time, the buyer is accountable for other expenses such as insurance, customs charges, and taxes. 

With CPT, the seller is in charge of arranging the transportation of the goods to the agreed-upon destination and paying for the carrier's services. 

The buyer is now responsible for any risks once the seller delivers the goods to the carrier. 

4. CIP (Carriage and Insurance Paid To)

i) All modes of transportation 
ii) Seller -responsible for the contract of carriage, cost incurred during unloading (if any),  export formalities, contract for insurance
iii) Buyer – responsible for import formalities, expenses, and risks after that

Under CIP, the seller has all the responsibilities of CPT and an additional responsibility to arrange insurance coverage for the items during shipping and to deliver the goods to a particular location. 
The buyer is responsible for any risk of damage or loss to the goods once the seller delivers them to the buyer. 

The terms and coverage of the insurance policy must be sufficient to protect the value of the items during shipping.

5. DAP (Delivered at Place)

i) Any mode of transportation
ii) Seller -responsible for the contract of carriage, export formalities, contract for insurance
iii) Buyer – accountable for import formalities, cost of unloading, expenses, and risks after that
iv) No need for an insurance contract from the buyer/ seller

DAP refers to the seller's obligation to deliver the goods to a particular location in international trade. The seller is responsible for the risks and expenses of delivering the products to the buyer at a defined location, such as a warehouse or port. 

The buyer is responsible for customs procedures, taxes, and additional costs incurred during delivery. The buyer assumes all the risks and responsibility once the goods reach the location.

6. DPU (Delivered at Place Unloaded)

i) Any mode of transportation
ii) The seller is responsible for unloading goods at the place of destination
iii) Seller - contract of carriage, export formalities, contract for insurance
iv) Buyer – accountable for import formalities, cost of unloading, expenses, and risks after that
v) No need for an insurance contract from the buyer/ seller
 
Per DPU agreements, the seller is responsible for unloading the products at the predetermined site, such as a warehouse or port. 

The buyer is responsible for customs procedures, taxes, and extra expenses incurred when the products arrive at their destination.

7. DDP (Delivered Duty Paid)

i) Any mode of transportation
ii) Maximum responsibility on the seller
iii) Seller - contract of carriage, export formalities, import formalities, contract for insurance
iv) No need for an insurance contract from the buyer/ seller

Under DDP, the seller delivers the items to the buyer at the specified location. The seller covers all customs fees and taxes associated with the shipment to the buyer's region. 

The seller is responsible for any additional fees for the shipment, such as import or export clearance formalities. 

The risk of the products' transit till they arrive at their destination is also the seller's responsibility.

8. FAS (Free Alongside Ship)

i) Applicable to Sea and inland waterway transportation
ii) Maximum responsibility on the buyer
iii) Seller - export formalities
iv) Buyer – All expenses, import formalities, and risks

The shipping industry term FAS, or "Free Alongside Ship," refers to the seller's agreement to deliver the goods after the shipping vessel at a particular port. 

According to FAS regulations, the seller is in charge of preparing the items for shipment and transporting them to the port of dispatch. 

The buyer is responsible for all subsequent costs and risks once the products are brought alongside the vessel, including loading them onto it.

9. FOB (Free on Board)

i) Applicable to Sea and inland waterway transportation
ii) Seller - export formalities
iii) Buyer – All expenses of carriage of shipment from the port, import formalities, and risks
iv) No need for an insurance contract from the buyer/ seller

It refers to a contract when the seller consents to deliver the products to a particular port on board the cargo vessel. 

The seller is in charge of preparing the goods for shipment and putting them aboard the vessel under FOB arrangements. 

Any additional costs and hazards incurred during the shipping pass to the buyer once the products have been placed aboard the ship.

10. CFR (Cost and Freight)

i) Applicable to Sea and inland waterway transportation
ii) Seller - export formalities, contract of carriage till destination
iii) Buyer – Import formalities and risks from the port of delivery
iv) No need for an insurance contract from the buyer/ seller

CFR is used to clarify who is in charge of what costs and risks when goods are shipped by water.

The seller delivers the goods to the buyer by placing them in a vessel at the port of delivery. The seller is also responsible for processing the relevant export documents and paying for transportation to the specified destination port. 

The buyer is responsible for all expenses after the items reach the destination port. 

11. CIF (Cost, Insurance, and Freight)

i) Applicable to Sea and inland waterway transportation
ii) Seller - export formalities, contract of carriage till destination
iii) Buyer – Import formalities and risks from the port of delivery
iv) Insurance contract from the seller

According to CIF, the seller is in charge of shipping the products to a specified port of destination, covering the cost of transportation, and offering shipping insurance.

The cost of unloading the cargo from the ship and any further shipping expenses fall under the buyer's control after the items reach the intended destination port. 

For commodities shipped by water, the shipping abbreviation CIF offers a clear grasp of the expenses and dangers involved in the cargo.

Which Incoterms Should You Use for Your Business in 2023?

Choosing the right Incoterms is essential for any business making international trade. It would help to evaluate your requirements like type of goods, mode of transport, accountability of risks and expenses, etc. 

Considering the above factors can help you choose the Incoterm that best suits your preferences, capabilities, and budget.