The Incoterms® rules were developed by the International Chamber of Commerce (ICC) to facilitate international trade and for the interpretation of the trade terms that the parties to a contract of sale could agree to apply in their contract, thus avoiding ambiguities and misinterpretations of those terms, which often had been difficult to resolve under the preceding Uniform Customs and Practice for Documentary Credits (UCP). Despite their age (they were created in 1936), they are still in use today, due to their simplicity and comprehensiveness.
The 11th edition of the Incoterms® rules (Incoterms® 2011) came into force in September 2010, replacing the previous editions dating back to 1936 and introduced new definitions, reflecting recent developments in logistics and transport as well as changes in legislation in certain countries.
Functions of Incoterms
The primary function of these rules is to help both buyer and seller know which party will be responsible for transportation, loading, unloading, insurance, freight cost. They also help determine when title or risk passes between buyer and seller. In short, these rules are an interpretation of common commercial practices that have been formalized into a set of principles.
What does that mean? It means you’ll need to understand your business model and industry well enough to figure out what makes sense in your situation. For example, if you’re a wholesaler who sells directly to retailers without any third-party logistics involved, it probably doesn’t make sense for you to use terms like FOB (free on board) or FAS (free alongside ship).
Those terms require that goods be loaded onto a vessel before ownership transfers from seller to buyer—and as we said above, if there’s no third-party logistics involved in your supply chain, there won’t be any vessels involved! On top of all that, not every country uses Incoterms®, so while they can be useful in helping international buyers and sellers come to an agreement about terms, they aren’t universally accepted.
That means if you decide to stick with them, you should really only focus on those most relevant to your business model. If you sell products internationally but don’t use 3PLs or manage inventory yourself, DAP (delivered at place), DDP (delivered duty paid), and DAT (delivered at terminal) might not apply at all. So ask yourself: Do I manage my own inventory? Do I hire 3PLs? Is international shipping part of my supply chain process?
The Incoterms Rules
Rules for any mode of transport.
Rules for Sea and Inland waterway transport
- EXW – EX WORKS
- FCA – FREE CARRIER
- CPT – CARRIAGE PAID TO
- CIP – CARRIAGE AND INSURANCE PAID TO
- DAT – DELIVERED AT TERMINAL
- DAP – DELIVERED AT PLACE
- DDP – DELIVERED DUTY PAID
- FAS – FREE ALONGSIDE SHIP
- FOB – FREE ON BOARD
- CFR – COST AND FREIGHT
- CIF – COST INSURANCE AND FREIGHT
Rules for any mode of transport
EXW – Ex Works.
means that a seller fulfills his obligation to deliver when he has made the goods available at his premises (or another named place) ready for pick-up by the buyer. The buyer bears all risks involved in taking over control of the goods. This term may be used irrespective of who arranges for carriage of the goods to their destination.
FCA – Free Carrier
Under FCA, sellers undertake to deliver goods to a named place in their own country, provided that transportation costs are paid by buyer. If seller asks for a forwarding fee from buyer, such request is subject to national law of both parties. To facilitate trade, FCA terms provide for delivery at seller’s expense unless otherwise agreed. Some countries may have local customs duties or import restrictions. In those cases, it is usually seller’s responsibility to pay them before delivering goods under an FCA term.
CFR – Cost & Freight
The seller must arrange for transportation of goods to port (named by buyer) in country of origin, but the risk is transferred to buyer when goods are loaded on board. Transportation costs, insurance (if any), duties and taxes are paid by seller. CFR term requires that seller contract for insurance against loss or damage while goods are in transit.
CIF – Cost, Insurance & Freight
When you’re importing goods, you want to ensure that your supplier has covered all costs of getting those goods to your business. Cost refers to the price that your supplier charges for products, insurance is a policy that covers loss or damage of those goods in transit, and freight is usually an additional shipping cost from port-of-entry to your company. When you buy under CIF terms, it means that your supplier pays for these things.
CPT – Carriage Paid To
The seller pays for transportation of goods to their destination, but is not responsible for loading. DAP – Delivered At Place: The seller fulfills his obligation to deliver when he has handed over the goods, cleared for export, into the charge of a carrier at an agreed place. The seller must bear all costs and risks involved in bringing goods to that place.
CIP – Carriage & Insurance Paid To
This term means that the seller pays for transporting goods to their destination. The buyer is responsible for insuring, but not paying for delivery.
DAT – Delivered At Terminal
This term is used in a sea or inland waterway shipment when delivery is made at a terminal at which loading of goods for shipment is provided, but risk does not pass to buyer until goods are loaded onto vessel. This means that if something happens to your package between your door and a warehouse, you can get your money back. That being said, DAT deliveries have a very short timeframe from arrival at port of loading to departure from port of discharge.
DAP – Delivered At Place
The seller delivers when he places goods at the disposal of the buyer at a named place. The risk of loss or damage to such goods is transferred to buyer when they are so placed, whether or not payment has been made. This term may be used for any mode of transport, including multimodal transport.
DDP –Delivered Duty Paid
The DDP terms provide that title to goods shall pass when delivered to a carrier or another person named by buyer in writing. If seller is required to deliver at destination, seller must prepay freight charges and obtain a receipt for shipment. Any additional costs of delivery, such as fees for customs clearance or carrying charges, may also be included in price.
FAS – FREE ALONGSIDE SHIP
This is where a seller delivers goods to a carrier at his own expense and risk, when unloaded by that carrier at a named place. All costs up to that point are for account of seller. The buyer bears all risks while goods are in transit after being delivered alongside ship.
FOB – FREE ON BOARD
The seller pays for transportation to a named port of exit (named by buyer) from his factory or other place of business. Cost & Freight – CIF: The seller pays for transportation to a named port of destination (named by buyer). The seller must contract for insurance during transit. Cost, Insurance & Freight – CFR: The seller pays for transportation and also assumes all risks up to destination. Delivered at Frontier – DAF: Seller delivers when goods cross border before payment has been made.
CFR – COST AND FREIGHT
The seller must pay for all transportation costs and bear all risks of loss or damage to goods until they are delivered to destination, unless otherwise agreed. If at destination, customs duties must be paid before delivery can occur.
CIF – COST INSURANCE AND FREIGHT
The seller pays for shipping costs and insures goods, both while in transit and at their destination. The buyer bears any risk of loss or damage during transit. The CIF term requires that goods be tendered to a carrier at an agreed port of loading on a date that is within 30 days after conclusion of a contract for sale. In practice, buyers frequently ask sellers to waive or reduce documentation requirements so as to be able to present bills of lading that show CIF-origin cargo.