Incoterms—short for International Commercial Terms—are a set of predefined rules that govern international trade. They specify the roles and responsibilities of buyers and sellers, which is an essential step in optimizing an efficient global supply chain. But as with many facets of logistics, Incoterms can be intricate and confusing. In this guide, we’ll shed light on their nuances and how to use them effectively.
Why Incoterms Matter
Understanding Incoterms can mean the difference between a profitable transaction and one rife with misunderstandings and additional costs. These terms spell out who is responsible for payment, when the risk of loss shifts from seller to buyer, and where the goods should be delivered.
Decoding Incoterms
EXW – Ex Works
- When to Use: EXW is best suited for a buyer who wants to maintain total control over the transportation process.
- What It Means: Here, the buyer is fully responsible for picking up the goods from the seller’s premises and for all subsequent costs and risks.
FCA – Free Carrier
- When to Use: FCA works wonders for multimodal shipping scenarios, especially when the seller has better control or understanding of local conditions.
- What It Means: The seller’s responsibility ends when the goods are delivered to a mutually agreed location, ready for export or onward shipment.
CPT – Carriage Paid To
- When to Use: Choose CPT when you are shipping with multiple modes of transportation and prefer the seller to manage initial carriage costs.
- What It Means: The seller assumes all costs until the goods reach a predetermined destination, after which the buyer takes over the risks.
CIP – Carriage and Insurance Paid To
- When to Use: Ideal for buyers who want the comfort of insurance without the hassle of arranging it.
- What It Means: The seller covers both carriage and insurance costs to a specified destination, after which the risk transfers to the buyer.
DAT – Delivered At Terminal
- When to Use: DAT is useful when the buyer can easily manage the post-arrival processes and costs.
- What It Means: The seller bears all risks and costs until the goods are unloaded at a terminal, usually a port or an airport. From there, the buyer assumes responsibility.
DAP – Delivered At Place
- When to Use: This term is most effective when the seller is well-versed with the local shipping environment and can manage the risks until delivery at the final location.
- What It Means: The seller carries the goods to a predetermined place, takes care of all formalities, and informs the buyer when the goods are ready for unloading.
DDP – Delivered Duty Paid
- When to Use: DDP is the turn-key solution for buyers who prefer not to handle any part of the shipping process.
- What It Means: The seller is responsible for everything—transportation, duties, taxes, and other fees—until the goods are ready for unloading at the buyer’s location.
FAS – Free Alongside Ship
- When to Use: FAS is best reserved for bulk cargo shipments where the buyer’s vessel will collect the goods.
- What It Means: The seller’s role is to safely place the goods alongside the buyer’s vessel at a named port, from which point all responsibility shifts to the buyer.
FOB – Free On Board
- When to Use: FOB is a classic maritime term, ideal for sea shipments.
- What It Means: The seller has fulfilled their obligation once the goods pass over the ship’s rail at the agreed port of shipment, at which point all risks transfer to the buyer.
CFR – Cost and Freight
- When to Use: Opt for CFR when dealing with ocean shipments and you have your own insurance coverage.
- What It Means: The seller pays for all costs required to get the goods to the destination port, but the risk transfers to the buyer as soon as the goods are loaded on the vessel.
CIF – Cost, Insurance, Freight
- When to Use: CIF is beneficial for ocean shipments where the buyer prefers an all-in-one service from the seller.
- What It Means: The seller handles everything—from costs and freight to insurance—until the goods arrive at the port of destination, where responsibility and risk pass to the buyer.
Visualizing Incoterms
| Incoterm | Ideal Scenario | Seller’s Responsibility | Risk Transfer Point |
| EXW | Domestic trade, low-value goods | Only until goods are ready for pickup | At seller’s premises |
| FCA | Multimodal shipping | Until goods reach an agreed location | At agreed location |
| CPT | Multiple modes of transport | Freight costs to specified destination | Upon arrival at destination |
| CIP | Insurance needed | Freight and insurance to specified destination | Upon arrival at destination |
| DAT | Buyer manages post-arrival | Until goods are unloaded at terminal | At terminal |
| DAP | Seller familiar with local conditions | Until goods are ready for unloading at final location | Upon arrival at final location |
| DDP | Buyer wants no shipping responsibilities | Everything including duties and taxes | Upon unloading at buyer’s location |
| FAS | Bulk cargo | Until goods are alongside buyer’s vessel | Alongside ship |
| FOB | Sea shipments | Until goods pass over ship’s rail | Over ship’s rail |
| CFR | Ocean shipments, buyer’s own insurance | Costs to destination port | When loaded on vessel |
| CIF | All-in-one service for ocean shipments | Costs, insurance, and freight to port of destination | When loaded on vessel |
Best Practices and Expert Tips
- Be Specific: Clearly state the named place or destination in your contract to avoid misunderstandings.
- Validate Insurance: Always check the insurance coverage in terms like CIP and CIF to ensure it meets your requirements.
- Cross-Border Scrutiny: For terms like DDP, ensure the seller is capable of managing cross-border taxes and duties.
- Flexibility and Adaptability: Remember, the best term for one transaction might not be the same for another.
Incorporating Incoterms into your international shipping practices eliminates ambiguity, standardizes processes, and ultimately forges a transparent and efficient supply chain. By adhering to these terms and keeping our best practices in mind, you set the stage for smoother, more predictable, and more profitable trading relationships.
Omni Logistics offers customers access to a variety of transport modes and works with you to craft a unique solution to your specific logistical challenges – regardless of mode, time, or cost requirements. By using our “OmniModal” model, we retain access to and control of your shipments with fewer touches and handoffs to other providers. Let us help you optimize your supply chain today.
