Organizing the import and export of goods, both domestically and internationally, requires a laser focus on details and the ability to adapt when things don’t go as planned. There are many parts of shipping that rely on completed paperwork, transparent communication, and an understanding of the hoops that need to be jumped through.
Ironing out all these details beforehand can make the shipping and payment process much easier for import and export partners. As the governing body of international trade, the International Chamber of Commerce has laid out some regulations for the financial responsibilities of buyers and sellers. These responsibilities, called Incoterms, are in place to regulate and streamline the financial obligations of importers and exporters.
What Are Incoterms?
Incoterms are and agreed-upon set of terms between buyers and sellers. They determine who is financially responsible for shipping, insurance, tariffs, and other costs during the transportation of goods.
The first version of Incoterms was established all the way back in 1923. The 2010 version is the most recent, and a new version is expected to be released in 2020.
Agreeing on the right Incoterms in the sales contract can mean a clearer understanding of who pays for what and who is responsible for which stages of the shipping process. Incoterms determine who is accountable at different parts of the shipping process and when liability is transferred from one party to another.
Incoterms for All Transportation Modes
The following Incoterms are available for goods that are being shipped on any form of transportation, including land, air, and sea.
EXW: Ex Works
EXW is the only set of Incoterms that does not require the goods that are being shipped to be cleared for export. The seller is required to assist the buyer with documentation and getting export approvals. The buyer is obligated to pay for the export approvals and document gathering.
EXW terms involve the seller delivering the goods to the buyer’s agreed upon location, like a warehouse or manufacturing facility. The buyer has to give the seller proof that the buyer collected the goods. Then, the buyer assumes all responsibility for the products, export costs and clearances, and any additional risk.
FCA: Free Carrier
FCA Incoterms require the seller to deliver the goods to the buyer or a party approved by the buyer, such as a freight carrier or intermediary. This location or transfer is where the buyer assumes all responsibility for the goods. This location may be on the seller’s property, in which case they are required to load the products but not to unload them at the buyer’s intended destination.
The buyer may request there to be a freight contract, which can also be organized by the seller. The buyer is obligated to pay for the freight contract costs and risks. Insurance is to be arranged by the buyer.
CPT: Carriage Paid To
CPT is a kind of Incoterm that allows for goods to be delivered to a location that is mutually agreed upon by a buyer and a seller. The seller could deliver the shipment to a carrier or another intermediary party.
The seller is obligated to pay for the costs associated with freight shipment and transportation. Once the goods are delivered, the responsibility is transferred to the buyer. If multiple freight carriers are used, the seller is only required to deliver the shipment to the first carrier. The buyer is in charge of purchasing insurance.
CIP: Carriage and Insurance Paid To
CIP Incoterms have the seller deliver the goods to the freight carrier or another seller-chosen party at an agreed-upon location. The seller, in this instance, is responsible for paying for insurance coverage and freight fees. As soon as the carrier receives the goods, the buyer is in charge of the risks the products endure during transport.
In this case, the seller is only required to have a minimum level of insurance protection. Should more be desired, the buyer has to pay for additional insurance coverage themselves.
DAT: Delivered at Terminal
In Delivered at Terminal Incoterms, the seller is considered to have delivered the goods when they are unloaded at the destination terminal. This terminal can be a warehouse, cargo terminal, container yard, or another agreed-upon location. Insurance is not required, but the seller is in charge of purchasing insurance to cover potential risks to the shipment before it is delivered.
DAP: Delivered at Place
DAP Incoterms means that a seller delivers a shipment of goods that are ready to be unloaded at a pre-arranged destination. In this instance, the buyer is required to pay import duties, taxes, and arrange customs clearances. Although insurance is not necessary with DAP, the seller should be mindful of the risks associated with transportation and can choose to insure the shipment until it is delivered.
DDP: Delivered Duty Paid
DDP is a type of Incoterm that has the most responsibility for the seller. With this set of Incoterms, the seller is obligated to deliver the goods to the buyer, and they must be pre-cleared for import by the time they reach the agreed destination. The seller is responsible for the fees, costs, and risks associated with getting the goods to the destination. These costs could include duties, pre-shipment inspections, payments of customs formalities, and so on.
Although insurance is not required, the seller is the party that would be in charge of furnishing insurance coverage for the goods being shipped until the buyer has received them.
Incoterms for Maritime Freight
FAS: Free Alongside Ship
FAS Incoterms require the seller to deliver the goods, packaged and cleared for export, to the vessel at a previously agreed upon shipping port. Once these goods have been delivered, the buyer assumes responsibility for the shipment. The buyer is required to insure the shipment and arrange for the loading of the goods onto the transport vessel.
The buyer can arrange a freight contract, or allow the seller to get a freight contract. The buyer assumes responsibility for the terms laid out in the contract.
FOB: Free on Board
This type of Incoterm puts the seller in charge of the transportation of a shipment of goods until it is loaded onto a ship at an agreed-upon port. Once the goods are loaded on the vessel, the buyer assumes responsibility for them. The buyer is initially in charge of getting a freight contract, but may request that the seller do that. The seller is in charge of letting the buyer know about the shipment’s delivery details for the buyer to have enough time to arrange insurance.
CFR: Cost and Freight
CFR requires the seller to deliver the goods at an agreed-upon port. They should already be cleared for export and suitably packaged. The seller prepays the freight contract, and responsibility for the cargo is transferred to the buyer once the shipment is on board the vessel. The seller should pass on the delivery information to the buyer so that they can organize insurance coverage promptly.
CIF: Cost, Insurance, and Freight
CIF Incoterms require the shipper to prepay the freight contract and obtain shipping insurance before the buyer takes over the responsibility for the shipment. The seller is obligated to assume the risks for the delivery until the goods are cleared for export and loaded onto the transportation vessel at the correct port. With these terms, the seller is required to have a minimum amount of insurance; the buyer and seller may need to agree upon more insurance coverage if it is necessary.
Incoterms and E-Commerce
Most business to business e-commerce arrangements will use EXW, CPT, or CIF Incoterms. Some business to consumer agreements will use CPT, CIF, or DDP. Buyers will more often than not be in charge of VAT payments, tariffs, taxes, and other costs levied by the country where the goods are being imported.
International commerce carries many risks and obstacles. Entering a contract without a deep understanding of the terms of the sale can severely cripple the bottom line. Shippers must be well aware of all parties’ responsibilities and degree of liability. Most importantly, insufficient insurance may cost a great deal more than it would in domestic shipping.
For more information on this topic, click here to read our blog on types of cargo insurance.
Cabrella keeps your shipments safe, every time. Contact the Cabrella experts at 844-422-2735 or click below to get a quote. Our licensed professionals will be happy to answer any questions you have.