EXW, FOB, CIP, FCA… You’ve probably heard some of these terms in the past, but do you really know what they mean? The word Incoterm, which stands for international commerce terms defines the different types of agreements between a buyer and seller when exchanging goods from one country to the other. These include: who handles transportation, who pays for what and most importantly, when the risk is transferred.
Here is a brief overview of the 11 possible Incoterms to help you make a clear decision when negotiating with an international buyer.
Applicable to all means of transportation
EXW – ExWorks
ExWorks means all the risk and costs are assumed by the buyer. The seller only has to place the goods at the buyer’s disposal at an agreed location (e.g. the factory) but is not required to load the goods onto a vehicle or pay custom fees.
FCA – Free Carrier
When using FCA terms, the seller has to deliver the goods to the carrier at a named place. It is recommended to specify this place as clearly as possible as this is the place where the risk transfers from the seller to the buyer. Please note, that some clauses have been added, as of January 2020. Therefore we recommend you investigate further the Incoterm.
CPT – Carriage paid To
CPT means the seller has to deliver the goods at a named place, but also had to contract for and pay the costs of carriage to bring the goods to the named place of destination.
CIP – Carriage, Insurance Paid
Similar to CPT, the seller is responsible for ensuring the property at a named place. The seller must contract an “All Risk” insurance to protect the buyer from the risk of loss or damage to the named place of destination. However, the parties may agree to a lower level of coverage
DAP – Delivery at Place
The seller is responsible for arranging carriage and for delivering the goods, ready for unloading from the arriving means of transport, at the named place. Risk transfers from seller to buyer when the goods are available for unloading, meaning unloading is at the buyer’s risk. The buyer is responsible for import clearance and any applicable local taxes or import duties. Both parties are not obliged to make a contract of insurance, but it is recommended.
DDP – Delivery Duty Paid
All the risk and costs are assumed by the seller. The seller is responsible until the final destination. The buyer is responsible for unloading the goods at the final destination and has to assume the risk and the costs at this moment.
Applicable only to marine transport
FAS – Free Alongside Ship
FAS means that responsibility is transferred when the property is placed alongside the boat (for example, on the quay) the place defined by the buyer. Therefore, the seller does not assume the risk associated with the loading on the boat.
FOB – Free on Board
This Incoterm implies that the risk is transferred once the goods is loaded on the boat. Therefore, the buyer is responsible for all costs from this moment.
CFR – Costs and Freight
Costs and Freight means that the seller is responsible for loading the goods on the boat but must also contract and pay the transport to the destination port.
CIF – Costs, Insurance, Freight
The CIF implies that the seller delivers to the carrier and pays the transport and insurance for the buyer at a named place, for any mode of transport. It is important for the buyer to be aware that the required insurance coverage is minimal. However, the parties may agree on a higher level of coverage.
Except for CIP and CIF, insurance is not mandatory, neither for the seller nor the buyer. It is also good to know that the Incoterms, published by the International Chamber of Commerce (ICC), are updated every 10 years to monitor trends in international trade. The last edition is from January 2020.
When exploring international exports, we highly recommend collaborating with an export specialist. Such as, GoExport, which offers services and knowledge in the field of international exporting businesses.