Understanding Incoterms: 11 Terms You Need to Know

International shippers rely on a set of common terms to simplify agreements and streamline the shipping process.

International shippers rely on a set of common terms to simplify agreements and streamline the shipping process.

In international trade agreements, both parties involved are free to negotiate specific terms, which typically include the price, quantity, and type of cargo being exchanged. However, every international contract must include what is known as an international commercial term, or Incoterm, in order to avoid potential misunderstandings among global trading partners.

Incoterms state each party’s financial and logistical obligations in a shared language, which ensures that all stakeholders clearly understand the terms from the get-go. Incoterms are regulated by the International Chamber of Commerce (ICC), and have been in continuous use since 1933; however, they have been updated over time to reflect developments in international trade and changing commercial regulations. The latest version, Incoterms 2010, which was published in January 2011, can be obtained in full from the ICC Bookstore.

As Gary Wollenhaupt, writing for Inbound Logistics, points out, the 11 terms used today primarily define when “risk for the cargo” shifts from the seller to the buyer, as well as who is on the hook for the shipping and insurance costs.

The first letter of each term signifies something about the nature of the agreement:

  • Any term beginning with C stipulates that the seller pays for shipping
  • Any term beginning with D stipulates that the seller transfers responsibility at a predetermined point, but still negotiates docking and clearance fees
  • Any term beginning with E stipulates that the seller’s responsibility ends as soon as the goods are prepared to leave the seller’s premises
  • Any term beginning with F stipulates that the seller is not required to meet the primary shipping costs

Anyone entering into an international partnership should, of course, have a thorough understanding of Incoterms 2010 in full — or enlist the help of an experienced shipping and Iogistics partner to guide them through the process. That said, here is a basic overview of the 11 terms that define global trade agreements today.

Universal Transport Rules

EXW: EXW is an abbreviation of “ex works.” It indicates that the seller will leave the goods for the buyer at the seller’s premises or another explicitly stated location. The seller is not required to load the goods or clear them for exporting, and the buyer is responsible for transportation costs and any associated risks.

FCA: Short for “free carrier,” FCA indicates that the seller will leave the goods for the buyer or carrier at the seller’s premises or another explicitly stated location, but will cover the costs of transportation and assume all risks until the goods are in the buyer’s possession. The buyer assumes all risks after acquiring the goods.

CPT: Standing for “carriage paid to,” CPT indicates that the seller will deliver the goods to the buyer and assume all costs of transportation, as well as loading and unloading charges and export declarations. The buyer is responsible for insurance, import clearances, and import taxes.

CIP: CIP is an abbreviation of “carriage and insurance paid to.” It indicates that the seller will assume all costs of transportation, loading and unloading charges, and export declarations, in addition to purchasing insurance worth 110% of the shipment’s collective value. As with CPT shipments, the buyer remains responsible for import clearances and taxes.

DAT: A shortened form of “delivered at terminal,” DAT indicates that the seller will transfer the goods to the buyer after unloading them at an established point such as a pier, warehouse, or rail terminal. The seller incurs all costs and risks associated with transportation and unloading.

DAP: DAP means “delivered at place.” It indicates that the seller will transfer the goods to the buyer after arriving at port but before unloading the goods. The buyer is responsible for all duties and taxes levied by the local authorities.

DDP: An abbreviation of “delivered duty paid,” DDP indicates that the seller will pay for transportation, insurance, import and export clearances, any duties and taxes levied by the local authorities, and loading and unloading charges. The buyer is not responsible for any costs whatsoever.

Ocean Transport-Specific Rules

FAS: FAS is short for “free alongside ship.” It indicates that the seller has transferred the goods to the buyer upon placing them beside the vessel at port. The buyer incurs all costs and risks from this moment.

FOB: A shorthand form of “free on board,” FOB indicates that the seller transfers the goods to the buyer upon placing them in the vessel. The buyer incurs all costs and risks from this moment.

CFR: CFR stands for “cost and freight.” It indicates that the seller transfers all risks to the buyer upon placing the goods in the vessel, but is still responsible for the cost of freight. The buyer incurs all costs related to transporting the goods from the port.

CIF: Meaning “cost, insurance and freight,” CIF indicates that the seller has transferred the goods to the buyer upon placing them in the vessel, but is still responsible for the cost of freight, as well as an insurance policy worth 110% of the cargo’s collective value and any additional coverage. As with CFR shipments, the buyer incurs all costs related to importing, including loading on a truck.

Successfully Navigating Incoterms

While Incoterms are intended to make international trade easier, that doesn’t mean they’re straightforward. An experienced shipping and logistics provider can help you wade through the jargon for clearer understanding of your obligations, thereby ensuring a stronger relationship with international partners from the start — and no unpleasant surprises down the road.

With nearly two decades of successfully facilitating international trade and transport agreements for our partners under our belt, Primary Freight has the requisite knowledge, capabilities, and dedication to ensure you get the most possible value out of every contract. Let us worry about the details so you can turn your attention to more pressing matters, like running your business.

To learn more about Incoterms, or Primary Freight’s wide array of services and solutions, call us today at (800) 635-0013. We look forward to working with you!