The Ultimate Guide to Shipping Incoterms
Incoterms play a vital role in international trade, and having a good understanding of each will put you in the best possible position to negotiate shipping processes that work well for your business.
If you’d like to learn more, look no further than our ultimate guide, in which we discuss all the current Incoterms and provide straightforward definitions so you can use each term with confidence.
Table of Contents
Which party is responsible for freight insurance
The requirements for exports and imports
Which party is responsible for transportation costs
Incoterms® for all shipping methods
CIP (Carriage and Insurance Paid To)
DPU (Delivered at Place Unloaded)
Incoterms for sea and inland waterway transport
CIF (Cost, Insurance, and Freight)
Why do shipments need Incoterms®?
The advantages of using Incoterms®
Legal transparency and liability
How do Incoterms® impact shipping costs?
Where the seller takes some/all the responsibility
Where the buyer takes some/all the responsibility
How do buyers and sellers agree on which Incoterm to use?
The type of goods being shipped
How far does your budget stretch?
Do you have any bargaining power?
Lean on SEKO to help you find the best shipping terms for your shipment
What are Incoterms®?
‘Incoterms’ is short for International Commercial Trade Terms and are legally binding agreements published by the International Chamber of Commerce (ICC).
They are used in the shipping industry by both buyers and sellers of goods to determine who is responsible for costs, risks, and tasks when trading internationally, and ultimately ensuring the shipment reaches its final destination. As shipping is a high-value industry across the world, Incoterms are seen as an incredibly beneficial method of communication. They are used by the majority of countries to define each stage of the shipment process.
To keep Incoterms up to date with new international trade practices and processes, the ICC reviews them every ten years. The most recent Incoterms update was on the 1st of January 2020, where 11 unique Incoterms (found below) were agreed upon.
Using Incoterms
Incoterms are most commonly used as a three-letter abbreviation. They aim to define the terms of the trade by sea, land, and air freight. They cover:
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Logistics
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Costs
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Risks
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Tasks
Each Incoterm defines a number of responsibilities and obligations that must be adhered to. These include:
Which party is responsible for freight insurance
Freight insurance plays a large role in shipping freight, so must be handled with care. Freight insurance is a requirement for some Incoterms, and within these Incoterms, the responsible party for paying freight insurance must be defined.
The requirements for exports and imports
It is vital to understand whether the seller or the buyer is responsible for covering the costs of the export and import of cargo, as well as facilitating the process. All Incoterms require this to be defined.
Which party is responsible for transportation costs
Defining who is responsible for transportation costs is necessary, so there are no crossed wires that can lead to unforeseen costs and delays. All Incoterms require costs to be defined. Aside from shipping terms, freight costs can be defined as Freight Prepaid (where shipping charges are paid in advance) or Freight Collect (where shipping charges are paid upon collection of the goods).
Incoterms® for all shipping methods
EXW (Ex Works)
The EXW (Ex Works or Ex-Warehouse) Incoterm dictates that packing the products and making the goods available is the responsibility of the seller. The buyer is then responsible for export, shipping, and import to get the cargo from the seller’s origin point through to the buyer’s location.
FCA (Free Carrier)
The FCA (Free Carrier) Incoterm dictates that transporting the cargo to the destination within the seller’s own country (generally a shipping terminal) is the responsibility of the seller. Upon arrival, the shipment becomes the responsibility of the buyer. The buyer must then pay freight charges and ensure the importing and delivery processes are completed.
Whether the cargo is exported by the seller or the buyer is dependent upon the final destination and the agreement between buyer and seller.
CPT (Carriage Paid To)
The CPT (Carriage Paid To) Incoterm dictates that the seller is required to ship the cargo and unload it from the vessel at the designated delivery location. After unloading, the responsibility of the cargo is handed over to the buyer, who handles customs clearance and delivery to the final destination.
CIP (Carriage and Insurance Paid To)
The CIP (Carriage and Insurance Paid To) Incoterm dictates that the shipping costs to the defined delivery destination, alongside insurance, are covered by the seller. Once the cargo is delivered to the terminal and unloaded, responsibility shifts to the buyer. The remainder of the order, including customs, and delivery, is handled by the buyer.
If this Incoterm is agreed upon, it is a requirement that the seller purchases freight insurance.
DAP (Delivered at Place)
The DAP (Delivered at Place) Incoterm dictates that it is the responsibility of the seller to deliver the shipment to the final destination as defined by the buyer. Upon delivery, the buyer is responsible for unloading the shipment, and must also cover taxes, customs clearance, and import duty.
DPU (Delivered at Place Unloaded)
The DPU (Delivered at Place Unloaded) Incoterm dictates that the seller is responsible for delivering and unloading the cargo at the destination defined by the buyer. The responsibility for the goods only transfers to the buyer when the unloading process has finished. At this point, the buyer is responsible for taxes, customs clearance and import duty.
DDP (Delivered Duty Paid)
The DDP (Delivered Duty Paid) Incoterm dictates that the seller pays for all duty charges, and taxes, alongside customs clearance, duty and delivery to the final destination. Upon arrival, the buyer assumes responsibility and covers the cost of unloading the shipment.
Incoterms for sea and inland waterway transport
FAS (Free Alongside Ship)
The FAS (Free Alongside Ship) Incoterm dictates that the full export process of the cargo is the responsibility of the seller until they are alongside the designated freight transport (for instance plane, boat, lorry). The buyer picks up responsibility for the shipment at this point and must handle the loading of cargo and shipping to the final destination.
FOB (Free on Board)
The FOB (Free on Board) Incoterm is the natural next step to FAS and dictates that the seller is responsible for the full export process until the goods are safely loaded onto their method of transport. At this point, the buyer is then fully responsible for the shipment, including the cost of freight and import costs.
CFR (Cost and Freight)
The CFR (Cost and Freight) Incoterm dictates that transporting the cargo to the designated port of the buyer’s choosing, at the responsibility of the seller. Upon arrival, the responsibility of transporting the goods shifts to the buyer, who then covers the cost of customs clearance in the destination country, as well as delivering them to their final destination.
CIF (Cost, Insurance, and Freight)
The CIF (Cost, Insurance, and Freight) Incoterm dictates that the cost of shipping the goods to the buyer’s selected port, as well as insuring the goods, is the responsibility of the seller.
Responsibility for the goods transfers to the buyer once they arrive at the port of choice. From there, the buyer is responsible for the costs of unloading, customs, and delivering the shipment to its final destination.
If CIF is agreed upon, freight insurance must be purchased by the seller.
Why do shipments need Incoterms®?
Shipments require Incoterms because they act as a short code for the costs, responsibilities, and tasks for both the seller and the buyer.
International Trade can be incredibly complex, especially when multiple languages are involved. Incoterms remove the language barrier almost completely by making each part of the process easy to understand and designate who handles the shipment at each stage.
The advantages of using Incoterms®
Incoterms offer a range of advantages for international shipping, including:
Clear communication
Incoterms were designed to overcome language barriers. Through the simple 3 letter abbreviation, buyers, and sellers across the world can immediately understand what is required from them during the shipping process.
Legal transparency and liability
Shipment responsibility is a key factor in all shipments that use Incoterms, and it is thoroughly defined at all stages of the shipping process.
This provides legal transparency between shipping companies and means that when issues arise like a ship fire (the most expensive cause of marine insurance claims), it is clear which party may be at fault or responsible for compensation.
You can also lean into your Incoterm to ensure that responsibility for other elements is covered as well. These could include:
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Port inspections
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Customs fees
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Shipment documentation
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Import and export documents
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Transportation costs
Controlling your supply chain
While it can be an exceptional challenge to truly control your supply chain, selecting Incoterms which offer you the most responsibility also puts you in the position to have the most control.
This is because it’s down to you to select who loads, ships, and transports your product, which is particularly helpful if you have a dependency on the product arriving in a very particular condition. It can also help to cut down on other costs imposed by the seller.
Just be sure to keep abreast of the latest shipping news to find workarounds for issues, such as the Suez Canal being blocked in 2020.
Even the port itself can be chosen by you. Port selection is a useful responsibility to have, as you can decide which ports to use and which to avoid. This can potentially save time and money on port waiting times and fees, especially if the port itself should only be a short stopping point before the next leg of another long journey.
How do Incoterms® impact shipping costs?
The chosen Incoterm can have a very large impact on shipping costs, and companies should consider carefully how they want to approach shipping, especially if they have the manpower to assume more responsibility for the product.
Where the seller takes some/all the responsibility
Selecting an Incoterm that places more responsibility on the seller can be incredibly convenient. This is especially the case for smaller businesses that may not have the time, manpower, or understanding to manage supply chain alongside their business.
It also puts businesses in a better position if there is an issue with the shipment, as the liability falls to the seller to rectify.
It is worth bearing in mind, though, that leaving the shipping to the seller can make the shipment more expensive. This is because the seller is likely to arrange each aspect to their preference, which could result in a more expensive journey. It could also lead to the shipment taking longer, which may have a knock-on effect on sales.
Where the buyer takes some/all the responsibility
It can be much more cost-effective to take full responsibility for the shipment as the buyer.
Simply being able to choose who loads the product and ships it can make a big difference in the cost of the shipment.
You can also take the time to select a route that you know works for you. This route could purposefully avoid larger ports to skip waiting times.
You should also be aware though that any problems with the shipment means that it is also your responsibility to cover the costs. An issue might include damaged goods, which can be a painful expense on top of the potential lost sales.
You should also consider that shipping and logistics require a great amount of knowledge and skill.
You could also consider using a freight forwarding partner like SEKO to ensure your products get from A to B.
How do buyers and sellers agree on which Incoterm to use?
There are many considerations to take into account when agreeing upon an Incoterm, you should consider:
The type of goods being shipped
Not all goods are handled equally. Bulk goods and containerised goods may be handled very differently to other shipment types, and as such it is vital that you consider whether the method of loading, unloading, and shipping is suitable.
You should also consider whether an Incoterm that includes insurance would be beneficial. This is particularly the case when shipping manufactured goods and technology.
Customs Experience
Do you have a lot of experience with customs and export processes? It may be more beneficial for you to select an Incoterm where you have responsibility over those procedures.
You can then use that experience to push through the required documentation at your own pace.
Most companies will want to control the customs clearance aspects that are handled within their borders. This will help ensure compliance for audits and safekeeping.
How far does your budget stretch?
Budget is a big factor in Incoterm selection, especially for young companies that are inexperienced with shipping.
For said companies, a good idea may be to select an Incoterm like DDP. This ensures that the cost of export and import clearances, insurance, freight charges, and more, are all laid out in a single invoice. Keeping shipments to a single invoice means you will never be caught out by unexpected costs.
Do you have any bargaining power?
Do you have a relationship with a freight company? Or a partnership with a carrier that may be able to acquire cheaper quotes? If you can negotiate cheaper prices on elements of an Incoterm like freight, you may consider saving money by leaning towards an Incoterm that puts more responsibility in your hands.
Standard Terms on Specific Trade Lanes
Some markets have standard shipping terms that are widely adopted to help lubricate international trade on the specific trade lane. Trade between the US and UK will predominately utilise door to door trade terms such as EXW and DDP. While Far East West Bound imports from countries such as China will often see the importer using FOB terms.
Lean on SEKO to help you find the best shipping terms for your shipment
SEKO is a leading third-party logistics provider. We offer an extensive range of services across 150 offices worldwide, with teams ready to help you with award-winning solutions, innovative tech, and top-level customer support.
Alongside helping you to secure the best Incoterm for your shipment, we also guarantee:
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Hands-on service and support
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Strong personal relationships
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Creative and configured 3PL logistics solutions
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Responsiveness and reliability
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Flexibility and consistency
With over 150 offices worldwide, SEKO can offer your e-commerce business end-to-end global logistics with award-winning solutions customised to your needs. SEKO has the expertise and resources to help your business optimise its supply chains, from warehousing and distribution to transportation and freight forwarding.
Optimise your supply chains today. Contact a member of the SEKO team to discover how we can help your business succeed.
Incoterms® FAQs
Where can I find the terms on shipping documents?
Incoterms are required for every international shipment, and they can be found or written on the commercial invoice.
What are the main categories of Incoterms?
There are 4 categories of Incoterms that each Incoterm has a place in. These are:
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Incoterms Group E - Includes the EXW (Ex Works) Incoterm.
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Incoterms Group F - Includes FCA (Free Carrier), FAS (Free Alongside Ship), and FAB (Free On Board) Incoterms.
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Incoterms Group C - Includes CFR (Cost and Freight), CIF (Cost, Insurance, and Freight), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To) Incoterms.
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Incoterms Group D - Includes DAT (Delivered At Terminal), DAP (Delivered At Place), DDP (Delivered Duty Paid) Incoterms.
Why are there different editions of shipping terms?
Shipping Incoterms have been updated over time to reflect how businesses ship on a global scale. The first edition of Incoterms was released in 1936 by the ICC (International Chamber of Commerce). The most recent edition was released in 2020, and is still being used today.
Who publishes Incoterms?
The International Chamber of Commerce (ICC) reviews and publishes Incoterms - A series of commercial terms that relate to international commercial law, and define roles and responsibilities in shipping goods.
Are Incoterms mandatory?
Incoterms are not mandatory, but it is most beneficial for all parties to use them. Incoterms are the language of international trade and define the entire shipment journey so both the buyer and seller understand who is responsible for each part of the process.
