If you’re looking to start trading goods globally, whether importing or exporting, you will probably come across “Incoterms” in your sales negotiations. “Incoterms” stand for International Commercial Terms and are a set of pre-defined trade codes compiled by the International Chamber of Commerce (ICC), which can be used as a basis for sales contracts.
What does incoterm mean in shipping?
In the world of shipping, there is no legal obligation to use incoterms, but they clearly establish the ‘point of delivery’ within a contract, helping avoid any confusion or misunderstanding in regards to both buyer and seller responsibilities and costs associated with worldwide trade.
The incoterms rules feature abbreviations for terms, like FOB (“Free on Board”), DAP (“Delivered at Place”) EXW (“Ex Works”), CIP (“Carriage and Insurance Paid To”), which have very precise meanings for the sale of goods around the world.
What are the 4 groups of incoterms?
There are four groups of incoterms; E, F, C and D. These categories are determined by the delivery locations and who is responsible for covering the cost of each part of the journey. The groups are then split into sub-categories which refer to various scenarios.
There are eleven incoterms in total, each consisting of a three digit code. Seven of these are applicable terms for transportation via any mode of transport and the other four are specific to trade conducted by sea and inland waterways.
EXW (Ex Works)
FCA (Free Carrier)
CPT (Carriage Paid To)
CIP (Carriage and Insurance Paid)
DPU (Delivered at Place Unloaded)
DAP (Delivered at Place)
DDP (Delivered Duty Paid)
Specific Incoterms Applicable to Sea and Inland waterways
FAS (Free Alongside Ship)
FOB (Free On Board)
CFR (Cost and Freight)
CIF (Cost, Insurance and Freight)
What has changed with the updated Incoterms for 2020?
Incoterms were first introduced in 1936 but have been periodically updated. The last updated version came into place in January 2020. Some of the differences between Incoterms 2020 and Incoterms 2010 are: The DAT rule Delivered At Terminal has been renamed DPU Delivered at Place Unloaded, incoterms 2020 tries to assist the seller when the FCA rule is used in conjunction with a letter of credit and the incoterms 2020 rules now cover the situation where either the buyer or the seller transports the goods using their own vehicles, without engaging the services of a third party.
What you should consider when using incoterms
Most costs associated with your international transactions are covered by the incoterms except VAT. It is important to specify from the outset, whether payment of the VAT will be the responsibility of the buyer or seller.
Additionally, it is good to know that an insurance provided as part of CPT, CIP and CIF terms offers minimal amount of coverage. From a commercial perspective, it’s unlikely the insurance offered is sufficient enough to cover the cost of your goods, so seek the advice of a marine insurance specialist on options available for your products.
You should always look to strike a deal for a contract under trading terms that provide you the best value and, should it be your requirement, the ability to maintain the control of goods throughout the supply chain. A freight forwarder will be able to advise you of the most suitable term to negotiate your sales contract upon, to meet your business needs.