With today’s supply chain more convoluted than ever, simplicity is a must. Incoterms are a must-have addition to your vocabulary list if you want to work with international transportation.
Incoterms is short for International Communication Terms, designed to simplify a fundamentally complex process. These terms were introduced nearly 85 years ago and have been adjusted several times to keep up with evolving norms. Whether you’re a buyer or a seller, learning these terms will ensure nobody is confused on pricing, experience, or transportation type.
From the blockage of the Suez Canal to a maritime worker shortage, there are a lot of obstacles to finding the most compatible shipping resource. We’ll break down the most commonly used Incoterms so you can enjoy a more seamless buyer or seller experience.
Depending on the Incoterm you choose, you may have to keep in mind the following obligations:
- Main carriage
- Loading charges
- Discharge/Unloading charges
- Pre-shipment inspection
- Goods, commercial invoice, and documentation
There are more responsibilities to remember, but we’ll explore them below with the most commonly used Incoterms.
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The Most Used Incoterms
The following Incoterms are famous for their simplicity. Remember that a Buyer is any party paying for goods or a service (also known as a Brand Owner). A Seller is a manufacturer or business selling goods, services, or both.
If you’ve ever seen a quote filled with these acronyms, you already have an idea on how they’re used to clarify the purchasing process.
Ex Works (EXW)
EXW is an Incoterm that states the Seller will make their goods readily available at a specific location. The Buyer will then be responsible for the protection and transportation of the goods.
Buyer’s Obligations
Below is a basic list of the Buyer’s obligations when working under an EXW Incoterm.
- Pay the exact price of the goods in the stated contract
- Provide the Seller with proof of taking the delivery
- Copies of export licenses and customs formalities
- Loading, main, and discharge carriages
- Pre-shipment inspection costs
Seller’s Obligations
Below is another list of the Seller’s obligations with an EXW Incoterm.
- Documentation of the goods and sales invoices
- Written notice of the Buyer’s delivery
- Export packaging, marking, and any necessary documentation
Free On Board (FOB)
The FOB Incoterm is a little different than the EXW Incoterm in terms of responsibility. The Seller is obligated to protect and transport goods until they arrive at a previously agreed upon port.
Upon arrival, the Buyer will then have the responsibility to oversee the goods until they reach the final destination.
Buyer’s Obligations
Many of the obligations here are similar to the EXW Incoterm.
- Pre-shipment inspection costs
- Import formalities
- Payment of goods
- Main carriage
- Discharge carriage
Seller’s Obligations
Likewise, the Seller’s obligations are similar to the EXW Incoterm contract.
- Proof of delivery
- Loading charges
- Goods and commercial invoice
- Pre-shipment inspection costs
- Export licenses and customs
Related: 5 Ways COVID-19 Pandemic Has Disrupted Supply Chains
Delivered Duty Paid (DDP)
Last but not least, one of the most common Incoterms is DDP. This responsibility rests heavily on the shoulders of the Seller, so you should only agree to this contract if you trust who you’re working with.
Buyer’s Obligations
The Buyer’s obligations are extremely simple with this Incoterm.
- Written proof of payment for goods
- Help the Seller with any necessary documents or information for export purposes
Seller’s Obligations
The Seller takes on the majority of responsibility in the DDP contract.
- Goods and commercial invoice documentation
- Main and loading carriage
- Proof of delivery
- Export licenses and customs formalities
- Packaging
- Marking
- Cost of any and all inspections
- Proof of delivery upon arrival
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Other Incoterms Worth Knowing
Free Carrier (FCA)
The FCA Incoterm requires the Seller to be responsible for both export clearance and delivery of goods to the designated carrier.
Remember that a carrier is defined as any person or business that takes the carriage. These carriers can look like the following:
- Shipping line
- Airline
- Trucking company
- Freight forwarder
- Railway
Free Alongside Ship (FAS)
Likewise, the FAS Incoterm gives the Seller the responsibility to clear goods for export. The name refers to how the Seller needs to place said goods alongside the vessel before departure.
Not any port will be allowed, either. A loading dock or a barge is acceptable, but not a container port. This Incoterm is considered exclusive to ocean or inland waterways.
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Cost and Freight (CFR)
Most responsibilities in the CFR Incoterm are under the Seller, but the Buyer still needs to be aware of their own obligations. A CFR contract has the Seller clearing goods for export, delivering them to the ship, and paying for transport.
The Buyer will then pay for any extra transportation costs such as import clearance.
Cost, Insurance, and Freight (CIF)
The Seller has a significant amount of responsibility here, required to pay costs, insurance, and freights to the destination port. However, the Buyer has to protect the goods once they’re on the ship.
Carrier and Insurance Paid (CIP)
The Seller oversees the risks of cost of carriage and insurance until the goods reach their first carrier. The Buyer will then accept all the responsibility of risk afterwards.
Delivered at Place (DAP)
The Seller bears the majority of responsibility under DAP, transporting goods all the way to the final destination. The Buyer takes care of all the steps before transportation such as customs clearance or import duties.
Incoterms Final Thoughts
Incoterms are a vital part of your shipping and loading vocabulary. No single term is suited for all occasions, so make sure you pay attention to the smaller details.
The most commonly used Incoterms include the following:
- EXW
- FOB
- DDP
Other terms to be aware of include FCA, FAS, CFR, CIF, CIP, and DAP.
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