Incoterms Guide

Understanding Incoterms 2020: FAQs

The freight-forwarding industry is full of jargon – arguably no more so than incoterms 2020 published by the International Chamber of Commerce.

Yet incoterms form part of the contractual agreement paying customers have with merchandise sellers and the freight forwarding company. So just slightly important then!

Importers should really be considering which incoterms work best for you before negotiating a contract of sale. If you don’t, you risk being stung by the seller and have no protection should any complications arise with the shipment.

Download PDF
What are Incoterms?

Simply put, incoterms stands for ‘International Commercial Terms’. As the title suggests, the ‘term’ outlines what the exporter is legally responsible for, and what the importer is legally responsible for.

These terms cover everything from tasks, responsibilities, costs, taxes, and risks, together with when the responsibility shifts from the exporter to the importer.

The agreements are categorised and abbreviated (i.e: EXW, FCA etc). We have outlined what each of these means at the end of the article.

General Information
A typical incoterm will include:
  • Point of delivery when goods change hands
  • Who has been appointed to handle goods between the point of delivery
  • Transportation costs
  • Import and export duty fees
  • Insurance
Incoterms do not cover:
  • All the conditions of a sale
  • Identify the merchandise or contract price of goods being sold
  • Reference the method or payment terms
  • State when the title of ownership passes from the seller to buyer
  • Specify which documents the seller must provide to facilitate customs clearance at the destination border
  • Address liability for delayed, damaged or lost delivery
Incoterms for ocean freight
Most incoterms 2020 apply to both air and sea freight. However, for export-import arrangements that are being delivered by “sea and inland waterways transport” have an additional four incoterms;
‍
FAS – Free Alongside Ship (named port of shipment)
FOB – Free on Board (named port of shipment)
CFR – Cost and Freight (named port of destination)
CIF – Cost, Insurance and Freight (named port of destination)
Incoterms for air and water freight
‍EXW – Ex Works (named place of delivery)
FCA – Free Carrier (named place of delivery)
CPT – Carriage Paid To (named place of destination)
CIP – Carriage and Insurance Paid to (named place of destination)
DAT – Delivered at Terminal (named terminal at port or place of destination)
DAP – Delivered at Place (named place of destination)
DDP – Delivered Duty Paid (named place of destination)
What are the most common incoterms?
In general freight forwarders prefer to use a particular set of incoterms which work for them. The five most common are:
‍
‍DDP – Delivered Duty Paid
EXW – Ex Works
FAS – Free Alongside Ship
CIF – Cost, Insurance and Freight

Please note: these are generally the most common, but you may encounter others. It’s worth noting that some freight-forwarders may not be too willing to use the incoterm you prefer. It may work better for you, but does not suit their usual mode of operation. In this scenario, be persistent or use a different shipping company.
Naming Locations in Sales Contract
Sometimes incoterms are written into the sales contract. In this scenario, make sure you explicitly state the port of delivery immediately after the incoterm. For example: “EXW Portsmouth International UK.”

Note: Larger ports have several terminals so make sure you know which terminal your shipment will be delivered to and include this in the sale contract.
How Do Incoterms Effect Shipping Costs?
Each incoterm represents a different arrangement which impacts on costs. For example, some incoterms require the exporter to pay taxes, others require the importer to pay taxes.

You can calculate the cost including the relevant incoterms using our cost calculator.
What is a Deferment Account?
The advice above covers most circumstances when forwarding freight by air and sea. However, imports to the UK also requires a Deferment Account.

When goods are imported into the UK, they are typically subject to sales tax and customs duties which must be paid to customs and excise at the time of import.

A Deferment Account means shipments are not subject to additional credit checks so will be cleared quickly.
Types of Incoterms

The list below details the incoterms you will typically encounter when dealing with freight-forwarding companies and sales contracts. Here we explain what the responsibility is for exporters (sellers) and importers (buyers).

There are 11 types of incoterms in total. Seven of these terms are used for all modes of transport across land, water and air. The other four are specific to goods that are being transported by ocean freight and inland waterways.

Incoterms for any mode(s) of transport
EXW - (Ex-Works)
  • Point of delivery when goods change hands
  • Who has been appointed to handle goods between the point of delivery
  • Transportation costs
  • Import and export duty fees
  • Insurance
FCA - (Free Carrier)
  • The seller is responsible for passing goods that have been cleared for export over to the first courier – even if the courier has selected by the buyer.
  • Once the goods have been collected by the courier, the cost and risk of moving the goods pass to the buyer.
CPT - (Carriage Paid To Named Place of Destination)
  • The seller pays for the carrier to deliver the goods to a destination named in the contract agreement (i.e, Szechaun). The seller also pays the cargo insurance (in the buyer’s name).
  • Responsibility for the goods is passed to the buyer once the goods are delivered by the carrier at the named destination.
CIP - (Carriage and Insurance Paid To Named Place of Destination)
  • Seller clears goods for export and pays freight and insurance costs involved for delivering goods via a third-party to the named point of destination.
  • The risk of damage or loss of goods is transferred to the buyer once the carrier receives the shipment.
DAP - (Delivered at Place)
  • The seller is responsible for the costs of delivering goods to an agreed arrival port (i.e Portsmouth).
  • Responsibility is passed to the buyer once the goods are unloaded. The buyer is also responsible for paying import duties, taxes and customs clearance.
DPU - (Delivered at Place Unloaded)
Usually used when the buyer or seller want to deliver goods to somewhere other than a terminal.
  • The seller is responsible for collection, delivery, unloading and clearance of goods.
  • Once the goods have been unloaded at the named destination, the costs and risks pass to the buyer.
DDP - (Delivered Duty Paid)
  • The seller is responsible for all costs, risks and obligations of shipment including import duties, taxes and clearance fees.
  • Responsibility passes to the buyer upon arrival at the named destination. The buyer is responsible for unloading the goods.
Additional Incoterms for Ocean Freight
FAS - (Free Alongside Ship)
  • Seller is responsible for delivering goods to the designated exportation port and placing them alongside the correct vessel.
  • Responsibility passes to the buyer once the goods have been unloaded.
FCA - (Free Carrier)
  • The seller is responsible for passing goods that have been cleared for export over to the first courier – even if the courier has selected by the buyer.
  • Once the goods have been collected by the courier, the cost and risk of moving the goods pass to the buyer.
FOB - (Free on Board)
  • Seller is responsible for delivering goods to the named port of shipment and loading the goods on the correct vessel.
  • Once the shipment is loaded, risks, costs and customs obligations pass to the buyer.
CFR - (Cost and Freight)
  • Seller assumes responsibility for clearing goods for export and delivering them to correct vessel at the port of shipment. The seller also bears the cost of transport to the vessel.
  • Liability is transferred to the buyer once the goods have been loaded on the transportation vessel at the port of origin. The buyer is also responsible for paying insurance costs.
CIF - (Cost Insurance and Freight)
  • The seller is responsible for the entire shipping process including suitably packaging goods, clearing items for export, prepaying the freight contract and covering the insurance.
  • Responsibility passes to buyer once the goods have been unloaded at the final destination named on the sales agreement.