UNDERSTAND & MAKE THE MOST OF INCOTERMS® 2020
Incoterms® were developed as a set of norms for international deliveries, in order to guarantee the smooth sailing of international trade. They are often used as abbreviations, such as FOB or CIF, and can sometimes lead to misunderstandings amongst business partners. Follow the lead of the Forwarding Experts and make sure that Incoterms® always play in your favor.
What Do Incoterms® 2020 Actually Cover?
Under the contract of sales, Incoterms® determine the rights and obligations of the parties as far as the delivery of goods from the seller to buyer is concerned. They give a common framework to understand how transport is organized and by whom, who bears the risks inherent to it, and who is in charge of the shipment’s security and customs compliance.
Incoterms® always follow the same structure – a three-letter acronym and a location name. The location name is important in the sense that it indicates where transportation costs are handed over from the seller to the buyer. However, from one Incoterm to the other, that same location name may not indicate where risks are being transferred, nor give information on where and by whom transport insurance should be organized.
The current Incoterms® 2020 contains 11 terms. Four of them are specifically designed for ocean freight, as they exclusively apply to sea and territorial water transport; the remaining seven are applicable to cargo delivered via any type of transport mode – including water. You can find a detailed explanation of each Incoterm in our dedicated article.
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Incoterms differ mainly by the distribution of transportation costs and organization. This covers trucking, ocean, air or rail freight but not only: loading, unloading, and packaging the goods are also part of the equation.
In international trade, transportation costs naturally have a significant impact on the final bill! Buying goods under Ex-Works (EXW) terms or Delivered at Place Unloaded (DPU) will generate very different costs for you as a buyer. The same goes if you are the selling party.
At the same time, deciding which of the parties is the best equipped to organize fast, safe and cost-efficient transportation can also help to bring you peace of mind. When in doubt, let the expertise of a freight forwarder connect your goods to where they are needed the most.
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While knowing who is responsible for organizing and paying for transportation is important, knowing who is bearing the risks of the shipment and where is essential.
In some Incoterms®, such as Carriage and Insurance Paid To (CIP), the buyer is assured that the seller will be responsible for insuring the cargo. Other Incoterms® do not inform on insurance policies and therefore leaves them up for discussion between the parties.
Additionally, while risk and transportation costs can be transferred at the same location (it is the case of EXW or DPU shipments, for example), not all Incoterms® follow this rule. The Carriage Paid To (CPT) Incoterm already transfers risks from seller to buyer when the cargo is handed over to the carrier, in its origin country, whereas transportation costs are borne by the seller until a named place of destination.
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Last but not least, Incoterms® dictate who is responsible for filing customs declaration and clearing all duties, both at export and import. Under these terms, cargo must also be compliant with any security control measures and pass all inspections.
In most of the Incoterms®, the seller is responsible for export duties, while the buyer is responsible for import customs clearance. Only under EXW terms does the buyer take both import and export duties under his responsibility, while the seller bears these responsibilities under the Delivered Duties Paid (DDP) terms.
Classifying Incoterms® 2020
While differences exist between each individual term, Incoterms® can easily be grouped in four categories, based on their acronym’s first letter – not so difficult to remember! To become an Incoterm Expert, you can read the full description of each rule in our dedicated article.
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EXW shipments place almost all of the obligations under the buyer’s responsibility. They are transferred to the recipient at the initial time and place of shipment.
The seller ensures the transfer of goods to the buyer at a selected location.
The buyer organizes the entire delivery from the place of loading, including the main transportation, and bears all risks from the moment the goods are accepted from the seller. This includes export customs clearance.
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With Free Carrier (FCA), Free Alongside Ship (FAS), and Free On Board (FOB), the main carriage is not paid by the seller, and the goods are transferred at a place agreed by the parties in the seller’s country.
The seller clears the shipment for export customs. They deliver the cargo at a named place of shipment.
The buyer is responsible for concluding the main contract of carriage, for choosing a carrier or a forwarder, and monitors the freight costs. They are responsible for import customs duties.
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With CPT, CIP, Cost & Freight (CFR), and Cost, Insurance and Freight (CIF), the main carriage is paid by the seller, but the risks are transferred when the goods are handed over to the first carrier. Two of these terms oblige the seller to insure the goods in favor of the buyer.
The seller is responsible for concluding the main contract of carriage, for choosing a carrier or a forwarder, and they monitor the freight costs. They organize the delivery of the goods to the place of loading for the main carriage, where risks will also be transferred to the buyer. They are responsible for export customs clearance.
The buyer bears the risk of cargo damage or loss during the main carriage. They also rely on the seller to provide correct information to the main carrier. They are responsible for import customs clearance.
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The so-called "full delivery" group includes Delivered at Place Unloaded (DPU), Delivered at Place (DAP), and DDP. Most costs and obligations are borne by the seller and transferred to the buyer when they receive their goods at the country of destination.
The seller is responsible for concluding the main contract of carriage, for choosing a carrier or a forwarder and monitoring the freight costs. They organize the delivery of the goods to the place of loading for the main carriage, where risks will also be transferred to the buyer. They are responsible for export customs clearance, and also import in the case of DDP.
The buyer is responsible for unloading their cargo at the place of transfer of goods (except with DPU).
Top 4 Tips to Use Incoterms® 2020 to Your Advantage
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Knowledge is your best ally – make sure you know your Incoterms® to select the most adapted one.
Beyond theoretical knowledge, ask yourself a few questions before deciding. Which of the parties is the most likely to make the right decisions? What is the best way to transport your specific cargo? Is insurance needed (we found that it usually is)?
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To make sure the correct Incoterm is applied, it must be clearly indicated in your contract of sales, using the following structure:
[Selected Incoterms®], [Named location], [in accordance with Incoterms® 2020]e.g. CIF, Long Beach, Incoterms® 2020
An Incoterm is only valid once the contracting parties have determined a city location or a port. Indicate these places as accurately as possible.
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It is still possible to use the Incoterms® 2010, the Incoterms® 2000, and even earlier versions of the Incoterms®. Therefore, when specifying the terms of delivery, it is necessary to indicate which version of the Incoterms® should be used.
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The Incoterms® only indicate how transport costs and risks are distributed between the seller and the buyer, as explored above.
The Incoterms® rules do not indicate the price to be paid for the goods, nor their payment method.
They also do not regulate the transfer of ownership of goods or the dispositions in case of a breach of contract. These matters are usually defined in express terms in the sales contract, or in the laws applicable to it. Moreover, the parties are strictly bound by local laws – they may take precedence over any aspect of the contract of sale, including the selected Incoterms®.
