Incoterms are the agreement used for the shipping and delivery of goods internationally as well as the documents used for the shipping and delivery of goods. These agreement boils down to three points – cost, control and liability. Cost refers to the responsible party of the shipment at any point of the journey. Control pertains to the ownership of the goods at any point of the journey. And liability pertains to who is responsible for damages at any point of the shipment’s journey. Knowledge of incoterms is essential to both shippers and consignees in determining how much responsibility they want to shoulder with regards to cost, control and liability.
Below are eleven (11) incoterms. Source www.foreign-trade.com
INCOTERMS can thus have a direct financial impact on a company’s business. What is important is not the acronyms, but the business results. Often companies like to be in control of their freight. That being the case, sellers of goods might choose to sell CIF, which gives them a good grasp of shipments moving out of their country, and buyers may prefer to purchase FOB, which gives them a tighter hold on goods moving into their country.
In this glossary, we’ll tell you what terms such as CIF and FOB mean and their impact on the trade process. In addition, since we realize that most international buyers and sellers do not handle goods themselves, but work through customs brokers and freight forwarders, we’ll discuss how both fit into the terms under discussion.
Recently the ICC changed basic aspects of the definitions of a number of INCOTERMS, buyers and sellers should be aware of this. Terms that have changed have a star alongside them.
One of the simplest and most basic shipment arrangements places the minimum responsibility on the seller with greater responsibility on the buyer. In an EX-Works transaction, goods are basically made available for pickup at the shipper/seller’s factory or warehouse and “delivery” is accomplished when the merchandise is released to the consignee’s freight forwarder. The buyer is responsible for making arrangements with their forwarder for insurance, export clearance and handling all other paperwork.
FOB (Free On Board)
One of the most commonly used-and misused-terms, FOB means that the shipper/seller uses his freight forwarder to move the merchandise to the port or designated point of origin. Though frequently used to describe inland movement of cargo, FOB specifically refers to ocean or inland waterway transportation of goods. “Delivery” is accomplished when the shipper/seller releases the goods to the buyer’s forwarder. The buyer’s responsibility for insurance and transportation begins at the same moment.
FCA (Free Carrier)
In this type of transaction, the seller is responsible for arranging transportation, but he is acting at the risk and the expense of the buyer. Where in FOB the freight forwarder or carrier is the choice of the buyer, in FCA the seller chooses and works with the freight forwarder or the carrier. “Delivery” is accomplished at a predetermined port or destination point and the buyer is responsible for Insurance.
FAS (Free Alongside Ship)*
In these transactions, the buyer bears all the transportation costs and the risk of loss of goods. FAS requires the shipper/seller to clear goods for export, which is a reversal from past practices. Companies selling on these terms will ordinarily use their freight forwarder to clear the goods for export. “Delivery” is accomplished when the goods are turned over to the Buyers Forwarder for insurance and transportation.
CFR (Cost and Freight)
This term formerly known as CNF (C&F) defines two distinct and separate responsibilities-one is dealing with the actual cost of merchandise “C” and the other “F” refers to the freight charges to a predetermined destination point. It is the shipper/seller’s responsibility to get goods from their door to the port of destination. “Delivery” is accomplished at this time. It is the buyer’s responsibility to cover insurance from the port of origin or port of shipment to buyer’s door. Given that the shipper is responsible for transportation, the shipper also chooses the forwarder.
CIF (Cost, Insurance and Freight)
This arrangement similar to CFR, but instead of the buyer insuring the goods for the maritime phase of the voyage, the shipper/seller will insure the merchandise. In this arrangement, the seller usually chooses the forwarder. “Delivery” as above, is accomplished at the port of destination.
CPT (Carriage Paid To)
In CPT transactions the shipper/seller has the same obligations found with CIF, with the addition that the seller has to buy cargo insurance, naming the buyer as the insured while the goods are in transit.
CIP (Carriage and Insurance Paid To)
This term is primarily used for multimodal transport. Because it relies on the carrier’s insurance, the shipper/seller is only required to purchase minimum coverage. When this particular agreement is in force, Freight Forwarders often act in effect, as carriers. The buyer’s insurance is effective when the goods are turned over to the Forwarder.
DAT (Delivered At Terminal)
This term is used for any type of shipments. The shipper/seller pays for carriage to the terminal, except for costs related to import clearance, and assumes all risks up to the point that the goods are unloaded at the terminal.
DAP (Delivered At Place)
DAP term is used for any type of shipments. The shipper/seller pays for carriage to the named place, except for costs related to import clearance, and assumes all risks prior to the point that the goods are ready for unloading by the buyer.
DDP (Delivered Duty Paid)
DDP term tend to be used in intermodal or courier-type shipments. Whereby, the shipper/seller is responsible for dealing with all the tasks involved in moving goods from the manufacturing plant to the buyer/consignee’s door. It is the shipper/seller’s responsibility to insure the goods and absorb all costs and risks including the payment of duty and fees.
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