A lot of dynamics are involved in the shipping of cargo from a buyer to a seller. There are so many responsibilities, who gets to cover the cost of transportation, customs clearance, loading and unloading, and so many more. Supply chain issues will occur if these responsibilities are not well defined and clearly shared between buyer and seller.
These problems are even more compounded when there’s a language barrier between the buyer and the seller. Some words or context may get lost during translation even when they use translators, resulting in a failed supply chain.
Fortunately, these problems are significantly mitigated through the use of shipping Incoterms. And in this article, we discuss all the 11 Incoterms, their benefits, and how to choose one that works best for you.
What Are Incoterms?
Incoterms is short for International Commercial Trade Terms. They are terms used by buyers and sellers to communicate who gets to do what responsibilities and tasks in transporting cargo.
Depending on the Incoterm agreed by both buyer and seller, each party must bear the responsibilities defined by the Incoterm. And this helps to ensure that the cargo leaves the seller and gets to the buyer hitch-free, eliminating the risks of miscommunication.
Incoterms are not made-up acronyms to confuse buyers or sellers. An organization, the International Chamber of Commerce (ICC), is in charge of creating these terms, managing them, and updating them once they get outdated.
ICC convenes every decade to update the Incoterms to keep up with the modern responsibilities and cargo shipping requirements. The latest set of Incoterms is Incoterms 2020, updated on the 1st of January 2020. And we expect the next updated set of Incoterms would come in 2030.
Areas of responsibility
There are four significant areas of responsibility that every Incoterm describes.
- Point of delivery
This section defines where the buyer and seller have agreed that the cargo’s final delivery point should be. It is also the section that marks the point during the shipping process that the complete responsibility of the shipment falls into the hands of the buyer.
- The party responsible for transportation costs
This section of the Incoterms contains agreements about who gets to pay the transportation costs of the cargo. If the transportation cost is going to be shared, both parties should also specify it in this section. Finally, this is the section where the responsibility of who handles each stage of transportation is shared.
- Import and export requirements
The documentation and formalities of the shipment are specified here. For instance, this section defines who represents the cargo at the customs, what documentation the load should have, and what duty payments must be made.
- The party responsible for freight insurance
You’ll find in this area who is responsible for the insurance of the freight during transportation.
The 11 Incoterms You Need To Know
This section describes what you need to know about the 11 Incoterms.
CFR (Cost and Freight)
According to the CFR Incoterm, the responsibility of shipping the cargo to the destination port lies with the seller. That means the freight cost, export clearance, and any costs related to loading the shipment on the ship are the seller’s responsibility.
Although the seller contracts, at its own expense, the carriage of the cargo to the port of destination, the risk of ownership falls on the buyer the moment the freight is aboard the vessel and en route to the port of destination. As far as the seller is concerned, they can tick the cargo off as having been delivered as soon as the load is aboard the vessel.
CIF (Cost, Insurance, and Freight)
The CIF Incoterm places the responsibilities of shipping cost, insurance, and other clearance for export on the seller. These responsibilities don’t end until the cargo gets to the buyer’s agreed port or destination.
At this port of destination, the buyer then assumes responsibility for the cargo, such as clearing the cargo for import and transporting it to the final destination. But the risk of ownership is the buyer’s the moment the load is aboard the cargo.
Even at the destination port, the seller may still have to pay for unloading the cargo unless otherwise agreed. But the import clearance of the shipment is all on the buyer.
Another responsibility the seller undertakes is contracting insurance for the cargo up to the port of destination. The insurance must be a minimum of Clauses (C) of the Institute Cargo Clauses.
CIP (Carriage and Insurance Paid to)
According to the CIP Incoterm, the seller assumes responsibility for the transportation cost and the export clearance of the cargo up to the port of destination. In addition, the cost of insurance of shipment against damage also falls on the shoulders of the seller. The only thing the buyer does is handle the import clearance and any further transportation to the final destination.
However, the CIP Incoterm is like the CIF Incoterm. The responsibility of ownership of the cargo belongs to the buyer the moment the freight is on the vessel en route to the port of destination.
The insurance should conform with Clauses (A) of institute Cargo Clauses or any similar clause. It should also cover the cost of the contract at the very least.
CPT (Carriage Paid To)
CPT Incoterm specifies that the seller handles the transporting of the cargo up to an agreed destination, where the buyer’s carrier then takes the shipment to the final destination. The seller bears the export clearance and charges, and freight costs to the agreed destination.
This final destination could be the port of destination, where the buyer has to handle the cargo clearance or the buyer’s own premises. The buyer assumes responsibility for the cargo when the cargo gets here.
DAP (Delivered at Place)
Under the DAP Incoterm, the seller bears the cost of transporting the cargo to the place of destination of the buyer. The seller, however, is not responsible for unloading or clearing the cargo for import. As soon as the shipment gets to the destination, it becomes the buyer’s responsibility.
Also, insurance is not required for any party under the DAP Incoterm.
DDP (Delivered Duty Paid)
The DDP Incoterm gives the most responsibility to the seller. Not only does the seller prepare and cover the cost of transportation and export clearance from the place of delivery, but they also have to clear the cargo for import at the place of destination and prepare it for unloading.
DPU (Delivered at Place Unloaded)
The DPU Incoterm is new, and the ICC added it to replace the abolished DAT (Delivered at Terminal) Incoterm. DPU Incoterm exonerates the buyer from undertaking responsibility for the cargo until it is unloaded at the place of destination. The seller bears all the cost and clearance responsibility up to that point. After which, the buyer handles the import clearance.
EXW (Ex Works)
The EXW Incoterm imposes the most responsibilities on the buyer. The seller’s only obligation is to prepare the cargo for shipment at an agreed place of delivery. Often, this place of delivery is the seller’s premises, but it could also be a warehouse or a factory. But beyond that, the buyer takes over.
According to EXW Incoterm, the buyer contracts the carriage from the agreed place of delivery handles the export and import clearance of the cargo, all at the buyer’s expense.
FAS (Free Alongside Ship)
The FAS Incoterm requires that the seller get the cargo to the delivery port where the vessel contracted by the buyer awaits. They also clear the load for export and cover any related charges. As soon as the cargo gets here, the buyer bears all other responsibilities, including the cost of transportation to the port of destination and the thereon.
FCA (Free Carrier)
According to the FCA Incoterm, the seller handles the transporting of the cargo until it is delivered to the buyer’s carrier at an agreed location. This agreed location could be a shipping terminal where the load is prepared for export, a warehouse, or within the seller’s premises.
The seller shoulders the cost of transporting the cargo to the agreed destination. There are some cases where the buyer has to handle the export clearance. But as soon as the shipment gets to the hand of the buyer’s designated carrier, it is no longer the responsibility of the seller. And as such, the seller has no obligations to clear the cargo for import.
Also, if the agreed location of delivery is anywhere within the seller’s control, such as the seller’s premises, it becomes their obligation to load the cargo into the buyer’s carrier. But everywhere else, the seller sheds the responsibility of unloading and loading the cargo into the buyer’s carrier.
FOB (Free on Board)
The FOB Incoterm specifies that the seller’s responsibilities end the moment they load the cargo onto the ship contracted by the buyer.
Up to that point, however, the seller handles every other responsibility, including clearing the cargo for export and covering the costs of getting the shipment to the port of delivery. But soon as the delivery is made to the ship, the seller marks the cargo off as “delivered” in their books.
Benefits of Incoterms
The Incoterm rules are very extensive. And they help to bridge the communication gap between sellers and buyers. But what other benefits do shipping Incoterms have?
- Avoidance of Confusion and Miscommunication
The ultimate benefit of using Incoterms is that they help avoid miscommunication between buyers and sellers concerning freight shipping. Once an Incoterm rule is agreed upon, each party follows the rules stipulated by that Incoterm. These rules are unambiguous and reduce the risks of miscommunication.
- Supply Chain Efficiency
Incoterms also help to improve the efficiency of any supply chain. Every party knows what to do and when, making the freight transport from the shipper to the consignee as smooth as possible.
- Cross-border Communication
Thanks to the Incoterms, you can easily communicate shipping details with sellers or buyers in countries where they don’t speak your language. Once both parties agree on an Incoterm, the chances of miscommunicating important shipping details are very slim.
What Don’t Incoterms Cover
Thanks to Incoterms, buyers and sellers can make headway in figuring out the best way to transport freight from seller to buyer. However, these Incoterms are limited. Some instances are:
- Incoterms don’t identify the goods being shipped. They also don’t declare the contract price.
- They also don’t specify what documents should be provided by the seller to ease the custom clearance process for the buyer.
- While Incoterms help avoid disputes over responsibilities, there isn’t much on dispute resolution.
Because of these limitations, we advise both parties to reach contractual agreements on what to do in those instances.
Choosing an Incoterm For Your Shipment
DAP and FCA are the two most commonly used Incoterms because they cover international and domestic shipments. Both Incoterms require that the seller handles every transportation detail until the point of export, while the buyer handles everything from import until the shipment gets to the final destination.
But what works for everyone may not always work for you. Therefore, you have to do your own research on what Incoterm works best for you. But don’t forget that the other party has to agree to it.
Also, if you think you want to be in complete control of your shipment from the moment you purchase it from the seller, you might want to use the EXW incoterm. The EXW is the Incoterm that gives buyers the most responsibilities over the shipment, hence, the highest level of control. But remember that this would cost you the most as the buyer.
Ultimately, you must choose the best incoterm for your shipment to ensure that there are no ruffles on your supply chain down the line. If you’re still unsure what to do, partnering with an experienced carrier, such as Total Connection, can help relieve this burden, as they know what’s best for you.
Relying On Total Connection For All Shipping Incoterms
The Incoterm you choose can affect how your shipment goes. It can affect how fast your shipment gets to you and what condition.
But there are 11 of them. It may seem overwhelming for an inexperienced shipper or consignee as they try to figure out which one works best for them. One sure way to solve this problem is to rely on an experienced carrier to advise them on the best course of action. Total Connection is a perfect example of such a carrier.
With over two decades of experience handling all kinds of incoterms, Total Connection has built expertise in all aspects of shipping, including knowing what Incoterm works best for any type of cargo.
You can also ride on our extensive supply chain network to get the best set of people working on your supply chain while maintaining complete cargo control.
Contact us through the brief quote form below to access our one-of-a-kind domestic and international shipping services.