Freight Basics - Incoterms

When negotiating an international sales contract the Terms of Sale can be just as important as the sale price. Language barriers could complicate this point. Since 1936 the Incoterms created by the International Chamber of Commerce (ICC) has been used to breakdown these barriers.

Incoterms 

INternational COmmerce Terminology (Incoterms) defines exactly the shipping responsibilities of both the buyer and the seller. This table illustrates the cost responsibilities for each party –

INCOTERMS	EXW - Ex Works	FOB - Free on Board	CFR - Cost and Freight	CIF - Cost, Freight and Insurance	DAT - Delivered at Terminal	DAP - Delivered at Place	DDP - Delivered Duty Paid
Pickup & Delivery	BUYER	SELLER	SELLER	SELLER	SELLER	SELLER	SELLER
Handling Fees	BUYER	SELLER	SELLER	SELLER	SELLER	SELLER	SELLER
Export Documents	BUYER	SELLER	SELLER	SELLER	SELLER	SELLER	SELLER
Container Loading (if required)	BUYER	SELLER	SELLER	SELLER	SELLER	SELLER	SELLER
Terminal Fees	BUYER	SELLER	SELLER	SELLER	SELLER	SELLER	SELLER
Freight	BUYER	BUYER	SELLER	SELLER	SELLER	SELLER	SELLER
Import Documents	BUYER	BUYER	BUYER	BUYER	SELLER	SELLER	SELLER
Inland to Terminal	BUYER	BUYER	BUYER	BUYER	SELLER	SELLER	SELLER
Container Unloading	BUYER	BUYER	BUYER	BUYER	SELLER	SELLER	SELLER
Import Handling	BUYER	BUYER	BUYER	BUYER	SELLER	SELLER	SELLER
Door Delivery	BUYER	BUYER	BUYER	BUYER	ADVISE	SELLER	SELLER
Customs Clearance	BUYER	BUYER	BUYER	BUYER	ADVISE	ADVISE	SELLER
Duties & Taxes	BUYER	BUYER	BUYER	BUYER	BUYER	BUYER	SELLER

 

What does this all mean? 

Here is a simple explanation of the most commonly used terms:

EXW – Ex Works

Buyer will pay all freight charges from the seller door to the door at the destination. The seller needs to ensure the freight is ready for shipping and provide all the correct documents i.e. commercial invoice and packing declaration. The buyer will have full control of the freight.

FOB – Free on Board

Seller will arrange through their freight forwarder the movement of the goods up to the origin port. The goods will then be the buyer’s responsibility. Their nominated forwarder will take control from here. Freight and destination costs will be charged to the buyer.

CFR – Cost & Freight

Costs from the seller’s door to the destination port will be paid by the seller. Given the seller is responsible for transportation, they also nominate the forwarder. The buyer will take care of the destination charges.

CIF – Cost, Insurance & Freight

Similar to CFR but the maritime insurance cost will be paid by the seller. Insurance cover will up to the destination port only.

DAT – Delivery at Terminal

All charges up to the nominated terminal will be paid for by the shipper. Delivery, Customs Clearance, and Customs import charges will be paid for by the buyer. The seller will arrange freight to the terminal through their freight forwarder, the buyer can have their own customs and delivery agent takeover from the terminal.

DAP – Delivery at Place

All charges, as well as delivery to the buyer facilities, will be arranged by the seller. Customs clearance cost can be arranged by either the seller or the buyer depending on the agreement at the time of the freight booking. Import Duty and Taxes will be paid by the buyer at the destination.

DDP – Delivered Duty Paid

The seller will arrange and pay for all freight charges to the buyer’s door including customs clearance, duty, and taxes at the destination. The seller has full control of the shipment.

Choosing the right terms

Each option has its own benefits and risks for both the buyer and the seller.

BENEFITS

• Freight Control – Working on tight time frames or stock control it is essential to know where your freight is the majority time
• Buyer – EXW, FOB, CFR/CIF Seller – DAT, DAP, DDP
• Cost Control – Knowing the cost of the freight will help you work out the true cost of your products
• Buyer – EXW, FOB, CFR/CIF Seller – DAT, DAP, DDP

RISKS

• Lack of visibility – Stock control
• Buyer – DAT, DAP, DDP Seller –EXW, FOB, CFR/CIF
• Unexpected costs – Not having the ability you nominate your forwarder can incur additional costs that you haven’t taken into account, resulting in loss of profit
• Buyer – CFR/CIF, DAT Seller – FOB

Incoterms get updated periodically. The full current list of Incoterms (2010) is available for purchase on the ICC website.

For further information on Incoterms contact your local Air & Ocean Team.

For more helpful articles see our on-going series of Freight Basics articles