Incoterms® are a set of internationally recognized rules that define responsibility and liability between sellers and buyers in international transactions.
- Define the responsibility and liability for the moving cargo throughout the life of the shipment. The use of Incoterms® creates a common and relatively precise understanding of the respective operational obligations and costs between a seller and a buyer relating to the movement and delivery of the goods.
- Define the risk between the buyer and seller regarding cargo loss or damage.
- Provide instructions to carriers, forwarders, customs brokers, and others involved in shipping your goods, as well as banks and others involved in financing.
- Cover ownership/passage of title. Passage of title should be separately defined via a “retention of title” clause within the sales contract.
- Cover payment. Terms of payment for the goods are negotiated separately.
- Cover insurance. Only CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid) specifically outline insurance as the seller’s responsibility. No other terms outline who has this responsibility.
What are the most common Incoterms®?
Below is a chart summarizing 5 of the most commonly used Incoterms® followed by a brief explanation of each. These terms are most common because they are the most clear cut and cost-effective, while other terms are less common because they involve more complicated hand-offs.
FCA (Free Carrier) / FOB (Free on Board)
With both of these terms, the seller is responsible for delivering the goods to the port of departure, or the buyer's nominated premises, and loading them on board the moving vessel, or buyer's nominated transportation. The seller is also responsible for all costs associated with those duties, including the terminal handling charges, export clearance and meeting security requirements. With FOB, risk is transferred from the seller to the buyer as soon as the goods pass the ship’s railing. In FCA, risk is transferred once the goods are loaded on the buyer's transportation. These terms are often used interchangeably.
FAS (Free Alongside Ship)
With FAS terms, the seller is responsible for delivering the goods alongside the buyer's vessel at the named port of shipment. The buyer bears responsibility for costs and liability for loss or damage from that moment. Under Incoterms® 2020, FAS terms require the seller to clear the goods for export (under the Incoterms® 2010, the buyer was responsible for arranging export clearance.)
EXW (Ex Works)
With EXW terms, the seller is responsible for making the goods available at their premises. The buyer then bears the full responsibility, cost, and risk from pick-up at the seller’s premises all the way through to final delivery (incl. duties).
DDP (Delivered Duty Paid) / DAP (Delivered At Place)
These terms are essentially the opposite of EXW terms with some simple variations. With both terms, the seller bears the full responsibility, cost, and risk from origin pick-up through to the transfer of goods to the buyer at destination, whether at the port of arrival, or the buyer’s nominated premises. With DDP terms, the seller is also responsible for customs clearance and paying the import duties. With DAP terms, the buyer is responsible for customs clearance and paying import duties.