Meaning: International Commercial Terms
If you make the choice to arrange your own transport, or you are in negotiations with your supplier, you will run into the multiple options being offered related to incoterms.
The incoterm determines a couple of things related to transport of the goods you purchased. These incoterms are based on international agreements about these matters.
The most important subjects in relation to incoterm you choose are:
- Location where goods will be delivered (by supplier).
- Insurance: Supplier arranges and pays for insurance or does not.
- Import / export / customs handling, who does what.
- Who is responsible for the goods during transport.
- Who arranges what.
- Who pays what.
We will now look into each incoterm starting with the cheapest (purchase price), EXW cheap purchase but having to do most by yourself up to the supplier arranging (almost) everything and with that making the purchase price higher, which DDP. The price difference being quite logical, the more the supplier does, the higher the purchase price gets. However there are differences in prices being offered for the logistics part of the supply chain. The supplier normally not being a specialist in this will most likely also use 3rd party companies, and put a percentage on top for the work they do themselves (and don’t forget their profit of course). On the other hand if you want to do it cheaper (by yourself), you will need to put a lot of effort in and do research about these things, to be able to arrange it all yourself. Incoterms determine among other things: Who pays, Who arranges and who is liable.
We will now look at each individual incoterm. Not going into detail, just a short overview explanation:
EXW: Exworks
The supplier is responsible to have the goods ready for pick-up on an agreed date. Ready for pick-up means goods are packed for transport and are standing ready for pick-up in the suppliers warehouse/factory. Everything else needs to be arranged and paid for by the buyer. All responsibility for the goods is for the buyer as soon as the goods are picked up. Supplier needs to provide needed information for the buyer to be able to do export procedures.
FCA: Free Carrier
Supplier will arrange transport up to an agreed upon location (normally within the suppliers country), however the costs fort his transport needs to be paid by the buyer. Agreement needs to be made on these prices and the location where goods will be dropped by the supplier. This location can literally bet he truck itself at pick-up at suppliers location. Important to note, the liability of the goods is for the buyer as soon as the goods are received by the designated location or carrier. All other transport is arranged and paid by the buyer. All risk is for the buyer as well.
FAS: Free alongside ship
This option is virtually the same as the famous FOB (explained next). There is one big difference, the supplier needs to deliver the goods on the agreed upon quay next to the ship. (This could also be a spot at an agreed upon airport, outside of the actual plane). As soon as the goods are delivered all costs and liabilities are moved to the buyer. The supplier has to arrange all export and customs matters.
FOB: Free on board
The supplier will deliver the goods on board of the agreed upon ship (planes and trains are possible too). Supplier arranges all export and customs matters. As soon as the goods are on board the ship (or plane), all liabilities and costs are shifted to the buyer.
The costs of the international transport are paid by the buyer, both with FOB as with FAS.
CFR: Cost and freight
This is one step up from FOB, the supplier will pay for the transport up to the destination port/airport as agreed upon. So with CFR your goods will be delivered in your local international port (or airport), Rotterdam, Hamburg, San Francisco, etc.. The liability of the goods during transport is still with the buyer, any damage to the goods are at risk of the buyer. Finally anything that needs to be arranged in the location of arrival needs to be done by the buyer. Customs/import/clearing and local transport all need to be arranged by the buyer.
CIF: Cost Insurance and freight
Again supplier arranges and pays for all transport up to destination port/airport, just like CFR. In fact all things are the same as CFR, with one exception. The supplier is responsible for arranging insurance for the goods while they are being transported up to the destination port. IMPORTANT: Without detailed agreement the “normal” minimal standards for insurance will be applicable, this could be a very cheap minimum insurance that won’t get you what you want. Make sure to discuss this before making a deal with CIF as an incoterm.
CPT: Carriage paid to
With this term the agreement will be that the supplier will arrange and pay for all transport up to a designated location (a location in the country/area of the arrival port/airport). As soon as the goods are delivered at that location (or with that specific carrier) all responsibility and costs shift to the buyer. All transport costs up to the delivery at agreed upon location (or delivery with carrier as designated by buyer), will be payable by the supplier. However important to know is that the liability of the goods during the international transport is still with the buyer. Any damage due to transport by plane/train/ship is still on the buyers own risk. Finally, the buyer needs to arrange anything linked to the import / customs at arrival destination port.
CIP: Carriage + Insurance Paid to
Just like with CFR/CIF, the CIP incoterm has all the rules and regulations as described with the CPT term. Only one thing is added again, which is the arrangement of insurance. The supplier is responsible for arranging insurance for the goods while they are being transported up to the agreed upon designated location. IMPORTANT: Without detailed agreement the “normal” minimal standards for insurance will be applicable, this could be a very cheap minimum insurance that won’t get you what you want. Make sure to discuss this before making a deal with CIF as an incoterm.
DAT: Deliver at terminal
This incoterm means that the supplier is responsible fort he goods and costs of the entire transport up to a designated (and agreed upon) “terminal” in the country of destination. Normally that would be a port or airport in the country/area of the buyer. The buyer only has to do two things, first of all he is responsible for all import and customs matters at arrival and secondly the buyer need to arrange transport from the agreed “terminal” to his own door. Liabilities and risks during transport up to the agreed “terminal” are carried by the supplier.
DAP: Delivered at place
With this incoterm, the supplier will be responsible for everything transport and export related , up to the designated (agreed upon) final destination. That would normally be the location of the buying party (warehouse, office, or 3rd party warehouse). There is only one thing that the buyer needs to do, which is arranging anything linked to importing the goods, clearing and customs matters linked to it.
DDP: Delivered Duty Paid
The final incoterm, and there with the most complete package you can buy, DDP. There is nothing you need to do as a buyer. The supplier is responsible for everything, import, export, duties, transport, costs and risks. Everything is taken care of by the supplier. They will deliver at the agreed upon location (buyers choice, normally warehouse or office). The purchase price of goods under incoterm DDP will be the highest possible, but can be very interesting if you don’t want any form of hassle yourself. Just like with ordering a single piece online as a consumer, the goods show up at your door.
Online there is much information to be found on these incoterms, and I would suggest searching for pictures/tables. They give a very clear visual overview.
Be careful looking up information about incoterms, as there is so much information to be found, not all of it is correct and can even contradict between different sources.
Maarten de Vreeze