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Each
INCOTERM refers to a type of agreement
for the purchase and shipping of goods internationally.
There are 13 different terms, each of which helps users
deal with different situations involving the movement of
goods. For example, the term FCA is often used with
shipments involving Ro/Ro or container transport; DDU
assists with situations found in intermodal or courier
service-based shipments.
INCOTERMS also deal with the
documentation required for global trade, specifying
which parties are responsible for which documents.
Determining the paperwork required to move a shipment is
an important job, since requirements vary so much
between countries. Two items, however, are standard: the
commercial invoice and the packing list.
INCOTERMS were created primarily for
people inside the world of global trade. Outsiders
frequently find them difficult to understand. Seemingly
common words such as "responsibility" and "delivery"
have different meanings in global trade than they do in
other situations. In global trade, "delivery" refers to
the seller fulfilling the obligation of the terms of
sale or to completing a contractual obligation.
"Delivery" can occur while the merchandise is on a
vessel on the high seas and the parties involved are
thousands of miles from the goods. In the end, however,
the terms wind up boiling down to a few basic specifics:
|
Costs |
Who is
responsible for the expenses involved in a
shipment at a given point of the journey? |
|
Control |
Who owns the
goods at a given point in the journey? |
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Liability |
Who is
responsible for paying damage to goods at a
given point in a shipment's transit? |
It is essential for shippers to know the exact status
of their shipments in terms of ownership and
responsibility. It is also vital for sellers & buyers to
arrange insurance on their goods while the goods are in
their "legal" possession. Lack of insurance can result
in wasted time, lawsuits, and broken relationships.
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.
INCOTERMS are most
frequently listed by category. Terms beginning with F
refer to shipments where the primary cost of shipping is
not paid for by the seller. Terms beginning with C deal
with shipments where the seller pays for shipping.
E-terms occur when a seller's responsibilities are
fulfilled when goods are ready to depart from their
facilities. D terms cover shipments where the
shipper/seller's responsibility ends when the goods
arrive at some specific point. Because shipments are
moving into a country, D terms usually involve the
services of a customs broker and a freight forwarder. In
addition, D terms also deal with the pier or docking
charges found at virtually all ports and determining who
is responsible for each charge. 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.
EX-Works
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 multi modal 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.
DAF (Delivered At Frontier)
Here the seller's responsibility is to hire a forwarder
to take goods to a named frontier, which usually a
border crossing point, and clear them for export.
"Delivery" occurs at this time. The buyer's
responsibility is to arrange with their forwarder for
the pick up of the goods after they are cleared for
export, carry them across the border, clear them for
importation and effect delivery. In most cases, the
buyer's forwarder handles the task of accepting the
goods at the border across the foreign soil.
DES (Delivered Ex Ship)
In this type of transaction, it is the seller's
responsibility to get the goods to the port of
destination or to engage the forwarder to the move cargo
to the port of destination uncleared. "Delivery" occurs
at this time. Any destination charges that occur after
the ship is docked are the buyer's responsibility.
DEQ (Delivered Ex Quay)
In this arrangement, the buyer/consignee is responsible
for duties and charges and the seller is responsible for
delivering the goods to the quay, wharf or port of
destination. In a reversal of previous practice, the
buyer must also arrange for customs clearance.
DDP (Delivered Duty Paid)
DDP terms tend to be used in inter modal 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.
DDU (Delivered Duty Unpaid)
This arrangement is basically the same as with DDP,
except for the fact that the buyer is responsible for
the duty, fees and taxes.
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