An Introduction to Incoterms—Part 2: Why Do Incoterms Matter?

David Noah | November 12, 2014 | Export Basics, Incoterms
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An introduction to incoterms. Why they matter

In the first article on this topic, we learned what Incoterms are and how they originated. Today, we’ll discuss how to apply Incoterms, how exporters benefit from them, and why they matter.

Do rules make life more fun? Most people would shake their heads no, as the word itself has negative connotations. But as an exporter, you know better. Where Incoterms are concerned, following the rules actually gives you more freedom to export—and more opportunity to make more profit!

Here are each of the specific terms defined, via export.gov:

Incoterms that apply to any mode of transport are:

  • EXW (Ex Works): the seller fulfills his obligations by having the goods available for the buyer to pick up at his premises or another named place (i.e. factory, warehouse, etc.). Buyer bears all risk and costs starting when he picks up the products at the seller’s location until the products are delivered to his location. Seller has no obligation to load the goods or clear them for export.
  • FCA (Free Carrier): the seller delivers the goods export cleared to the carrier stipulated by the buyer or another party authorized to pick up goods at the seller’s premises or another named place. Buyer assumes all risks and costs associated with delivery of goods to final destination including transportation after delivery to carrier and any customs fees to import the product into a foreign country.
  • CPT (Carriage Paid To): seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller at a named place of shipment. Seller is responsible for the transportation costs associated with delivering goods to the named place of destination but is not responsible for procuring insurance.
  • CIP (Carriage and Insurance Paid To): seller clears the goods for export and delivers them to the carrier or another person stipulated by the seller at a named place of shipment. Seller is responsible for the transportation costs associated with delivering goods and procuring minimum insurance coverage to the named place of destination.
  • DAT (Delivered at Terminal): seller clears the goods for export and bears all risks and costs associated with delivering the goods and unloading them at the terminal at the named port or place of destination. Buyer is responsible for all costs and risks from this point forward including clearing the goods for import at the named country of destination.
  • DAP (Delivered at Place): seller clears the goods for export and bears all risks and costs associated with delivering the goods to the named place of destination not unloaded. Buyer is responsible for all costs and risks associated with unloading the goods and clearing customs to import the goods into the named country of destination.
  • DDP (Delivered Duty Paid): seller bears all risks and costs associated with delivering the goods to the named place of destination ready for unloading and cleared for import.

Incoterms that apply to sea and inland waterway transport only:

  • FAS (Free Alongside Ship): seller clears the goods for export and delivers them Incoterms 2010: Terms of Sale Seminarwhen they are placed alongside the vessel at the named port of shipment. Buyer assumes all risks/costs for goods from this point forward.
  • FOB (Free on Board): seller clears the goods for export and delivers them when they are onboard the vessel at the named port of shipment. Buyer assumes all risks/cost for goods from this moment forward.
  • CFR (Cost and Freight): seller clears the goods for export and delivers them when they are onboard the vessel at the port of shipment. Seller bears the cost of freight to the named port of destination. Buyer assumes all risks for goods from the time goods have been delivered on board the vessel at the port of shipment.
  • CIF (Cost, Insurance, and Freight): seller clears the goods for export and delivers them when they are onboard the vessel at the port of shipment. Seller bears the cost of freight and insurance to the named port of destination. Seller’s insurance requirement is only for minimum cover. Buyer is responsible for all costs associated with unloading the goods at the named port of destination and clearing goods for import. Risk passes from seller to buyer once the goods are onboard the vessel at the port of shipment.

As you can see, each Incoterm provides exporters clear, succinct rules that help us understand our responsibilities, clarify any gray areas in contracts, and can save us a lot of headaches when used correctly.

  • Incoterms reduce the risk of legal complications by giving exporters a single home base from which to reference trade practices.
  • Incoterms help establish and execute an international transaction by defining distinct obligations and responsibilities between buyers and sellers. When a seller and a buyer agree to employ a particular Incoterm, each accepts the corresponding obligations and responsibilities as clearly set forth and defined under that particular Incoterm.

By correctly using Incoterms, you’ll be able to partner more harmoniously, transport and deliver your goods more easily, and get paid more quickly. And who doesn’t want that?

Here are some articles we've written to help you figure it out.

Do you have more questions? Need personalized help?

Along with the information housed at the export.gov website, government and private sector organizations offer seminars, webinars, books and other training opportunities about Incoterms 2010. We’re here to help your business succeed!

Download Incoterms 2010 Chart of Responsibilities