Getting to Know Incoterms

Incoterms are intended to reduce confusion between international buyers and sellers. Short for International Commerce Terms, Incoterms are used universally to define how transactions work between importers and exporters, including roles, costs, risks, and responsibilities.

When your organization purchases goods from overseas, or begins working with new vendors, it’s important to use the right Incoterms to define the transport of goods. That, along with proper documentation and careful attention to regulatory compliance, ensures your goods keep moving without delay. Whether you’re shipping or receiving, get to know these Incoterms and what they mean.

What Incoterms Cover

Incoterms were created in 1936 and are regularly updated as industry and international trade changes. Incoterms 2020 will come into effect January 1, 2020, so if you’re negotiating contracts into the upcoming year, be aware of the latest edit.

Regardless of the editing year, Incoterms cover the same responsibilities and obligations: the point of delivery where the cargo officially moves from seller to buyer, who pays for transportation costs, which party will arrange for the formalities of import and export, and who is responsible for insurance costs. Overall, there are 11 main terms and a variety of sub-terms to outline every aspect of a contract clearly.

Incoterms to Know

You can — and should — familiarize yourself with the full set of Incoterms.  Know that one set of terms applies to any form of transport, while another applies only to waterway transport. From there, we find that there is a handful of Incoterms most commonly used:

• Ex Works (EXW): With EXW, the seller carries minimal responsibility. They are to package the goods and make them available at a specified place. The buyer is responsible for loading, export procedures, onward transport, and any costs arising after the goods are in their hands.
• Free on Board (FOB): A waterway Incoterm, this means the seller is responsible for delivering and loading goods, cleared for export, at a named port. The buyer assumes costs and risk after the goods are loaded.
• Delivered at Place (DAP): Seller arranges carriage and delivery but does not handle unloading (that would be Delivered at Terminal). As soon as the shipment is available to unload the risk transfers to the buyer, and the buyer is also responsible for import clearance, taxes, and duties.
• Delivered Duty Paid (DDP): Seller arranges carriage and delivers goods, cleared for import with all taxes and duties paid. When the seller makes the goods available and ready to unload, the risk transfers to the buyer. This places much of the work on the seller, who has to navigate import clearance at the destination.

Regardless of the Incoterms you’re using, a clearly written sales contract avoids risk and ensures that everyone understands what’s supposed to be happening. Relying solely on Incoterms introduces the potential for a very expensive misunderstanding, especially when additional transportation and insurance costs are involved.

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