INCOTERMS
EXW – Ex Works
Definition
Ex Works is a trading scenario in which the Seller of the goods responsible for the production and packaging of the goods at their place of manufacture only. This is In contrast with Free Carrier Arrangements, in which the seller is responsible for clearing the goods through customs at the place of transport – ie a shipping port.
This then means that the buyer (and/ or any co-signers they have involved) is then responsible for the rest of the transaction proceeds. This liability includes aspects such as the loading and transportation of goods, unloading and final transportation.
With domestic trade, Ex-works is preferable to other liability arrangements. This is because, within the domestic market, the buyer is likely to have transport links/ existing supply chains that they may be able to use – potentially being cheaper than the seller’s preferred arrangement.
| Advantages | Disadvantages |
|---|---|
| The buyer is responsible for all of the fees/ errands associated with the transport of the goods so in this instance, there is much less work. | The difficulties surrounding the clearing of customs alone may be enough to put businesses off using Ex Works. In many cases, the buyer is still required to provide communication and proof of purchase documents from the seller in order to have the goods approved for export, meaning a lot of legwork and time potentially wasted. |
| For the Buyer, they receive full transparency with the costs associated with the transaction. This also means that there is no risk of the Seller inflating the costs of transport when building their price. | There may be large costs involved as a by-product of the aforementioned issues. Costs such as the price of the necessary licences required for Customs can be a real strain on SME businesses, who may not need the full term of coverage offered by the licence but have no alternative. |
| For the Buyer, they receive full transparency with the costs associated with the transaction. This also means that there is no risk of the Seller inflating the costs of transport when building their price. | The difficulties surrounding the clearing of customs alone may be enough to put businesses off using Ex Works. In many cases, the buyer is still required to provide communication and proof of purchase documents from the seller in order to have the goods approved for export, meaning a lot of legwork and time potentially wasted. |
| The very fact that the Buyer is to arrange the transport of the goods may actually be positive. The idea is that they are free to arrange the transport completely on their own terms meaning that the conditions of transport, delivery times and insurance are all open to be chosen by the Buyer. | The Buyer is fully responsible for the majority of the transport. This could be complex and incur hidden fees, as well as the liability of faulty or damaged goods |
FCA - Free carrier
Definition
Free carrier is one of the most common incoterms used. It is a trade arrangement that depicts the seller holding liability of the goods packaging and the loading into the mode of transport at the port or truck hub. The buyer is therefore responsible for the following:
- Shipment of the goods
- Unloading the goods at the buyer’s port of choice
- Transporting the goods to the end destination.
CPT – Carriage Paid to
Carriage Paid To is a fairly uncommon incoterm where the seller is responsible for the freight and shipping of the goods up until they arrive at the terminal or warehouse in the country of the buyer. Under CPT, the seller is not responsible for providing insurance of the goods when they are shipped. As with Free Carrier, the seller is also responsible for clearing the goods for export at the port or terminal.
CPT is common for large importers who have their own port agents that can manage the delivery of goods when they arrive in their country.
However, the risk of the seller passes on to the buyer once the goods leave their country or port, despite the seller paying for the transport of the goods.
The buyer (or consignee) is then responsible for everything else:
- Insuring the goods as they are being shipped (but not paying for this shipment)
- Unloading the goods at the buyer’s port or terminal
- Transporting the goods to the end destination or warehouse
CIP – Carrier & Insurance paid to
CIP (or Carriage and Insurance Paid To) is an Incoterm where the seller is responsible for the delivery of goods to an agreed destination in the buyers country, and must pay for the cost of this carriage. The sellers risk however, ends once they have placed the goods on the ship, at the origin destination. The buyer can pay for additional insurance during carriage of the goods.
The risk is passed when the goods are received by the first carrier. Carriage and Insurance Paid to is eligible for any form of transportation.
However, the risk of the seller passes on to the buyer once the goods leave their country or port, despite the seller paying for the transport of the goods.
DAT – Delivered at terminal
DAT, or, Delivery at Terminal, is where the seller clears goods for export and is fully responsible for the goods until they have arrived at a named terminal at the end destination. The goods must be unloaded at the terminal. DAT can be used with any transportation mode.
It is recommended that the seller’s contract with their forwarding company mirrors the contract of sale.
DAP – Delivered at place
DAP, or, Delivery at Place is an incoterm defining the buyer and seller’s responsibilities when moving goods. In this case, the seller is responsible for moving the goods from the country of origin right through to the end destination, which includes responsibility for loading, transport and unloading. With DAP, we’d recommend being very clear about the end destination place to avoid any confusion later on. DAP means that seller bears the risk of any issues with the goods until the agreed delivery point. If there are any extra fees for unloading the goods, the seller must incur these.
This term can be used for any mode of transportation.
DDP – Delivery duty paid
DDP stands for Delivery Duty Paid, an international commerce term (incoterm) used to describe the delivery of goods where the seller takes most responsibility.Under DDP, the supplier is responsible for paying for all of the costs associated with the delivery of goods right up until they get to the named place of destination. The buyer is then responsible for unloading the goods at the end destination.DDP can be used to describe ocean, road or air transportation of goods, including multimodal transportation.
It’s also expected that the seller clears the goods at export and import customs.
FAS – Free alongside ship
FAS stands for Free Alongside Ship, an international commerce term (incoterm) used to describe the delivery of goods where the seller takes on some responsibility for the shipment of goods.
Under FAS, the exporter is responsible for clearing the goods at customs and delivering them to the vessel at the point of origin.
Free Alongside Ship only applies to sea or inland waterway ports. As with most points of delivery, it’s recommended to highlight the exact location at which the goods are being delivered to, particularly in the case of large ports as the seller is responsible up for the goods until the port of shipment.
FAS is ideal for the shipping:
- Hard commodities (e.g. oil)
- Soft commodities (e.g. grain, soybean)
- Liquids
- Chemicals (both pharmaceutical and non-pharmaceutical)
- Bulk cargo
- Break bulk cargo
FOB – Free on Board
To understand FOB Pricing, one must understand what FOB means. FOB is the short form for Free on Board (or Freight on Board) and translates to sellers including the cost of the product being delivered to the nearest port in the purchase price. However, buyer is liable to pay for the shipping costs from that port, and also any other fees associated with transporting the goods to their desired destination.
CFR – Cost and freight
CFR stands for Cost and Freight – it is a legal term used in international shipping which translates into the seller assuming more responsibility for the delivery of goods and needs to pay for transport to an agreed port.
Furthermore, the seller will also need to pay for delivery of goods and export, up until the point the goods are loaded on board the ship.
DDU – Delivery Duty unpaid
DDU Incoterm, which is short for “delivered duty unpaid,” is an international commerce term (incoterm) which means that the seller will deliver the goods as soon as they are made available at an agreed-upon location in the country to which they are imported.
Unlike DDP (delivery duty paid), where the seller takes the most responsibility for delivery costs all the way up to the consignee’s doorstep, DDU requires the consignee to take the responsibility of costs, and oftentimes physical delivery, once they have signed for the shipment.
DDU can provide for additional costs to be taken on by the seller if they are agreed upon ahead of time. For example, the parties may agree that the seller will pay expenses such as value added tax (VAT) or customs charges. These terms should be clearly stated on their contracts.
CIF – Cost, Insurance & Freight
CIF stands for Cost, Insurance and Freight – it’s a legal incoterm term which is used in international shipping for the delivery of goods to a port. In this case, the seller must pay for the delivery of goods, and their export, including insurance, and has responsibility of the goods right up until they’re loaded on the ship.
CIF and FOB (Free on Board) are the most common shipping terms.
