What Are Incoterms
Global shipping and trade can present language barrier challenges in contracts and terminology. In 1936, the International Chamber of Commerce (ICC) developed Incoterms, an established and internationally accepted set of rules in contracts for the sale and shipping of goods across the world1. Incoterms designate who is responsible for paying for each portion of the global transportation of goods process and which parties are responsible during each portion. Incoterms eliminate the challenge of various languages and the different ways contracts are interpreted. These internationally accepted terms allow for a smoother international trade process.
The original set contained 13 terms. However, the latest version, updated in 2010, contains 11 terms. The Incoterms are updated and evaluated approximately every 10 years, providing an opportunity for change as trade evolves2.
The terms are broken into two sections, rules for any mode of transportation and rules for sea and inland waterway transport. These terms define who is responsible for payment of various aspects throughout transport2.
Incoterms for All Modes – These terms are used in contracts despite what mode of shipment the goods may take such as air or truck.
Ex-Works means the buyer assumes total responsibility for the shipment of goods. Delivery is accomplished when the product is handed over to the buyer’s representative at the plant or distribution center. The buyer is responsible for freight costs, insurance, export and import clearance, and all customs charges3.
FCA (Free Carrier)
Free Carrier explains that the seller fulfills his responsibility for the goods when he delivers the product to the carrier3.
CPT (Carriage Paid To)
Carriage Paid To explains that the seller pays transportation costs and export clearance charges, but the buyer pays for insurance3.
CIP (Carriage and Insurance Paid To)
Carriage and Insurance Paid To is a term used primarily for multimodal moves and is essentially the same as CPT, except the seller must also purchase cargo insurance in the buyer’s name3.
DDP (Delivered Duty Paid)
Delivered Duty Paid explains that the seller is responsible for all risks and charges up to the consignee’s door. This is the maximum obligation that can be assumed by a seller3.
DAT (Delivered at Terminal)
Delivered at Terminal explains that delivery is accomplished when goods are unloaded and placed at the disposal of the buyer at a named terminal3.
DAP (Delivered at Place)
Delivered at Place explains that delivery is accomplished when goods arrive and are ready for unloading at the destination other than a terminal location3.
Incoterms for Ocean and Inland Waterway Transport – These incoterms are specific to goods shipped via ocean or inland waterway.
FOB (Free on Board)
Free on Board means that the seller is responsible for getting the goods to a port. The buyer bears the cost and responsibility from that point on3.
FAS (Free Alongside Ship)
Free Alongside Ship requires the seller to deliver the product alongside a given vessel at a port3.
CFR (Cost and Freight)
Cost and Freight deals with the cost of the merchandise as well as the freight costs. The seller is responsible for the product and the transportation costs to the destination port3.
CIF (Cost, Insurance, and Freight)
Cost, Insurance, and Freight explains that the seller pays for insurance in addition to the product and transportation costs3.
Understanding the Acronyms
The following acronyms are commonly used in international shipping:
LCL – Less than Container Load – Describes a shipment that does not fill the shipping container capacity. Cost savings can be achieved through consolidation with your 3PL, filling the remaining capacity.
LTL – Less than Truckload – Describes a ground shipment that does not fill the shipping container or trailer’s capacity. Cost savings can be achieved through consolidation with your 3PL, filling the remaining capacity.
CFS – Container Freight Station – A port facility for loading and unloading containerized cargo to and from ships or planes.
CY – Container Yard – Where containers are staged before they are loaded onto vessels.
FCL – Full Container Load – Describes a shipping container that is filled to capacity.
AWB – Air Way Bill – A receipt issued by an international airline for transportation of goods.
HAWB – House Air Way Bill – A document provided to the shipper from the freight forwarder or consolidator as a receipt for the goods which will be shipped with other cargo as one for better freight rates.
HBL – House Bill of Lading – Transportation contract which takes place between a customer and a forwarder for goods to be shipped or transported in a group.
MBL – Master Bill of Lading – Transportation contract which takes place between a customer and a forwarder for goods to be shipped or transported in a group. However, unlike the HBL, the master bill of lading is issued by the shipping company or carriers. The document summarizes the different quantities of cargo that is to be hauled for transport by the vessels or other modes of transport.
SLI – Shipper’s Letter of Instruction – Issued by the exporter to the forwarding agent and includes shipping instructions for air or ocean shipment.
ETD – Estimated Time of Departure – Provides an approximate time the shipment will leave its origin.
ATD – Actual Time of Departure – Provides the exact time the shipment left its origin.
ETA – Estimated Time of Arrival – Provides an approximate time a shipment will reach its destination.
ATA – Actual Time of Arrival – Provides the exact time the shipment arrived at destination.
NVOCC – Non Vessel Operating Common Carrier – Also known as a freight forwarder or consolidator who does not own any vessel but functions as a carrier issuing its own bills of lading or air way bills and assumes responsibility for the shipment.
Navigating the complexities of Incoterms can be a challenge. Utilizing a 3PL that is fluent in global transportation with integrated supply chain solutions and a deep understanding of Incoterms can address business goals and achieve the greatest results. The graph below provides a visual understanding of Incoterms and the areas of shipment a buyer or seller is responsible for. For more information on Incoterms visit the International Chamber of Commerce.