Incoterms, what are they and what are they used for?

Have you ever been surprised by a client or a supplier telling you that they work “Ex Works”? Have you seen terms such as acronyms like “FOB” or “CIP” appear and you were not sure what they meant? Do you want to start making or receiving international shipments and you are not very sure how to agree the conditions with the rest of the parties involved? Then you probably need the help of Incoterms.

What are Incoterms

The Incoterms (or International Commercial Terms – International Trade Terms) are acronyms composed of three letters and that describe the delivery conditions of merchandise and products, traditionally in international transits (although they have also begun to be used domestically). They are not required to be used and individuals and companies are free to agree on their own conditions, but their use is widespread as they make it much easier to agree on conditions under a common framework.
The International Chamber of Commerce has been in charge of creating them -since their origin in 1936- and renewing them. Its last revision took place in 2010 and it entered into force on January 1, 2011. The secret of its good reception lies in harmonizing the conditions of shipments and their expenses, which makes life much easier for shippers, importers and logistics operators. , since all the actors in the chain are clear about what to expect and what obligations correspond to them depending on the Incoterm used.

What do Incoterms regulate?

Product delivery

Depending on whether the delivery is made directly to the buyer or if it is left in the hands of an intermediary (logistics operator, freight forwarder, etc.) there are two groups of Incoterms. Those beginning with the letters “E” and “D” correspond to direct deliveries to the buyer, while those beginning with “F” and “C” include indirect deliveries.

The responsibility of the risks

Claims, insurance and their responsibility is a traditionally difficult topic in the world of logistics and supply chain. And it is a difficulty that multiplies when more hands are involved in shipments and there are many kilometers between buyer and seller. The Incoterms detail precisely who is responsible for assuming the risks and/or contracting the insurance and its expenses. Again, this simplifies and eliminates a lot of disputes.
Who takes care of the expenses

The fact that the responsibility for the merchandise passes from one party to another does not always mean that the various expenses that may occur also do so at that precise moment. This is the case, for example, of the four Incoterms that begin with “C”. In these cases, there are sections in which who pays for transport and who assumes the risk do not coincide.

customs processing

The Incoterms also specify who is responsible for managing the paperwork, cost and transit of the merchandise with customs. In the vast majority of cases, it is the seller who must manage these procedures in the country of origin. However, there is an Incoterm (EXW, Ex Works) in which the buyer is in charge of customs management in the country of origin of the merchandise. It also stipulates the responsibility at the time of arrival in the country of destination.

Which are

Group E; direct delivery to the outlet

EXW (Ex Works – Factory)
The only component of the group is, once again, the Incoterm Ex Works. The merchandise is made available to the buyer in the factory or warehouse itself and it is the buyer himself who assumes all expenses and risks from that moment on. The seller also does not need to load the merchandise on the pickup vehicle.

Group F; indirect delivery without payment of the main transport

FAS (Free Alongisde Ship)
The seller delivers the merchandise at the agreed port, in addition to taking care of customs procedures and costs (the latter constitutes a change compared to previous versions of this Incoterm). From that point, the expenses correspond to the buyer.

FOB (Free On Board – Free on board)
If in the previous case the merchandise was left at the port, in this case the seller is obliged to leave it loaded on the ship designated by the buyer, again assuming customs management. The buyer pays all other costs from this point forward.

FCA (Free Carrier – Free carrier)
The seller is obliged to deliver the merchandise at the place designated by the buyer in the country of origin, in addition to managing customs at origin. This site can be a warehouse, a port, a train station, the facilities of a freight forwarder or a logistics operator, etc. From there, the expenses and procedures will correspond to the seller.

The contracting of insurance is not mandatory in all cases

Group C; with payment of the main transport

CFR (Cost and Freight – Cost and Freight)
In this Incoterm the seller assumes all transportation costs until the merchandise reaches the agreed destination. The peculiarity is that the risk of what is transported passes to the buyer once the merchandise is loaded on the ship, despite the fact that it is the seller who pays for the transport by ship.

Cost, Insurance and Freight (CIF – Cost, Insurance and Freight)
The difference with the previous Incoterm is that the seller is the one who must manage the insurance of the merchandise until it reaches the port of destination.

Carriage Paid To (CPT – Transportation paid to)
The seller assumes more obligations than in the previous Incoterms. In this case, he must pay all the transport costs that originate up to a point agreed with the buyer in the country of destination of the merchandise. The risk, however, passes to the buyer when the merchandise reaches the first carrier in the country of destination.

Carriage and Insurance Paid (CIP – Transportation and Insurance paid up to)
Regarding the CPT, in this Incoterm the contracting of insurance is added to the obligations of the seller while the merchandise is in transit to the place of destination. Despite the fact that the insurance is contracted by the shipping company, the beneficiary of the insurance will be the purchasing party.

Group D; Direct delivery on arrival

Delivered at Terminal (DAT)
The seller takes care of the costs and procedures until the merchandise is unloaded at the terminal or port agreed with the buyer, and in turn assumes the risks until that moment. After downloading, all costs are borne by the buyer.

Delivered to Place (DAP – Delivered at a point)
It is one of the new Incoterms that arrived with the last revision of 2010. In this case, the risk passes from the seller to the buyer at the place specified in the delivery agreement (which does not have to be a terminal). The seller fulfills his part when he makes the goods available to the buyer for unloading.

Delivery Duty Paid (DDP – Delivered Duty Paid)
This Incoterm is the one that puts more responsibilities on the seller and less on the buyer. Here it is the part that sells the one that must take care of all the expenses and procedures until the merchandise is delivered at the agreed destination point, including transport, insurance, customs, import, etc. The only thing it is not forced to do is download at the end point.

Although the Incoterm specifies who must assume the risk of possible damage to the merchandise at all times, this does not mean that the contracting of insurance is mandatory in all cases. The only cases in which insurance must be contracted obligatorily are agreements under CIF, CIP and DDP.
Another important division that is usually made is that of incoterms designed to be used with any means of transport (EXW, FCA, CPT, CIP, DAT, DAP, DDP) and those designed for maritime transport (FAS, FOB, CFR, CIF). .

In conclusion, we can see how the raison d’être of Incoterms is the simplification of trade agreements and international transport, establishing common rules of the game for all.

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