What are incoterms?
Shipping your exported goods to buyers can be a fairly complex process. When you're negotiating a contract with a buyer, you’ll need to discuss and agree:
- where the goods will be delivered to
- who arranges transport
- what insurance is needed, and who pays
- who handles customs procedures
- who pays any duties and taxes
Incoterms (international commercial terms) are a kind of international shorthand system to make sure all your responsibilities, costs and associated risks of exporting products are clearly allocated, agreed and recorded. They're used worldwide, usually with a contract or other form of sales agreement for any goods you export - and they should be recorded on your export invoices.
They are produced by the International Chamber of Commerce (ICC). The current version is Incoterms 2020. The previous version is Incoterms 2010, and you may still see some references to terms from this version in trading documentation.
Incoterms 2020 has 11 terms. Seven of these cover all forms of transport and 4 are for ocean freight.
Commonly used incoterms
The full list of the 11 terms in Incoterms 2020 can be found on the website of the International Chamber of Commerce. Here's a list of the most commonly used ones:
EXW: Ex Works
Applies to all forms of transport. You make the goods available at your location, at your premises or another named place such as a warehouse. The buyer takes on all the transportation costs and also bears the risks of bringing the goods to their final destination.
Pros
- All risks and costs are picked up by the buyer after the goods leave your premises
- Some countries, such as Australia, Canada and New Zealand, prefer this incoterm
Cons
- You’ll have no control over matters such as care of the goods and their proper transportation once they leave your premises
- Buyer needs to be aware of UK customs clearance procedures
FOB: Free on Board
Applies to ocean freight. You'll be responsible for all costs involved in the process up until the goods are loaded on to a vessel at the named UK port. Once goods have been loaded, the buyer is responsible for any costs and risks involved in the onward shipment.
Pros
- You have control of the goods, their transportation and customs clearance whilst they are in the UK
- Some countries, such as India, Pakistan and Sri Lanka, prefer this incoterm
Cons
- You’ll have no control over care of the goods and their proper transportation once they’re loaded on the ship
CFR: Cost and Freight
Applies to ocean freight. You have to pay the costs and freight to bring the goods to the overseas port of destination. The buyer pays costs and takes risk from then on.
Pros
- You'll have control over your goods up to the destination port and can ensure they’re shipped safely and efficiently
- All costs and paperwork associated with unloading the goods at the named port of destination and clearing goods for import are covered by the buyer
Cons
- You’ll have to pay the extra freight costs
CIF: Cost, Insurance and Freight
Applies to ocean freight. You have to pay the costs and freight and insurance to bring the goods to the overseas port of destination. The buyer pays costs and takes risk from then on.
The default level of insurance cover under CIF is Institute Cargo Clauses (C). This applies to both 2010 and 2020 Incoterms.
Pros
- You'll have control over your goods up to the destination port and can ensure they’re shipped and insured efficiently and securely
- All costs associated with unloading the goods at the named port of destination and clearing goods for import are paid by the buyer
Cons
- You’ll have to pay and complete paperwork for freight and insurance
DPU: Delivered at Place Unloaded
Applies to all forms of transport. You'll arrange the carriage and delivery of the goods, ready for unloading at the named place. You will be in charge of unloading the goods at this destination.
After the goods’ arrival, the customs clearance in the importing country needs to be completed by the buyer at their own cost and risk, including payment of all customs duties and taxes.
Pros
- You’ll have control of clearing the goods for export and the transportation process
Cons
- You’ll bear all risks and costs associated with delivering the goods and unloading them at the terminal
DDP: Delivered Duty Paid
Applies to all forms of transport. You'll be responsible for delivering the goods to the named place in the country of the buyer and pay all costs in bringing the goods to the destination.
Pros
- In some circ*mstances, this may be the only way you’ll make a sale with particular buyers
Cons
- You’ll bear all risks and costs associated with delivering the goods to the named place of destination ready for unloading and cleared for import
- You’ll need to be fully aware of the import clearance procedures in the country of import, or how to find a competent local customs broker.
Agree the terms. But make sure you both know what this means practically, and everyone can do what they’ve agreed to do. If your buyer is clearing through customs do they have the know-how and the right paperwork? Will you need to factor in extra costs or support, say for insurance, or using a customs broker?
International trade adviser
