International Commercial Terms, or Incoterms, are the standard set of terminology devised by the International Chamber of Commerce (ICC) that describe the practical arrangements regarding the delivery of goods and who is responsible at each key stage of the shipping journey.
Incoterms provide buyers and sellers with a clear, consistent and unambiguous way to avoid the common issues that can arise when moving goods.
But as many manufacturers are discovering, when it comes to interpreting these simple three-letter acronyms there can be a surprising amount of confusion.
Who is responsible for the main transport? Where is delivery to take place? And at what point does the risk transfer from seller to buyer?
Even subtle changes to the rules can leave even the most experienced of trade specialists scratching their heads - and the tiniest of misinterpretations can have costly implications.
In the most recent iteration of the Incoterms regulations in January 2020, there were a number of small but significant updates reflecting new developments in commercial practice.
There were adjustments in the levels of insurance required for manufactured goods vs commodities, new measures to avoid the back charging of terminal handling charges, and further the tightening up of cargo security requirements.
Whether you're importing or exporting, the Incoterms that you agree on will directly impact the overall cost of moving your products.
So let’s take a closer look at the most commonly used Incoterms and what they mean.
For the seller, FCA means that their responsibility is restricted to arranging and paying for freight clearance and handing over the goods to the carrier for transport. Once the product is “on the truck” the onus is then on the buyer to appoint a direct customs agent, arrange and pay for transportation of the freight, handle UK destination clearance and pay the required UK import taxes and VAT.
DAP relates to the exporting of goods outside of the UK. As the seller you agree to take responsibility for arranging and paying for UK origin clearance, the movement of freight to the agreed destination and the appointing of a customs agent. Your buyer is then obliged to handle EU destination clearance at their end, including paying any EU taxes and import VAT.
When using DDP, all of the responsibility rests in the hands of the seller. If you’re a UK exporter then this means that you’re agreeing to arrange and pay for UK origin clearance,the movement of the freight to its agreed destination and all EU destination clearance, taxes and VAT. You’ll also be required to sign a letter appointing an indirect customs agent.
EXW indicates that the seller is making the goods available for collection from their selling location. Once collected, the buyer is then liable for all transportation costs and for the safe delivery of goods to their final destination.
FOB requires that the seller agrees to cover all costs incurred in the transportation process up until the goods are loaded on to a vessel at a named UK port. Once loaded, it is then up to the buyer to handle all costs and risks associated with the onward shipment.
When using CFR, the seller is responsible for all costs in bringing the goods to the overseas port of destination, at which point the buyer is then liable for all additional costs.
CIF is almost identical to CFR, but with the additional responsibility on the seller to source and pay for the required level of insurance. The default level of insurance under CIF is institute Cargo Clauses (C) which applies to both the 2010 and 2020 iterations of Incoterms.
The seller manages carriage and insurance as far as the named overseas destination port, at which point the buyer takes on all risk. The default level of insurance for CIPis Institute Cargo Clauses (A) which is a higher level of cover than CIF.
DPU replaces the 2010 Incoterm DAT (Delivered at Terminal) to allow for the fact that delivery can happen at any location. With DPU, the seller arranges for carriage and delivery of the goods to a named destination. Once the goods arrive it is then up to the buyer to handle customs clearance and payment of all customs duties and taxes.
Whether you’re an importer or an exporter, the use of Incoterms can provide a concise and transparent way of agreeing on the core elements of your contract - from the arrangement of transport and insurance to the handling of customs procedures and the paying of duties and taxes.
Taking the time to ensure that all freight terms, responsibilities and handovers are clearly understood and agreed will help avoid unnecessary confusion and avert the risk of costly unplanned charges.