The purpose of Incoterms is to determine :
Costs - Who is responsible for the expenses
Control - Who owns the good at any given point in shipment
Liability - Who is responsible for paying damages at any given point in shipment
There are two basic methods for categorizing Incoterms: the first is by the nature of the terms, the other by the means of transportation used.
Incoterms four categories: ---(CDEF)----
1. Category E contains only one term: EXW (Ex Works).
2. Category F contains three terms: FCA (Free Carrier), FAS (Free Alongside Ship), and FOB (Free on Board).
3. Category C contains four terms: CPT (Carriage Paid To), CIP (Carriage and Insurance Paid to), CFR (Cost and Freight), CIF (Cost, Insurance and Freight).
4. Category D contains three terms: DAP (Delivered at Place), DPU (Delivered at Place Unloaded), DDP (Delivered Duty Paid).
While category E imposes a minimum set of obligations on the supplier, category D indicates the opposite: most of the responsibilities and risks are put on the supplier while the buyer has little to worry about.
Let us take a look at the Incoterms by dividing them into those two groups.
-Incoterms used for all modes of transport: EXW - FCA - CPT and CIP - DAP, DPU, and DDP
-Incoterms for sea and inland waterway transport: FAS and FOB - CFR and CIF
1. EXW (Ex Works)
-Ex works (EXW) is a shipping arrangement in which a seller makes a product available at a specific location, but the buyer has to pay the transport costs.
-Once buyers have their goods, they are responsible for other risks, such as loading the goods onto trucks, transferring them to a ship or plane, and meeting customs regulations.
-Ex works is an Incoterms (International Commercial Terms), one of 11 standardized international trade terms that are published by the International Chamber of Commerce.
2. FCA (Free Carrier)
-Under FCA Incoterms, the seller must handle the full export process for the products they are selling. Once the cargo is ready to be loaded on to the vessel, responsibility transfers to the buyer
3. FOB (Free on Board)
-In ocean freight, the FOB Incoterm, or “Free on Board”, is an Incoterm that’s exclusive to ocean freight shipping. It states that the seller must load the goods onto the ship chosen by the buyer.
-The seller is also responsible for all costs and risks up until all goods are loaded on board the vessel, at which point the risks are transferred to the buyer.
-The FOB Incoterm is similar to the FCA Incoterm, the only difference being the risk transfer point upon complete loading of goods is not specifically mentioned in the FCA Incoterm. As such, unlike FCA, FOB is not recommended for shipping containerized cargo.
4. CFR (Cost and Freight)
-Not only responsible for delivering the goods to port specified by the buyer but also transportation cost of the goods to the destination port. #freight #transport #export #commerce
Incoterms® 2020 vs 2010: What’s changed?
1. Bills of lading:
FOB (free on board) should not normally be used for container shipments. This is because a seller usually loses control of the container once the container arrives at the port of export before the container is loaded. However, FOB means the seller takes all the risk and cost of the export, port terminal handling charges and loading costs/risks. Sellers should then use FCA (Free Carrier).
However, many sellers still use FOB because the letter of credit from the bank often requires an onboard bill of lading for the seller to get paid. As under FOB the seller is responsible for loading, they have a higher chance of getting an onboard bill of lading.
Therefore, to try and help people to use FCA, FCA has changed to allow the buyer and seller to agree that the seller will get an onboard bill of lading.
2. Insurance under CIF (carriage insurance and freight) and CIP (carriage and insurance paid to):
The Incoterms® rule, CIP means that the seller is only responsible for delivery of the goods to the carrier but pays for the carriage and insurance of the goods to the named destination. CIF is the same, except that it can only be used for maritime transport (delivery is onto a ship and the destination needs to be a port).
In Incoterms® 2020, CIF keeps the same insurance requirements as in Incoterms® 2010, but CIP has increased the level of insurance required to be obtained by the seller. This is due to the fact that CIF is more often used with bulk commodity trades, and CIP is more often used for manufactured goods, and manufactured goods tend to require a higher level of insurance.
Although CIF and CIP require the seller to obtain insurance, it is recommended that parties consider whether additional insurance coverage is required to reflect the potential risk of damage to the goods during transport.
If you use CIF or CIP, you need to review to see if that is still the correct approach.
3. DAT (delivered at terminal) has changed to DPU (delivered at place unloaded):
In Incoterms® 2010, DAT means the goods are delivered once unloaded at the named terminal. As DAT limits the place of delivery to a terminal, in Incoterms® 2020, the reference to terminal has been removed to make it more general. DPU means delivered at place unloaded (which can now be used for all modes of transportation). There is no other change.
If you use DAT Incoterms® 2010, then change over to DPU Incoterms® 2020.
4. Security Requirements:
In recent years, transport security requirements have become more prevalent in international trade, and Incoterms® 2020 reflects such a change by detailing security requirements for each Incoterms® rule. For example, CPT (carriage paid to) includes a specific requirement that the seller must comply with any security-related requirements for transport to the destination. These security requirements bring cost and risk delay if not fulfilled by the parties.
#freight #incoterms2020
1. Bills of lading:
FOB (free on board) should not normally be used for container shipments. This is because a seller usually loses control of the container once the container arrives at the port of export before the container is loaded. However, FOB means the seller takes all the risk and cost of the export, port terminal handling charges and loading costs/risks. Sellers should then use FCA (Free Carrier).
However, many sellers still use FOB because the letter of credit from the bank often requires an onboard bill of lading for the seller to get paid. As under FOB the seller is responsible for loading, they have a higher chance of getting an onboard bill of lading.
Therefore, to try and help people to use FCA, FCA has changed to allow the buyer and seller to agree that the seller will get an onboard bill of lading.
2. Insurance under CIF (carriage insurance and freight) and CIP (carriage and insurance paid to):
The Incoterms® rule, CIP means that the seller is only responsible for delivery of the goods to the carrier but pays for the carriage and insurance of the goods to the named destination. CIF is the same, except that it can only be used for maritime transport (delivery is onto a ship and the destination needs to be a port).
In Incoterms® 2020, CIF keeps the same insurance requirements as in Incoterms® 2010, but CIP has increased the level of insurance required to be obtained by the seller. This is due to the fact that CIF is more often used with bulk commodity trades, and CIP is more often used for manufactured goods, and manufactured goods tend to require a higher level of insurance.
Although CIF and CIP require the seller to obtain insurance, it is recommended that parties consider whether additional insurance coverage is required to reflect the potential risk of damage to the goods during transport.
If you use CIF or CIP, you need to review to see if that is still the correct approach.
3. DAT (delivered at terminal) has changed to DPU (delivered at place unloaded):
In Incoterms® 2010, DAT means the goods are delivered once unloaded at the named terminal. As DAT limits the place of delivery to a terminal, in Incoterms® 2020, the reference to terminal has been removed to make it more general. DPU means delivered at place unloaded (which can now be used for all modes of transportation). There is no other change.
If you use DAT Incoterms® 2010, then change over to DPU Incoterms® 2020.
4. Security Requirements:
In recent years, transport security requirements have become more prevalent in international trade, and Incoterms® 2020 reflects such a change by detailing security requirements for each Incoterms® rule. For example, CPT (carriage paid to) includes a specific requirement that the seller must comply with any security-related requirements for transport to the destination. These security requirements bring cost and risk delay if not fulfilled by the parties.
#freight #incoterms2020
Insurance under CIF (carriage insurance and freight) and CIP (carriage and insurance paid to):
The Incoterms® rule, CIP means that the seller is only responsible for delivery of the goods to the carrier but pays for the carriage and insurance of the goods to the named destination. CIF is the same, except that it can only be used for maritime transport (delivery is onto a ship and the destination needs to be a port).
In Incoterms® 2020, CIF keeps the same insurance requirements as in Incoterms® 2010, but CIP has increased the level of insurance required to be obtained by the seller. This is due to the fact that CIF is more often used with bulk commodity trades, and CIP is more often used for manufactured goods, and manufactured goods tend to require a higher level of insurance.
Although CIF and CIP require the seller to obtain insurance, it is recommended that parties consider whether additional insurance coverage is required to reflect the potential risk of damage to the goods during transport.
If you use CIF or CIP, you need to review to see if that is still the correct approach.
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