The Incoterms 2024 Guide Simplified to Demystify Shipping
Even the most seasoned professionals could use a refresher when it comes to Incoterms. This is why we have prepared this guide that provides a simplified overview and some best practices to fully maximize the use of them.
What are Incoterms?
Incoterms a.k.a International Commercial Terms were first developed by the International Chamber of Commerce (ICC) during 1936. These terms have since been used as standard terms in sales contracts for importing and exporting.
They are also internationally recognized rules that define which party arranges for the payment and handling of goods during shipping, from origin to destination.
However, do note that not every Incoterm is applicable for every mode of transportation.
Below is the chart that summarises all the Incoterms.
Download the Incoterms 2024 PDF
Are there any updates for Incoterms in 2024?
There are no updates for Incoterms in 2024. The latest version remains to be Incoterms 2020. These terms are roughly updated every 10 years. Hence, we should be expecting the next update in the year 2030.
Why is it important to know your Incoterms?
As importers and exporters, knowing the right Incoterms can be very beneficial as it
1. Brings about clarity and certainty
Incoterms help to clarify the responsibilities of both parties, which helps reduce the chances of disputes and delays
2. Reduce costs
With a lower level of probability for delays, unnecessary costs can also be avoided.
3. Reduce risks
Incoterms also help to lay out who bears the risk at different stages of a shipment, which will help both parties to manage risks more effectively.
4. Simplify communications
By understanding the intricacies, both parties can facilitate clearer communications with each other at any point of the shipment.
What are the 7 Incoterms for all modes of transportation?
EXW: Ex-Works or Ex-Warehouse
EXW (Ex-Works or Ex-Warehouse) places minimum responsibility on the seller and maximum responsibility on the buyer. The seller's only obligation is to make the goods available at their own premises (usually their factory or warehouse), suitably packaged and ready for collection.
Seller risk: Lowest
Buyer risk: Highest
Insurance: NA
Freight cost: Buyer bears the most cost
FCA: Free Carrier
FCA (Free Carrier) divides the responsibilities between a seller and a buyer at a designated location. It falls somewhere between the seller-friendly EXW and the buyer-friendly DAP/DDP in terms of cost and risk allocation.
Seller risk: Lowest
Buyer risk: Highest
Insurance: NA
Freight cost: Buyer bears the most cost
CPT: Carriage Paid To
CPT (Carriage Paid To) is an incoterm that requires the seller to transport the goods at their own cost to a named destination.
Seller risk: Low
Buyer risk: High
Insurance: NA
Freight cost: Seller bears the most cost
CIP: Carriage and Insurance Paid To
CIP (Carriage and Insurance Paid To) defines the seller's responsibility to deliver the goods to a carrier, arrange and pay for carriage to a named destination, and provide insurance coverage for the goods during transit.
Seller risk: Low
Buyer risk: High
Insurance: Yes (only during transit phase)
Freight cost: Seller bears the most cost
DAP: Delivered at Place
DAP (Delivered at Place) denotes that the seller delivers the goods to the buyer’s named location, ready for unloading. It places more responsibility on the seller than FCA but less than DDP. It is a popular choice for sellers who are looking to offer some flexibility for buyers while managing costs and risks on their side.
Seller risk: High
Buyer risk: Low
Insurance: NA
Freight cost: Seller bears the most cost
DPU: Delivered at Place Unloaded
DPU (Delivered at Place Unloaded) requires the seller to deliver the goods and unload them at the buyer’s named location. It is the only incoterm that requires the seller to unload the goods.
Seller risk: Highest
Buyer risk: Lowest
Insurance: NA
Freight cost: Seller bears the most cost
DDP: Delivered Duty Paid
DDP (Delivered Duty Paid) places the maximum responsibility on the seller in an international trade transaction. It essentially means the seller takes care of everything involved in delivering the goods to the named place of destination, which can be anywhere agreed upon by the buyer and seller.
Seller risk: Highest
Buyer risk: Lowest
Insurance: NA
Freight cost: Seller bears the most cost
What are the 4 Incoterms for sea or inland waterway transport?
FAS: Free Alongside Ship
FAS (Free Alongside Ship) denotes that the seller is responsible for delivering the goods alongside the buyer’s vessel at the named port of shipment. The buyer shall bear the responsibility for the costs and risk of loss or damage from that moment.
Seller risk: Low
Buyer risk: High
Insurance: NA
Freight cost: Buyer bears the most cost
FOB: Free On Board
FOB (Free On Board) is an incoterm that places the responsibility of transferring the goods onto the nominated vessel on the seller, while all subsequent costs and risks become the buyer's responsibility.
Seller risk: Medium
Buyer risk: Medium
Insurance: NA
Freight cost: Buyer bears the most cost
CFR: Cost and Freight
CFR (Cost and Freight) defines that the seller is responsible for delivering the goods to the port of destination, and for paying the freight costs.
Seller risk: Medium
Buyer risk: Medium
Insurance: NA
Freight cost: Buyer bears the most cost
CIF: Cost, Insurance and Freight
CIF (Cost, Insurance and Freight) requires the seller to be responsible for delivering the goods to the port of destination, and for paying the freight and insurance costs.
Seller risk: Medium
Buyer risk: Medium
Insurance: Yes (Only for onboarding on main carriage phase)
Freight cost: Buyer bears the most cost
What are some of the best practices and tips for incoterms?
While learning the incoterms is good theory knowledge, applying best practices can practically ensure your shipments go smoothly. Here are some of the best practices to take note of:
1. Evaluate your shipping goods
Consider whether your goods will get affected in any way in any sort of critical condition. Some of the questions to ask yourselves could be:
- Are they fragile?
- Are my goods perishable?
- Are they of high value and low risk is key?
- Do they require temperature control?
From there on, you should have a clearer idea about which incoterm is best, with the most appropriate risk transfer points and insurance options that will facilitate the smoothest delivery.
For example, if you are looking to ship out fragile cargo, you might want to consider CIF instead of EXW since insurance has to be covered in this incoterm. Or, if you are shipping sensiive goods with short shelf lives, DAP or DDP could be better incoterms to look at as they tend to facilitate a faster delivery.
2. Ensure compliance
It is always key to know the compliance rules ahead to prevent any scramble at any point of the delivery process. So, be sure to research important import/export information such as restrictions, licenses, and taxes.
This step will help you select the appropriate Incoterms that facilitate obtaining necessary export documents (e.g., FCA for export clearance or DDP for import clearance).
3. Know your appropriate freight modes
As shown above, not every incoterm covers all modes of transportation. If sea freight is not an option, incoterms such as FAS, FOB, CFR and CIF should not be at the top of mind as they are exclusive incoterms used for sea or inland waterway transportation.
Choosing the appropriate freight modes could also affect costs, which is also a key factor to consider while determining the best incoterm to use. For example, shipping your goods via air freight with incoterms such as DAP or DDP as the seller could impact your budget.
4. Documentation
Shipping rules and regulations around the world changes from time to time and when new regulations arise, you may need to review or adjust your selected incoterm and associated documentation.
It is always wise to clearly state your selected incoterm in the contracts, including the named place (if applicable) and any insurance provisions. This step will help prevent ambiguity, confusion, and even legal disputes if things happen to be serious.
Be sure to also archive all relevant documentation (invoices, customs declarations, insurance certificates, etc) properly for compliance checks, audits or potential claims.
Cargobase’s TMS helps to keep every shipping documentation traceable and secured in one platform using its Invoice Matching feature. Shippers will also be able to identify errors, eliminate overcharges, ensure contract compliance, and even track CO2 emissions.
5. Consult supply chain experts
Shipping your goods can be very complex and challenging, which can complicate decisions to select the right incoterm. This is when it would be best to consult a supply chain expert who has experience in dealing with shipments and incoterms to help determine the most suitable incoterm in your best interest.
Are there any limitations for incoterms?
While incoterms are great at clarifying delivery responsibilities, They do not address the following:
1. Payment terms
Incoterms do not cover payment terms. Separate agreements will be needed for this aspect.
2. Product details
They do not identify the prices and the specific goods being sold. Clarifications for these will be required to be facilitated between the buyer and seller.
3. Payment methods
Though incoterms do clarify on who will bear the cost at which stage, they do not determine the mode of payments for any kind of shipments.
4. Ownership or title transfers
Incoterms do not determine when the official ownership or title transfers of the goods shift from the seller to the buyer. A separate mutual agreement on this has to also be facilitated between the buyer and seller.
5. Customs documentations
While incoterms do specify who handles customs clearance, they do not detail the specific customs documents required. Both parties have to align on this aspect in order to prevent any potential bottlenecks or disputes.
Legal and non-legal disputes
Regarding legal or non-legal matters pertaining to performance issues (e.g. delays, non-deliveries, etc), Incoterms are not developed to handle them. Instead, robust contracts have to be reviewed and agreed upon by both parties to properly administer these matters should they occur.
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