Freight industry jargon is the worst, but Incoterms are necessary
I know how dull freight can seem to those not in the freight forwarding industry. The amount of jargon we use is overwhelming, and to outsiders, it probably feels a little obnoxious.
But it’s not without reason. You have to remember, we’re dealing with international policies that impact every country on the planet. That’s a lot of different languages, laws, cultures, and governments, so we just have to deal with it.
The good news is that I’m always sharing my experiences, and after more than 30 years in this industry, there’s a lot to share!
The better news is that there are organizations out there that are making it easier to understand the rules of engagement for international trade, and today I’m going to go over the most important guidelines there are.
A little background:
“Incoterms” is trademarked by the International Chamber of Commerce (ICC), and was first published 80 years ago after multiple studies on international trade. Since then, we have seen several iterations, with the most recent being published in 2010.
Each of the 11 rules (down from 13 in 2000) are three-letter acronyms to make them easy to identify and immediately understand how a shipment is being handled. They’re used everywhere, so it is definitely a great time to brush up.
Some of these we have covered in great detail, which I’ll link to for you in the individual descriptions.
Incoterms that apply to everything:
EXW – Ex Works
“Ex Works” means the seller is not responsible for transportation beyond having it available for pick up at the factory or the seller’s depot. This places virtually all shipping responsibilities and costs on the buyer, and that the seller won’t even load your shipment.
It typically works best for domestic shipping only, because the seller is needed for the customs clearance processes.
FCA – Free Carrier
“Free Carrier” puts a little more of the responsibility and cost on the seller than EXW. In this instance, the seller will arrange for pre-transport to the place of the buyer’s choice, prior to export, which could include a warehouse, transportation hub, like an ocean port or airport.
The buyer is responsible for actually unloading it off of the pre-transport vehicle if there is just one carrier for the entire shipment. If there are more, it will stay with the seller until unloaded.
This is better for international trade than EXW, and actually my personal preference for most cross-border and overseas shipments. The seller is going to be responsible for export clearance, while giving the buyer control as soon as it arrives at the shipping port. In addition, the buyer will have total control of the shipment once it arrives at the departure point, which is a very good thing.
CPT – Carriage Paid To
“Carriage Paid To” is very similar to FCA. The seller is responsible for getting the shipment through pre-transport, and they are the one actually contracturally and financially responsible for its shipment to the destination port. The buyer takes on the burden of risk once it arrives to the shipping port, but don’t contract with the carriers, so they’re the ones to buy cargo insurance.
CIP – Carriage and Insurance Paid To
“Carriage and Insurance Paid To” is exactly like CPT, except that the seller will pay for the insurance up until the destination hub.
DAT – Delivered at Terminal
“Delivered at Terminal” means that the seller is responsible for all shipping arrangements, financial obligations, and insurance coverage up until it arrives at the terminal. This can be anything from a transportation depot to a warehouse.
In this instance, the seller is responsible for unloading, and risk transfers to the buyer as soon as that’s done. The buyer is going to be responsible for all costs associated with import clearance, taxes, etc.
DAP – Delivered at Place
“Delivered at Place” is nearly identical to DAT, except that the buyer is responsible for unloading, so the risk is transferred to them right before that happens.
DDP – Delivered Duty Paid
“Delivered Duty Paid” means that the seller will get the goods to the arrival port, and the buyer doesn’t take responsibility until they’ve gone through customs, all duties have been paid, and the shipment is cleared to unload.
This one isn’t my favorite, because that puts too much responsibility on the seller, in my opinion. It’s better to have somebody local to deal with customs, because they’ll be able to better navigate through any challenges that may arise.
Incoterms that only apply to inland waterway & sea transport:
FAS – Free Alongside Ship
As soon as the shipment arrives to the departure port and is sitting alongside the vessel, it is considered delivered, and the buyer assumes logistic and financial responsibility and risk from that point forward.
This is helpful when moving things like heavy machinery or equipment like oversized tractors – things that don’t end up in containers.
FOB – Free on Board
“Free on Board” is treated just like FAS, except that it moves the line of responsibility from just before it is loaded onto the shipping vessel to after it is on board already. (Click HERE for more on FOB shipping)
CFR – Cost & Freight
“Cost & Freight” is similar to FOB in the sense that the seller is responsible for the costs and risks of getting the shipment to and aboard your vessel, even clearing it for export. Also, risk and insurance costs transfer at this point to the buyer.
The difference is that the seller pays for the main transport costs even though the buyer assumes responsibility before setting sail.
CIF – Cost Insurance & Freight
As you might expect, “Cost Insurance & Freight” is just like CFR, except that the seller is responsible for paying the insurance coverage up to the destination port.
These terms are only meant to serve as a quick reference guide. For the official breakdown and full reports, visit The International Chamber of Commerce at www.iccbo.org.
We also have a full glossary of terms that you can visit on our website at https://www.etcinternational.com/freight-forwarding-glossary-terminology-you-should-know.
Get the scoop on all of the incoterms 2010 with this handy reference guide: