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Logistics:Choose which incoterms are right for you

View transcript for Episode 2 - What are incoterms recording
Incoterms are internationally recognised, 3-letter terms, applied to exported goods. They make it clear what a buyer and seller’s responsibilities are. It’s really important to get familiar with them, so you’re clear about what you’re signing up for.

They cover elements of a contract such as where the goods will be delivered, who will arrange transport or who will handle and pay for insurance.

There are 11 incoterms in total. 7 cover all forms of transport and 4 are for ocean freight. So let’s look at some commonly used ones.

Ex Works (EXW)

This applies to all forms of transport, and it basically means the buyer arranges and pays for it.

Delivered at Place Unloaded (DPU)

This applies to all forms of transport and means that the seller will arrange the shipment and delivery of goods to the buyer including how the goods are unloaded. But the customs clearance will be completed by the buyer.

Finally, let’s look at cost and freight (CFR)

This applies to ocean freight and it states that the seller will have to pay the costs of freight to bring the goods to the overseas destination.

What you’ll learn

  • what incoterms are
  • the importance of incoterms for goods exporters
  • the most commonly used terms

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 circumstances, 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

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