Knowing and understanding how the 11 Incoterms work is essential if you plan to import or export cargo internationally. Incoterms define the responsibilities and liabilities of buyers and sellers when shipping goods. Continue reading our guide for a simple breakdown of each incoterm and how to select the right incoterm for your shipments.
7 Incoterms for Air and Sea Freight
Seven Incoterms can be used for both sea and air freight, while four Incoterms are used exclusively for ocean freight.
- EXW – Ex Works: The seller’s responsibility is to make the goods available for pickup at the warehouse or factory. The buyer assumes responsibility for all costs and risks and arranges for door-to-door transport with their freight forwarder.
- FCA – Free Carrier: The seller is responsible for delivering the goods to the carrier at a named place, typically a terminal or warehouse. Once the goods are handed over to the carrier, the risk transfers to the buyer.
- CPT – Carriage Paid To: The seller is responsible for the costs of transporting the goods to a named destination such as an airport. Responsibility transfers to the buyer once the goods are delivered to the agreed-upon destination.
- CIP – Carriage and Insurance Paid To: This incoterm is the same as CPT except that with CIP, the seller must also arrange and pay for insurance coverage in case of loss or damage to the goods during transit to the agreed-upon destination.
- DAP – Delivered at Place: The seller is responsible for arranging the entire shipment up to delivering the goods to a named place such as a port in the U.S. Risk transfers to the buyer upon delivery.
- DPU – Delivered at Place Unloaded: The seller is responsible arranging the shipment and delivering the goods to a named place. They are also responsible for unloading them. Risk transfers to the buyer once the goods are unloaded.
- DDP – Delivered Duty Paid: The seller is responsible for entire shipment, including customs clearance and fees, and delivering the goods to the buyer’s premises. This incoterm places the maximum responsibility on the seller.
4 Incoterms Exclusively for Sea Freight
- FAS – Free Alongside Ship: The seller is responsible for picking up the goods at the factory, clearing them for export, and delivering them to a designated departure location, typically the ship’s loading dock. Risk transfers to the buyer when the goods are placed alongside the ship.
- FOB – Free On Board: The seller is responsible for packaging, pickup, and delivery of goods onto a vessel at the port of shipment. Liability transfers to the buyer once the goods are on board the vessel.
- CFR – Cost and Freight: The seller is responsible for transportation to the port of origin and for loading the goods onto the vessel. They are also responsible for transportation to the destination port, but they are not liable for that portion of the journey. Instead, risk transfers to the buyer when the goods are onboarded at the port of origin.
- CIF – Cost, Insurance, and Freight: Similar to CFR, but the seller also arranges and pays for insurance coverage for the goods during transit to the port of destination.
Selecting the Right Incoterm
In our experience, selecting the right incoterm for your shipment comes down to two key factors: your comfort level for risk and your experience in logistics.
If your goal is to minimize as much risk as possible, consider selecting DDP incoterm. Your supplier will handle your shipment door-to-door. The downside is you won’t have any control over costs.
Incoterms such as EXW or FOB are popular options if you’re willing to accept some risk and if you have a reliable freight forwarder that you trust. You’ll have control over some of the costs and greater visibility over the ins and outs of your supply chain.
Best Incoterms for Buyers
The best Incoterms for buyers are those that grant you greater control over costs. EXW and FOB are the best options since you’ll have control over ocean freight costs as well as final delivery costs.
Best Incoterms for Sellers
The best Incoterms for sellers are CFR, CIF, DDP, and DAP because they grant you greater control over shipping costs.