INTERNATIONAL COMMERCIAL TERMS (INCOTERMS)

When you’re shipping goods internationally, there are a few terms that you should recognize and understand. INCOTERMS are used in 31 different languages, and you can find them in sales contracts as well as letters of credit.

 

What are INCOTERMS?

INCOTERMS are property of the International Chamber of Commerce and can be broken down into 4 categories: E, F, C, and D terms. Each INCOTERM is a code represented by three letters and a location. E terms refer to situations where the buyer can access the goods at the seller’s premises, while F terms involve the seller delivering the goods to a carrier. With C terms, the exporter arranges the shipping of the goods but isn’t responsible for damage. When the seller is responsible for both cost and risk, D terms are used.

 

How are INCOTERMS used?

Language is important when you’re making a deal, but things can get confusing when each party speaks a different one. INCOTERMS keep everyone on the same page and describe the nature of the transaction. You would use different INCOTERMS for different types of transportation. Some work for any kind of transportation, while others are only applicable to water transportation.

 

Why Incoterms are important?

It’s crucial that you are as clear as possible when working on a deal that involves international shipping, INCOTERMS lay out the costs and risks in each transaction and define what each party is responsible for. These terms help keep both sides on the same page, and they help to ensure that the goods are delivered safely and efficiently.

 

Basics of INCOTERMS:

  • Owned by International Chamber of Commerce
  • Standard Trade Definitions, available in 31 languages
  • Used by customs and banks
  • Found in sales contracts and letter of credit
  • Current edition is INCO 2010

INCOTERMS are a set of three-letter standard trade terms most commonly used in international contracts for the sale of goods. First published in 1936, INCOTERMS provide internationally accepted definitions and rules of interpretation for most common commercial terms.

 

What is the importance of INCOTERMS when quoting?

Provides clarity about the underlying commercial transaction. INCOTERMS inform the sales contract by defining the respective obligations, costs and risks involved in the delivery of goods from the Seller to the Buyer.

INCOTERMS rules are grouped into 4 categories:

  1. The “E” term: (EXW) – The only term where the seller/ exporter makes the good available at his own premises to the buyer/ importer.
  2. The “F” terms: (FCA, FAS and FOB) – Terms where the seller/ exporter is responsible to deliver the goods to a carrier named by the buyer.
  3. The “C” terms: (CFR, CIF, CPT and CIP) – Terms where the seller/ exporter/ manufacturer is responsible for contracting and paying for carriage of the goods, but not responsible for additional costs or risk of loss or damage to the goods once they have been shipped.
  4. The “D” terms: (DAF, DES, DEQ, DDU and DDP) – Terms where the seller/exporter/manufacturer is responsible for all costs and risks associated with bringing the goods to the named place of destination.

 

INCOTERMS rules example

Three letters followed by location: i.e. FOB Shanghai

Not all INCOTERMS are appropriate for all modes of transport. Some terms were designed with sea vessels in mind while others were designed to be applicable to all modes.

The following table sets out which terms are appropriate for each mode of transport.

intercoms

Shipping Guidance Incoterms Shipping Guidance Incoterms (DAF, FES, DEQ, DDU and DDP)

OCEAN FREIGHT TERMS

ABI Automated Broker Interface
AES Automated Export System: The US Customs and Border Protection (CBP) system for electronic filling Shipper’s Export Declaration (SED) and ocean manifest information directly to CBP.
AMS Automated Manifest System: A part’s of Customs’ Automated Commercial System (ACS), controls imported merchandise from the time a carrier’s cargo manifest is electronically transmitted to Customs.
BAF Bunker Adjustment Factor: An adjustment in shipping charges to offset price fluctuations in the cost of bunker fuel
BL Bill of Lading
Break The movement by ocean of packaged goods that are not containerized
Bulk
BSC Bunker Surcharge
BULK Homogenous cargo that is stowed loose in the hold of a ship and is not enclosed in a shipping container or box, bale, bag or cast
CAF Currency Adjustment Factor
CFS Container Freight Station
Courier Expedited, personalized package and document handling
CSC Container Service Charge
CY/CY Container Yard to Container Yard.
DTD Door to Door
DTP Door to Port
EDI Electronic Data Interchange
ETA Estimated time of Arrival
ETD Estimated time of Departure
EX DEC Shipper’s Export Declaration
FAF Fuel Adjustment Factor
FAK Fit All Kinds
FCL Full Container Load
FSC Fuel surcharge
GRI General Rate Increase
GRR General Rate Restoration
HBL House Bill of Lading
IFC Importer Security Filing (10+2 rule) and additional Carrier Requirements Information
LCL Less than Container Load
NVOCC Non-Vessel Operating Common Carrier
OTI Ocean Transportation Intermediary
PPS Pier Pass Surcharge
PSS/PSA Peak Season surcharge / Peak Season Adjustment
PTP Port to Port
TEU Twenty-foot equivalent unit. Used to measure a vessel’s capacity.
THC Terminal Handling Charges
TRC Terminal Receiving Charges

Other Charges: Clean truck fee, Handling Charges, Security Fee, Courier Fee.

 

1O + 2 REQUIREMENTS

The rule will mandate that importers of ocean cargo, or their authorized agents, supply U.S. Customs and Border Protection (CBP) with 10 additional data elements and ocean carriers to supply an additional 2 data sets. This information is to be required 24 hours prior to vessel loading in the foreign port and must be filed at this time by the Automated Broker Interface (ABI).

The ten data elements to be required are:

  • Manufacturer (or supplier) name and address
  • Seller (or owner) name and address
  • Buyer (or owner) name and address
  • Ship-to name and address
  • Container stuffing location
  • Consolidator (stuffer) name and address
  • Importer of record number (or foreign trade applicant identification number)
  • Consignee number(s)
  • Country of origin
  • Commodity HTSUS number (to the 6th digit)

The carrier is responsible for providing to CBP vessel stow plans and container status messages by the Automated Manifest System (AMS).

For more detailed information about the Importer Security Filing, please visit the CBP website here.

 

What’s new about INCOTERMS 2020

The Incoterms 2020 rules define the important responsibilities of buyers and sellers for the delivery of goods under sales contracts. They are the authoritative rules for determining how costs and risks are allocated to the parties. Incoterms rules are regularly incorporated into contracts for the sale of goods worldwide and have become part of the daily language of trade.

The 9th version of the Incoterms 2020 will come into effect on the 1st of January 2020 and contains the rules for use of the 11 Incoterms trade terms. It takes into account the latest developments in commercial practice and updates the rules to make them more accessible and easier to use.

 

What are the changes seen in Incoterms 2020?

In the last version of Incoterms 2010, there were 11 Incoterm rules. They were divided into two classes:

  1. Rules For Any Mode Of Transport
  2. EXW (EX WORKS)
  3. FCA (FREE CARRIER)
  4. CPT (CARRIAGE PAID TO)
  5. CIP (CARRIAGE AND INSURANCE PAID TO)
  6. DAT (DELIVERED AT TERMINAL)
  7. DAP (DELIVERED AT PLACE)
  8. DDP (DELIVERED DUTY PAID)
  9. Rules For Sea And Inland Waterway Transport
  10. FAS (FREE ALONGSIDE SHIP)
  11. FOB (FREE ON BOARD)
  12. CFR (COST AND FREIGHT)
  13. CIF (COST INSURANCE AND FREIGHT)

The most obvious change to the 2010 Incoterms is renaming the term Delivered at Terminal (DAT) to Delivered at Place Unloaded (DPU). The ICC renamed this term because it became apparent that sometimes the buyer and/or seller want the delivery of goods to occur somewhere other than a terminal.

This term is often used for consolidated containers with multiple consignees, and it is the only term that tasks the seller with unloading the goods.

  1. Rules For Any Mode Of Transport (2020)
  2. EXW (EX-WORKS)
  3. FCA (FREE CARRIER)
  4. CPT (CARRIAGE PAID TO)
  5. CIP (CARRIAGE AND INSURANCE PAID TO)
  6. DAP (DELIVERED AT PLACE)
  7. DPU (DELIVERED AT PLACE UNLOADED)
  8. DDP (DELIVERED DUTY PAID)
  9. Rules For Sea And Inland Waterway Transport (2020)
  10. FAS (FREE ALONGSIDE SHIP)
  11. FOB (FREE ON BOARD)
  12. CFR (COST AND FREIGHT)
  13. CIF (COST INSURANCE AND FREIGHT)

Apart from this, the other differences between the 8th revision (2010 rules) and 9th revision (2020 rules) are that:

  • The Incoterms FCA (Free Carrier) now provides the additional option to make an on-board notation on the Bill of Lading prior loading of the goods on a vessel.
  • The costs now appear centralized in A9/B9 of each Incoterms rule.
  • In Incoterms 2020 rules, the seller is now responsible for purchasing a higher level of insurance coverage—at least 110% of the value of the goods as detailed in Clause A of the Institute Cargo Clauses—under the revised term CIP. The insurance requirement hasn’t changed for CIF
  • CIF requires at least an insurance with the minimum cover of the Institute Cargo Clause (C) (Number of listed risks, subject to itemized exclusions).
  • The Incoterms rules Free Carrier (FCA), Delivered at Place (DAP), Delivered at Place Unloaded (DPU) and Delivered Duty Paid (DDP) now take into account that the goods may be carried without any third-party carrier being engaged, namely by using its own means of transportation.
  • The rule Delivered at Terminal (DAT) has been changed to Delivered at Place Unloaded (DPU) to clarify that the place of destination could be any place and not only a “terminal”.
  • The Incoterms 2020 now explicitly shifts the responsibility of security-related requirements and ancillary costs to the seller.

 

Any doubt about Incoterms?

Do you have questions about INCOTERMS and the terminology associated with it? At ILS we are fortunate enough to work with some of the most qualified professionals in the industry.

Feel free to send us a message here or give us a call at 1-800-ILS-9712