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Understanding Incoterms

IncotermsIncoterms® refer to a series of rules that define the responsibilities of sellers and buyers (business-to-business) when they purchase and ship goods internationally. These could include various costs and performance tasks which all businesses involved agree to handle.

Background

Incoterms were originally designed by the International Chamber of Commerce, in order to establish a more universal terminology across different members of the international trade industry. They were first introduced in 1936, and are revised as needed. Generally, their life span averages about 10 years. The 2010 Incoterm rules consist of 11 different terms that aid users in dealing with different situations that involve the movement of goods.

Significance

Using Incoterm rules in agreements ensures that both parties are on the same page, thus reducing the possibility of misunderstanding and increasing the likelihood of fulfillment.   Incoterm rules are a very significant part of purchase-sales contracts, and it is therefore very essential that both the seller and buyer understand how to use them properly.

General Guidelines

  • All Incoterms rules must include the exact geographical place.
  • Incoterms must be cited in purchase-sales contracts.
  • Incoterm rules are always in English regardless of the contract language.
  • Each Incoterm rule has a three letter abbreviation.
  • Each Incoterm rule states the location where seller risk (referred to as “delivery”) for the condition agreed upon ends.
  • All Incoterm rules require the packaging of goods for transport by the seller.

2010 Incoterm Rules                                                                                    

  • Ex Works (EXW): refers to the most basic shipment arrangement, where the seller is only obliged to ensure the packaging and availability of a good and notify the buyer.
  • The F-Group (FOB, FAS, FCA): overall, terms in this category indicate that the seller is only responsible for delivering the goods to a carrier determined by the buyer.
  • The C- Group (CIP, CPT, CIF, CFR): terms in this category indicate that the seller is obliged to contact and pay for carriage, but is not responsible for cost or risk once the goods are shipped.
  • The D- Group (DAF, DES, DEQ, DDU, DDP): terms in this category indicate that the seller is responsible for all costs associated with bringing goods to a certain location determined by the buyer.

Please check out our useful online Incoterms Guide, or contact us for more information. If you have an international shipment ready to go, click the button below to request a free, no-obligation transportation quote.

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