It is important to identify the trade terms (also known as incoterms) in your sales contract with any supplier or purchaser. Incoterms identify the rights and obligations for the buyer and the seller with respect to the transfer of ownership (and risk of loss) of the goods. These terms also outline which party covers the shipping costs to an agreed upon point in the shipping journey. There are currently 11 different incoterms that can be used to describe a transaction between a shipper (the seller) and a consignee (the buyer). For a graphical depiction of these incoterms, please scroll to the bottom of this page.
The 11 Incoterms
1. EXW, Ex Works (Place): The seller only makes the goods available to the buyer at the seller’s premises. The buyer is responsible for picking up the goods at the seller’s premises and moving it to the buyer's location at the buyer's cost and risk. The seller is only responsible for the packaging of the goods.
2. FCA, Free Carrier (Place): The seller is responsible for delivering the goods to a named location.
3. FAS, Free Alongside Ship (Port): The seller is required to deliver the goods near the vessel where the goods will depart to the buyer's country. The buyer covers the cost and risk of loading the goods onto the vessel (and thereafter).
4. FOB, Free On Board (Port): The seller is required to deliver the goods to the vessel at the port. The buyer is responsible for the cost and risk of the goods after the vessel departs.
5. CFR, Cost and Freight (Port): The seller is required to get the goods delivered to the destination port, minus the cost of cargo insurance. The buyer is responsible for insurance and carries the cost and risk of the goods after the vessel arrives at the destination port.
6. CIF, Cost, Insurance and Freight (Port): The seller is required to get the goods delivered to the destination port, including the cost of cargo insurance. The buyer carries the cost and risk of the goods after the vessel arrives at the destination port.
7. CPT, Carriage Paid to (Place): The seller is required to get the goods to an agreed upon place, covering the cost of transportation.
8. CIP, Carriage and Insurance Paid to (Place): The seller is required to get the goods to an agreed upon place, covering the cost of transportation and insurance.
9. DAP, Delivered at Place (Place): Informally known as "DDU - Delivered Duty Unpaid", the shipment is delivered to a named destination, minus duty owed to Customs. The buyer is required to unload the shipment from the carrier.
10. DPU, Delivered at Place Unloaded (Place): The seller covers the cost and risk of the entire shipping journey (including unloading the shipment from the carrier), minus duty owed. The buyer must ensure that duty is paid for.
11. DDP, Delivered Duty Paid: (Place): The seller covers the cost and risk of the entire shipping journey, including duty owed. The buyer must unload the goods at their destination. This term has the lowest obligation for the buyer.
In real trading operations, the most commonly used incoterms that we see are: EXW (#1), FOB (#4), CFR (#5), CIF (#6), DAP (#9), and DDP (#11).
The standard phrasing when using these incoterms are (name of incoterm)(name of place or port). For example, you have ordered 1000 bicycles from a manufacturer in China for US$20,000, FOB Shanghai port, this indicates that the seller has the obligation to get the goods onto the vessel (or carrier) at Shanghai port.
