Incoterms, short for International Commercial Terms, are three-letter trade terms established by the International Chamber of Commerce to facilitate cross-border trade.
The latest edition is the Incoterms 2010, which consists of a total of 11 Incoterms aimed to guide buyers and sellers with the shipment process by determining the responsibilities of each party during each leg of the transportation.
These are sorted into four different groups, C, D, E, and F, which are categorized according to the delivery location of the goods and the responsibility for payment at different stages of the international transport.
Here’s a breakdown of the four Incoterm groups.
Condition: The seller bears all costs to the destination port (including international transport) however, risk transfer will be made once the goods are loaded on the means of transport.
Condition: The seller bears all risks and costs necessary to bring the goods to the destination country.
Condition: The buyer is responsible for collecting the goods at the seller’s warehouse and bears all associated risk and cost.
Condition: The seller is responsible for bringing the goods to the buyer’s predefined transport medium; the buyer then accepts cost and risk responsibility from that point onwards.
To find out more about what each Incoterm entails, we recommend you to give our page on Incoterms meanings a read.
Choosing the Incoterm that best suits your ocean freight needs can be challenging, especially as a novice or first-time shipper.
Here are some practical considerations when choosing an Incoterm.
Not all Incoterms are suitable for all international shipments, and depending on your mode of transport, you may have to opt for one over another.
Here’s a quick breakdown of the transportation modes and their corresponding Incoterms.
These are Incoterms that can be used for multimodal transportation. I.e. a combination of at least two modes of transportation, be it maritime, air, road, rail, etc.
While these maritime Incoterms are suitable only for sea or inland waterway transportation:
Another factor to consider when choosing an Incoterm is whether you will be shipping containerized or non-containerized cargo.
FOB and CIF are two of the most commonly used Incoterms in the shipping trade. But the ICC actually deems them to be inappropriate for containerized cargo and advice against using them in the container trade.
This stems from the seller not actually ‘delivering’ the container onto the shipping vessel, but instead, drops it off at an inland location or terminal. This creates a gray area in which responsibilities become unclear should the cargo get damaged or even lost when it is sitting at the terminal waiting to be loaded.
Containerized cargo remains unopened until arrival at destination. In the event a containerized shipment being mistakenly shipped under FOB or CIF arrives damaged, it is difficult to determine where and when the damage actually occurred, which could lead to an insurance and/or liability gap.
Despite the official advice from the ICC, it is still common for freight forwarders and agents around the globe to list FOB and CIF as Incoterms when shipping containerized cargo.
It is also so ingrained that despite understanding the distinction between Incoterm usage for containerized and non-containerized cargo, many industry players continue to refer to FCA as FOB, CPT as CFR, and CIP as CIF when talking about containerized cargo.
If you’re shipping containerized cargo, make sure your freight forwarder or agent lists the correct Incoterm to avoid potential complications.
The Incoterm you choose for your international shipment determines the shipment areas and phases you’re responsible for.
The general rule of thumb is, the more responsibility you have, the higher the cost for you. But this also translates to having more control over the shipment.
This includes arranging land transportation, ocean freight, customs at origin, shipping insurance, etc. Essentially, this means that the buyer has no decision making power over the decisions made related to the shipment when it’s at origin.
This could be problematic if, as a buyer, you need your shipment to arrive by a certain date. But since it’s up to the seller to book and pay for the ocean freight, he or she may end up booking the cheapest option, which may risk your cargo not getting in on time.
Even though Incoterms are responsible for determining the rules and responsibilities of the shipment process, there are certain aspects that are beyond Incoterms.
With so much at risk, it’s a process into which you need to put much thought. The number of factors to consider can make the decision-making process rather daunting.
To fully grasp Incoterms and understand how to choose the right Incoterm, we recommend downloading our free ebook on How to choose the best incoterm. A guide for exporters and importers. In this ebook, we go through the best Incoterms for buyers and sellers, as well as the pros and cons of each Incoterm.
If you have more questions about choosing the right Incoterm, you may contact our team of specialists.
"The problem with these costs is that they’re often impossible to predict and are thus hardly ever considered when analyzing and comparing ocean freight rates"
Klaus Lydsal, vice president of operations at iContainers