Understanding Common Freight Terms (Incoterms)

The world of freight and international transport can be a culture shock for new importers. With a range of terms and concepts unique to the industry, it can take time to fully understand the ins and outs of freight and international transport.

One set of freight terms that you’ll come across are the International Commercial Terms, known as Incoterms. First published in 1936 by the International Chamber of Commerce, these terms govern the responsibilities of buyers and sellers during international transactions and are recognised as the world’s essential terms of trade for the sale of goods.

Incoterms provide universal rules, giving certainty and predictability to international trade. Whether you’re completing a purchase order in Asia, labelling cargo for shipment in Europe or preparing a certificate of origin at a port in South America, Incoterms provide specific guidance to anyone involved in importing or exporting goods.

The current set of rules, known as Incoterms 2010, are used in international transactions and are required on all commercial invoices. To help you better understand these terms, we’ve put together a list of the 11 Incoterms and the roles and responsibilities of sellers and buyers in international transactions.

Incoterms for any mode of transport

EXW – Ex-Works

EXW means that a buyer incurs all the costs and risks of transporting goods to their final destination, with the seller’s only job to ensure the buyer can access the goods. Once the buyer has access to the cargo, the risk transfers from the seller to the buyer. In most cases, EXW results in the buyer arranging loading and unloading, the collection of freight and customs clearance. EXW is often used when quoting for the sale of goods without any costs included.

DAP – Delivered At Place

DAP (Delivered at Place) means that the seller covers the costs and risk of transporting goods to an agreed address. Under DAP, the goods are classed as delivered when they’ve arrived at the address and are ready to be unloaded. The seller bears all risks involved in bringing the goods to the agreed place, including all export costs. All risk then passes to the buyer from that point on, with the buyer responsible for unloading costs and customs clearance. 

DDP – Delivered Duty Paid

DDP or Delivered Duty Paid means that the seller takes almost all responsibility throughout the shipping process, including arranging and paying for both the export and import of cargo. Under DDP, the seller has the obligation to clear the goods, not only for export but also for import, as well as paying relevant duties and carrying out all customs formalities. The risk transfers from seller to buyer when goods are ready for unloading at the agreed address.

CIP – Carriage And Insurance Paid To

Carriage and Insurance Paid to (CIP) means that the seller is responsible for the costs of carriage as well as the cost of insurance to protect the cargo against loss or damage during transit. CIP requires the seller to insure the goods for 110% of the contract value, allowing anyone with an insurable interest in the goods to be able to make a claim. Under CIP, risk transfers from the seller to the buyer when the buyer’s carrier receives the goods.

DAT – Delivered At Terminal

DAT (Delivered at Terminal) means that the seller delivers when the goods are placed at the disposal of the buyer at a terminal, such as a quay, warehouse or road, rail or air cargo terminal. The seller bears all the costs and risks involved in transporting, delivering and unloading the goods at the terminal. However, all charges after unloading (for example, Import duty, taxes, customs and on-carriage) are to be borne by the buyer.

FCA – Free Carrier

Free Carrier or FCA means that the seller delivers the goods to the buyer’s carrier at the seller’s premises or another agreed place. Under FCA, risk transfers from seller to buyer when the buyer’s carrier receives the goods. If delivery occurs at the seller's premises, the seller is responsible for loading the goods on to the buyer's carrier. However, if delivery occurs at another agreed place, the buyer is responsible for loading the goods onto their own carrier.

CPT – Carriage Paid To

Carriage Paid To (CPT) means that the seller delivers the goods, arranging and paying the costs of carriage necessary to bring the goods to the agreed destination. Similar to FCA, risk transfers from seller to buyer when the buyer’s carrier receives the goods, although under CPT the seller also covers the costs of delivery. The seller is responsible for export clearance and freight costs, with risk transferred to the buyer when the goods are handed over to the carrier.

Incoterms for sea and inland waterway transport

FAS – Free Alongside Ship

FAS or Free Alongside Ship means that the seller delivers when the goods are placed alongside a ship nominated by the buyer at the named port (e.g., on a quay or a barge). Under FAS, the seller is responsible for all costs and risk until the goods are alongside the ship. From that moment, the buyer takes on all costs, including customs clearance. FAS should only be used for goods transported by non-containerised sea freight or inland waterway transport.

FOB – Free On Board

Free On Board (FOB) means that the seller delivers the goods on board the ship nominated by the buyer at the named port. With FOB, the seller assumes all costs and risk, including export clearance, until the cargo is delivered on board the ship. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The buyer then bears all costs from that moment onwards, including bill of lading fees, insurance, unloading and transportation costs.

CFR – Cost And Freight

CFR (Cost and Freight) means that the seller delivers the goods on board the ship, with all risk passing to the buyer when the goods are on board. The seller pays for transporting the goods up to the named port of destination, with the risk transferring to the buyer when the goods have been loaded on their ship. With CFR, the seller has the same responsibilities as FOB but must also arrange and pay for the costs and freight required to bring the goods to the port.

CIF – Cost, Insurance And Freight

Cost, Insurance and Freight or CIF means that the seller delivers the goods on board the ship with all risk then passing to the buyer. Similar to CFR, the seller is responsible for the costs of delivering the goods to the port, however, the seller must also cover the costs of insurance to protect the buyer against loss or damage during transit (note the seller is only required to obtain the minimum level of insurance). CIF should only be used for non-containerised sea freight.

If you’re not sure how to navigate the ins and outs of international freight, it’s a good idea to engage the services of a licensed customs broker or experienced freight forwarder. Customs brokers and freight forwarders understand the import process, know the operations of a working port and can help decipher Incoterms, so your goods get to you safely.

PJ's Customs are experts in importing and customs brokerage and are here to guide importers through the import process. To find out how we can help, drop into our Darwin office, email us logistics@pjscustoms.com.au or give us a call on 1300 395 760 for more information.