Incoterms for FMCG export explained
An Incoterm sets out which of seller and buyer arranges the transport, who bears which costs and at what point the risk of loss or damage passes. Under EXW the buyer collects everything, under FCA the seller hands the goods to the buyer's carrier, FOB, CFR and CIF apply only to sea and inland waterway transport, and under DAP and DDP the seller brings the goods to the destination. Under DDP the seller also pays the import duties.
Every export order starts with the question of who arranges what: who books the transport, who pays the freight and who is responsible if something goes wrong on the way. An Incoterm answers those questions with a three-letter abbreviation. It is a standard clause from the International Chamber of Commerce (ICC) that you put in the quote, the order and the invoice. The current edition is Incoterms 2020.
What an Incoterm covers and what it does not
An Incoterm covers delivery: who organises the transport, who bears the costs of carriage, insurance and customs, and at what point the risk passes from seller to buyer. It does not cover when and how payment is made, when ownership passes or which law applies. You settle those separately in the sales contract.
The point where the risk passes does not always coincide with the point where the costs stop. Under CFR and CIF the seller pays the freight to the port of destination, while the risk passes as soon as the goods are on board at the port of shipment.
Seven Incoterms side by side
| Incoterm | Who arranges the main carriage | Where the risk passes | Mode of transport |
|---|---|---|---|
| EXW (Ex Works) | The buyer | When the goods are placed at the buyer's disposal at the agreed place, usually the seller's premises. The seller does not load them. | Any mode |
| FCA (Free Carrier) | The buyer | When the seller has handed the goods to the buyer's carrier at the agreed place. | Any mode |
| FOB (Free On Board) | The buyer | When the goods are on board the vessel at the agreed port of shipment. | Sea and inland waterway only |
| CFR (Cost and Freight) | The seller, up to the port of destination | When the goods are on board the vessel at the port of shipment. | Sea and inland waterway only |
| CIF (Cost, Insurance and Freight) | The seller, up to the port of destination, with insurance | When the goods are on board the vessel at the port of shipment. | Sea and inland waterway only |
| DAP (Delivered at Place) | The seller | At the agreed destination, on the arriving means of transport and ready for unloading. | Any mode |
| DDP (Delivered Duty Paid) | The seller | At the agreed destination, on the arriving means of transport and ready for unloading, after the goods have been cleared for import. | Any mode |
What to watch for with each Incoterm
- EXW: the buyer arranges the transport and also the export declaration, while the seller only makes the goods available. For a buyer abroad that can be awkward, because the export declaration has to be made in the seller's country.
- FCA: the seller handles export customs and the buyer the main carriage. For containers this is usually a better fit than FOB, because a container is often handed over at the terminal and not only once it is on board the vessel.
- FOB, CFR and CIF: only for transport by sea or inland waterway. Do not use them for road or air freight.
- CIF: the seller takes out insurance, but under Incoterms 2020 the required cover is limited to a minimum. If the buyer wants more cover, arrange it separately.
- DAP: the seller brings the goods to the destination. The buyer handles import clearance and pays the import duties and taxes.
- DDP: the seller also handles import clearance and pays the import duties and taxes in the destination country. That takes knowledge of the import rules there and may mean the seller has to register for tax in that country. Ask your forwarder or customs adviser beforehand.
Name the place and the version
An Incoterm without a place says little. FCA Rotterdam and FCA Hamburg move the point at which the seller is done. Always write the place next to it and name the version, for example FCA Rotterdam, Incoterms 2020. Parties can agree an older version, so put the version on the quote too.
Why this belongs in your order process
The Incoterm decides what the price includes. A quote based on EXW and a quote based on DDP cannot be compared without adding freight, insurance and duties. If you record the Incoterm on every order, you compare prices more fairly and know which documents and which transport belong to that order.
In an order process the Incoterm can be a field recorded per order that carries over by itself to the quote, pro forma and commercial invoice. Then nobody has to retype the agreement. BDI Nexus builds automation in which order documents are generated from your own data.
What to record per order
- The Incoterm, the place and the version.
- Who books the main carriage and who pays the freight.
- Who takes out the insurance and what cover goes with it.
- Who handles export customs and who handles import customs.
- The point where the risk passes, so it is clear who holds the claim if there is damage.
What people ask first.
- Which Incoterm suits container transport?
- FCA usually suits better than FOB, because a container is often handed over at the terminal and not only once it is on board the vessel. FOB, CFR and CIF are meant for cargo that is placed directly on board.
- What is the difference between DAP and DDP?
- Under both, the seller brings the goods to the agreed destination and bears the risk up to there. Under DAP the buyer handles import clearance and pays the import duties. Under DDP the seller does.
- What is the difference between EXW and FCA?
- Under EXW the goods are made available to the buyer, who arranges everything, including the export declaration. Under FCA the seller hands the goods to the buyer's carrier and handles export customs.
- Who pays for the insurance under CIF?
- The seller takes out the insurance, with a minimum level of cover. The risk still passes once the goods are on board, so if the buyer wants more cover, you agree that separately.
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