11 Incoterms 2020 Rules of which Every Supply Chain Manager should be Aware.

Transportation costs often comprise a significant portion of the cost to obtain a product and, therefore, should be carefully evaluated. There are 11 incoterm rules 2010 and 2020 of which every supply chain manager should be aware of.

International transportation terms (Incoterms^® rules meaning and definition)

The most frequently used international terms for transportation are known as the Incoterms^® rules 2010. These terms, controlled by the International Chamber of Commerce, determine: (1) who will pay the freight, (2) who will be liable for customs duties and (3) who will bear the risk of loss of the cargo. Incoterms^® rules define the different points where responsibilities are transferred from the seller to the purchaser. See www.iccwbo.org for a further explanation of these terms. The Incoterms^® rules 2010 can be broken down into two groups, and are as follows:

• Rules for Any Mode or Modes of Transport.
  • Single Mode Terms That Can Only Be Used with Waterway Transportation.

Domestic transportation terms

The four key issues related to the U.S. domestic transportation terms used between a buyer and supplier are as follows:

• Title transfer of the goods.
  • Filing of claims, if necessary, for loss or damage.
  • Administrative processing of the freight invoice.
  • Responsibility for the transportation costs.

Figure 1 describes the responsibilities of the supplier and buying organization for six major sets of shipping terms. Many U.S. organizations are moving away from domestic FOB terms and are adopting Incoterms^® rules 2010 as their standard.

Figure 1 – U.S. Domestic Transportation Terms

Primary Shipping Terms	Ownership Transfer	Party That Files Claims for Loss or Damage	Party That Process Freight Invoices	Party Responsible for Freight Costs
FOB Origin, Freight Collect	Purchase owns goods in transit. Title passes to purchaser at seller’s dock.	Purchaser	Purchaser	Purchaser
FOB Shipping Point, Freight Allowed	Purchaser owns goods in transit. Title passes to purchaser at seller’s dock.	Purchaser	Seller	Seller
FOB Origin, Freight Prepaid and Charged Back	Purchaser owns goods in transit. Title passes to purchaser at seller’s dock.	Purchaser	Seller	Purchaser
FOB Destination, Freight Collect	Seller owns goods in transit. Title passes to purchaser at purchaser’s dock.	Seller	Purchaser	Purchaser
FOB Destination, Freight Prepaid	Seller owns goods in transit. Title passes to purchaser at purchaser’s dock.	Seller	Seller	Seller
FOB Destination Freight Collect and Allowed	Seller owns goods in transit. Title passes to purchaser at purchaser’s dock.	Seller	Purchaser	Seller

A common misconception when using Incoterms^® rules is that they may only be applied to international transactions (those crossing international borders). There are two critical elements within the provisions of the Incoterms^® rules 2020 rules to make the “translation” domestic.

• First, seller and buyer must agree at what point/place risk of loss will shift.
  • Will it be at the seller’s premises (wherever the goods are shipped from — “origin”)?
  • Will it be at the buyer’s premises (wherever the goods are shipped to — “destination”)?
  • Second, which party is obligated to arrange and pay for the contract of carriage (who picks and pays the carrier to deliver the goods)?

International Commercial Terms (Incoterms^® Rules 2020)

The Incoterms^® rules are a set of standard delivery terms developed by the International Chamber of Commerce (ICC), primarily for use in international shipping. The ICC approved the newest version of the terms, designated Incoterms^® rules 2020, which became effective January 1, 2011.

For some time the Incoterms^® rules have consisted of 13 terms. Incoterms^® rules 2020 eliminate four of the previously-existing terms (DDU, DES, DEQ, and DAF) and add two new terms (DAT and DAP), resulting in a total of 11 terms. The new version is made available for both domestic and international use; contracting parties should, however, review the applicability of these terms to the domestic environment prior to applying them.

The terms have been structured to increase incrementally the obligations (control, risk, and cost) on one party while decreasing the obligations of the other, depending on the specific term chosen. Each term clarifies which party is responsible for the following items:

• Inland freight (transportation within the origination country)
• Forwarder selection.
• Export clearance.
• Carrier selection and scheduling.
• International freight.
• Import clearance.
• On-carriage (transportation within the destination country.)

Delivery occurs (and risk of loss transfers) at the point designated by the term selected. Transfer of title is not covered by any of the Incoterms^® rules and must be separately specified by the parties.

The Incoterms^® rules can be divided into two groups — multimodal (available for multiple forms of transport, including land, air, and waterway transportation) and single mode (applicable only to waterway transportation).

The multimodal terms are listed below:

• Ex works (EXW) named place (seller’s premises).
• Free Carrier At (FCA) point in seller’s country.
• Carriage Paid (CPT) destination point named.
• Carriage Insurance Paid (CIP) destination point named.
• Delivered at Terminal (DAT) port, airport, terminal — this term is added by Incoterms^® rules 2020.
• Delivered at Place (DAP) destination point named — this term is added by Incoterms^® rules 2020.
• Delivered Duty Paid (DDP) destination point named.

The single mode terms (which can only be used with waterway transportation) are those listed below:

• Free Alongside Ship (FAS) named vessel at loading port.
• Free On Board (FOB) named vessel at loading port.
• Carriage & Freight (CFR) named ocean or river port of destination.
• Carriage, Insurance, & Freight (CIF) named ocean or river port of destination.

The terms in each group are listed above in order of increasing responsibility for the seller (and correspondingly decreasing responsibility for the buyer). For example, using the term EXW makes the seller responsible only for making the goods available at its own premises; delivery occurs and risk of loss transfers at that point. When the term DDP is used, the seller becomes responsible for everything except on-carriage where the location for delivery is not the buyer’s actual location. DDP is the only Incoterms^® rule that makes the seller responsible for import clearance.

Buyers in the United States who are likely to be familiar with delivery terms defined within the Article 2 and 2A of the Uniform Commercial Code (UCC) should pay particular attention to the overlap in the use of certain terms/abbreviations between the Incoterms^® rules and the UCC. Free on board (FOB), free alongside (FAS), and Carriage, Insurance & Freight (CIF) are all used in the UCC, but their definitions there are much different from the definition of the same terms in the Incoterms^® rules. Under the Incoterms^® rules, all three of the overlapping terms (FOB, FAS, and CIF) fall into the “single mode” group, meaning they can only be used for waterway transportation. Under the UCC only FAS is limited to use with a vessel.

Although the new Incoterms^® rules 2020 became available for use as of January 1, 2011, Incoterms^® rules 2000 will continue to be available. It is incumbent upon contracting parties to determine which terms they want to use and to designate the version being applied.

Numerous publications and seminars are available through the International Chamber of Commerce (http://store.iccwbo.org/) as well as from other organizations explaining in depth the application of both Incoterms^® rules 2000 and Incoterms^® rules 2020.³¹

What are the 11 Incoterms rules 2020?

International Commercial Terms (Incoterms® Rules)

TERM	INCOTERMS® RULES DEFINITION
The multimodal (available for multiple forms of transport, including land, air, and waterway transportation) terms are:
Ex works (EXW) named place (seller’s location)	”Ex Works” means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another place (i.e., works, factory, warehouse, etc.). The seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable.
Free Carrier At (FCA) named place (seller’s country)	”Free Carrier” means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller’s premises of another named place. The parties are well advised to specify as clearly as possible the point within the named place of delivery, as the risk passes to the buyer at that point.
Carriage Insurance Paid (CPIP) named place of destination	“Carriage Paid To” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.
Carriage Paid To (CPT) named place of destination	“Carriage and Insurance Paid To” means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination. “The seller also contracts for insurance coverage against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”
Delivered at Terminal (DAT) named place of destination	“Delivered at Terminal” means that the seller delivers when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named terminal at the named port or place of destination. “Terminal” includes a place, whether covered or not, such as a quay, warehouse, container yard, or road, rail or air cargo terminal. The seller bears all risks involved in bringing the goods to and unloading them at the terminal at the named port or place of destination.
Delivered at Place (DAP) named place of destination	“Delivered at Place” means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.
Delivered Duty Paid (DDP) named place of destination	“Deliver Duty Paid” means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.
The single mode terms (which can only be used with waterway transportation) are:
Free Alongside Ship (FAS) named vessel at loading port	“Free Alongside Ship” means that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the named port of shipment. The risk of loss of or damage to the goods passes when the goods are alongside the ship, and the buyer bears all costs from that moment onwards.
Free On Board (FOB) named vessel at loading port	“Free On Board” means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onward.
Cost & Freight (CFR) named port of destination	“Cost and Freight means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from that moment onward.
Cost, Insurance & Freight (CIF) named port of destination	“Cost, Insurance and Freight” means that the seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the goods are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. “The seller also contracts for insurance to cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.”

Source:: ICC website. The full text of the 2020 edition of the Incoterms^® rules is available at http://store.iccwbo.org/. “Incoterms” is a trademark of the International Chamber of Commerce (ICC).

An example of applying Incoterms^® rules 2020 might include a German organization manufacturing goods in a Brazilian plant. If an order of goods was set to be delivered to New Jersey in the U.S., then the contract between the German organization and the U.S. customer would need to address the specific terms of the transaction. Assuming EXW (Ex Works) Brazil was specified in the transaction, the goods would be made available for pickup at the German organization’s Brazilian facility and delivery would be considered to take place when the goods were released to the customer’s transportation provider. At this point the customer is responsible for all transportation costs and incurs all risk.