Incoterms Explained

This article covers what incoterms are, why you need them and what you need to do.

What are Incoterms?

Incoterms describe the commercial arrangement between the buyer and the seller. They provide standardised and agreed reference points between a buyer and a seller in a Sales or Shipping Contract.

Why do You Need Incoterms?

Incoterms help facilitate International trade by clarifying who is responsible for various customs formalities as well as when the ownership and risk transfers between parties during the sales and transportation process.

Incoterms have three stages in a transport journey:

• Pre-Carriage
• Main Carriage
• Onward Carriage

These stages split into 11 Incoterms but four of these are specific to ocean freight transport (FCL / LCL) only.

The seven that relates to all modes of transport; including carriage by road are:

EXW: Ex Works

FCA: Free Carrier

CPT: Carriage Paid to (named place)

CIP: Carriage Paid & Insurance to (named place)

DAP: Delivered at Named Place

DPU: Delivered at Named Place, Unloaded

DDP: Delivery Duty Paid

Incoterms are normally recorded on a contract of sale but to necessitate international transport, they should also be stated on all commercial invoices pertaining to all consignments.

Download our Full Description of Each Incoterm

What do Incoterms Cover?

Transfer of Risk	Yes
Separation of Costs	Yes
Payment Resolution	No
Mode of Transport	Yes
Insurance	Yes
Dispute of Payment	No
Delivery Points	Yes
Customs Duties	Yes
Arbitration	Only if specified in Sales Contract

What Does my Business Need to do to Import or Export Across the UK/EU Border?

1. Peruse current Incoterms and check with your suppliers and clients for understanding.
2. Revisit older agreements to ensure they are still in your business’ best interests.
3. Ensure all shipping documentation will have the correct Incoterms entered.
4. Calculate the costs associated with Incoterms.
5. Assess the risks involved in the Incoterms.
6. Minimise your exposure to both
7. Know the capabilities of Incoterms.

Review, amend, clarify and approve your incoterms now. This is imperative so you understand and can minimise potential costs and risks.

Incoterms are not a complete contract of sales but a very important part of it.

Along with obtaining an EORI number and identifying your commodity codes, sorting out your incoterms is the last step you need to take before you engage a customs agent. 

If you have any questions relating to Incoterms, speak to the McCulla Ireland customs team today.  Find out more about our Customs Clearance Service here.