27/03/2014

OMGT 2247:
Global Trade Operations

Topic 8
Incoterms

Lecture Overview

• Incoterms
– What are Incoterms
– What are Incoterms used for?
– History of Incoterms
• Incoterms 2010

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What are INCOTERMS?

• INternational COmmercial TERMS

• 3 letter acronyms used in sales or purchase
contract.
• Published by the International Chamber of
Commerce (ICC).
• First published in 1936, the current version is
INCOTERMS 2010.

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Why do businesses use Incoterms?

• It is appropriate for buyers and sellers to bring up
Incoterms during the negotiation phase, not after.
• Incoterms enable buyers and sellers from
different regions/countries to have a common
understanding of who pays for what, and who is
responsible for what risks.
• If there is a dispute, buyers and sellers could rely
on the Incoterms listed on the sales/purchase
contract to settle the dispute.

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History of Incoterms
• First 6 Incoterms were published in 1923
– FOB, FAS, FOT, FOR, Free Delivered CIF and
C&F

• 1980s
– FCA was added. Due to containerisation, the
reception point may not be the ship’s rail, but at
a container yard.

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History of Incoterms (2)

•  1990s
– Seller’s obligation to provide proof of delivery
paperwork can be substituted by EDI-messages.

•  2000s
– In FAS, export clearance in placed on the seller.
– In FCA, it has become the seller’s obligation to load
goods onto the buyer’s collecting vehicle, and for the
buyer to receive the seller’s arriving vehicle unloaded.

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Incoterms 2010
•  Changes introduced with Incoterms 2010
– Outdated rules replaced. This is to reflect modern
logistics options, risks and liabilities.
– 13 Incoterms reduced to 11.
– DAP and DAT replace DES, DEQ, DDU and DAF.
– Incoterms are now categorised according to the mode
of transport, not according to increasing responsibility
of seller.

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Incoterms 2010 (2)

•  Changes introduced with Incoterms 2010 (continue)…
– References to ship’s rail removed.
– Containerised cargo are to use FCA, CPT, CIP, DAT,
DAP and DDP.
– Incoterms 2010 changes took effect on 1 Jan 2011.
– Cargo security assigned to both buyers and sellers.

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The 2 categories of Incoterms 2010

• Rules for any mode of • Rules for sea and

transport inland waterway
– EXW transport
– FCA – FAS
– CPT – FOB
– CIP – CFR
– DAT – CIF
– DAP
– DDP

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EXW
•  EXW (ExWorks)
– Seller has to have the goods available for pick up at
seller’s premises, or another named place.
– Once goods are collected, buyer bears all risk and
costs associated with transport, until product is
delivered to location.
– Minimum obligation by seller. Seller does not have to
load goods, nor clear goods for export.

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FCA
•  Free Carrier (FCA)
– Seller is to deliver goods cleared for export to carrier
stipulated by buyer, or to another party authorised to
collect goods from the seller’s premises or another
stipulated place.
– Buyer takes on all risks and costs associated with
delivery of goods to final destination.
– Buyer pays for customs fees to import goods into
foreign country.

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CPT

• Carriage Paid To (CPT)

– Seller clears goods for export.
– Seller delivers goods to carrier.
– Seller is responsible for transportation costs for
delivering goods to named place of destination,
but not for insurance.

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CIP

• Carriage and Insurance Paid To (CIP)

– Seller clears goods for export.
– Seller delivers goods to carrier.
– Seller is responsible for transportation costs for
delivering goods and procuring minimum
insurance coverage to named place of
destination.

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DAT
• Delivered at Terminal (DAT)
– Seller clears goods for export.
– Seller bears all risks and costs for delivering
goods and unloading goods at terminal at
named port, or destination.
– Buyer is responsible for all costs and risks from
this point, including clearing goods for import at
destination country.

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DAP
• Delivered at Place (DAP)
– Seller clears goods for export.
– Seller bears all risks and costs for delivering
goods to named place of destination not
unloaded.
– Buyer is responsible for all costs and risks for
unloading goods, and clearing customs for
importing goods into destination country.

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DDP
• Delivered Duty Paid (DDP)
– Seller bears all risks and costs for delivering
goods to named place of destination ready for
unloading and cleared for import.

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FAS
• Free Alongside Ship (FAS)
– Seller clears goods for export.
– Seller delivers goods when goods are placed
alongside the ship at named port of shipment.
– Buyer takes on all risks and costs from this
point forward.

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FOB
• Free On Board (FOB)
– Seller clears goods for export.
– Seller delivers goods when goods are onboard
the ship at the named port of shipment.
– Buyer assumes all risks and costs from this
moment forward.

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CFR
• Cost and Freight (CFR)
– Seller clears goods for export.
– Seller delivers goods when they are onboard
the ship at the named port of shipment.
– Sellers bears cost of freight to named port of
destination.
– Buyer assumes all risks for goods from the time
goods are delivered onboard the vessel at port
of shipment.

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CIF
•  Cost, Insurance, and Freight (CIF)
– Seller clears goods for export.
– Seller delivers goods when they are onboard the ship at
the port of shipment.
– Seller bears cost of freight and insurance to named port
of destination.
– Seller’s insurance requirement is only for minimum
cover.
– Buyer is responsible for all costs for unloading goods at
named port of destination and clearing goods for import.
– Risks passes from seller to buyer once goods are
onboard ship at port of shipment.
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Use the appropriate Incoterms

•  Different Incoterms are used for different transportation

modes and different scenarios. E.g. do not use sea/
maritime Incoterms for land or air transport.
•  Buyers may not interact directly with Sellers. Often there
is carrier involved.
•  Specifying the place clearly (point, place & port).
•  Consider local practices
– DAF is not applicable in Australia.
•  Buyers and sellers often use Incoterms to negotiate, i.e. to
determine who is responsible for what costs/risks.

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Use the appropriate Incoterms (2)

•  Video on tips for using the appropriate Incoterms

– http://www.youtube.com/watch?v=-A4F2v5hjH4

•  Understanding the appropriate Incoterms to use.

– Refer to the 2 scenarios given.
– Note: Incoterm calculations are not examinable. All
other aspects of Incoterms are examinable.

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Scenario 1: Sea freight

•  Question: You are a manufacturer of shoes. Your factory is located in
California, US. An Australian importer has asked you to provide a quotation for
600 pair of shoes. You are required to provide on quote, DDP Melbourne,
Australia. The importer has asked for the price in their local currency.
•  Available for offer: Shoes
•  Transport (sea) rate
•  To any port in Japan 1400 USD / teu
•  To any port in Australia 2000 USD / teu
•  To any port in US 50 USD / teu
•  200 Shoes will fit into 1 teu.
•  Road transport to port of California 200 USD / teu
•  Road transport in Melbourne to Richmond from port 250 USD / teu
•  EXW price- California 10 USD per pair of shoes
•  Insurance by American insurance group will be 2.5% of CFR value
•  Customs duty 15% of FOB value
•  GST 15% of landed price (CIF value)
•  Exchange rate is A$1.00 = US$1.00.

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Scenario 2: Air freight

•  Question: You are a manufacturer of clothing garments based in

Carlton Victoria. You have received a fax from Rome. An Italian
importer has asked you to quote Melbourne and DDP Rome for both
sea and air transport on 5000 shirts in Euro currency. The shirt cost
Ex works Carlton is 3.95aud per shirt. Customs duty in Italy is 17% of
the Fob value and the sales tax is 10% of the CIF/CIP + customs
duty. The road transport to the airport in Melbourne is 278aud for the
entire shipment and road transport to the Port of Melbourne is
202aud/teu. Insurance is 4% of the CFR/CPT value. Sea transport to
European ports (Italy) 3100aud/teu. The total box size is 270cm,
180cm,166cm. Gross weight of 1340kgs. Road transport in Italy is
213eur (entire shipment). (Exchange rate: A$1.00 = 0.787654 EUR)

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Summary
• Understand the purpose of using Incoterms.
• Understand the history of Incoterms.
• What were the changes introduced for Incoterms
2010.
• Appreciate the importance of using the
appropriate Incoterms.

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