Incoterms 2020: Everything you need to know

What is an incoterm?

INCOTERMS, as their name indicates :
International Commercial TERMS, are international trade terms, recognized and used worldwide for international contracts.

They define the obligations of the buyer and the seller concerning the delivery.

They clarify how all transportation costs are shared and when the risk is transferred.

However, INCOTERMS do not define the transfer of ownership because it is the full payment of the invoice that allows to acquire the ownership of the good.

Why incoterm 2020 ?

Incoterms are defined and updated every 10 years by the International Chamber of Commerce.

We speak from now on about INCOTERMS 2020 because the last update is applicable from January 01, 2020 to December 31, 2029.

To know everything about INCOTERMS 2020, discover this article from our partner Formation Achats.

How are the INCOTERMS built?

In international trade, between a seller and a buyer, several actors of the logistic chain intervene.

The seller makes his goods available, they are then loaded into a truck that delivers to a logistics hub or a forwarding agent (this is the pre-carriage), before passing through customs and being loaded onto the main means of transport (it can be land, sea, rail or air).

We call the main transport, the mode of transport that will cover the largest part of the journey.

The goods must then be unloaded from the main transport (which can be a truck, a plane, a ship or a train), pass through customs again, and make the post-carriage (that is to say, make the last kilometers that will take the goods to the buyer where they will be unloaded at their final destination).

In the diagram of the blog formation-achats we find all the actors of the logistic chain.

1/ At each of these stages costs are added, but who pays them? The buyer or the seller? A first bar shows who pays for the transport and up to which stage.

2/ If during the logistic chain a disaster occurred, who would be responsible? The buyer or the seller? Again, Incoterms answer this question with the second bar of the diagram illustrating the transfer of risk.

3/ In most cases, the seller’s insurance covers the seller’s risk only, which is illustrated by the third bar of the diagram, but we will see that for certain specific incoterms, the seller’s insurance may also cover part of the buyer’s risk.

To make it clearer, for each of the incoterms we will distinguish between the seller’s share and the buyer’s share, with 2 distinct colors.

When to use the incoterms ?

Ideally, for each commercial transaction that includes a delivery from the seller to the buyer, choose an adapted Incoterm 2020.

The choice of the incoterm is made on the offer of the salesman or at the time of the negotiation of the transaction, after having agreed on the price or the contents of the delivery.

Let’s review the 11 Incoterms 2020.

EXW (“Ex-Works”) is the simplest for the seller since the buyer takes care of everything.
FCA (“Free Carrier”) is a pre-carriage incoterm. It can cover the loading of the goods onto the truck or delivery to a domestic forwarder.
CPT (“Carriage Paid To”) where the transport is paid by the seller until the destination. However, the buyer covers the risk.

An alternative to CPT exists where the seller’s insurance covers the buyer during the delivery to the destination. This is the CIP (“Carriage & Inssurance Paid to”).

The same principle can be found for 4 incoterms specific to maritime transport:

FAS (“Free along Ship”) which covers the pre-carriage to the ship

FOB (“Free On Board”) which includes the loading of the goods onto the ship

CFR (“Cost & Freight”) where the main transport is paid by the seller but the buyer covers the risk

CIF (“Cost & Insurrance Freight”) which is a derivative of CFR where the seller’s insurance covers the main transport.

Finally, the last 3 incoterms can be used regardless of the main mode of transport.

DAP (“Delivery At Place”) which covers the post carriage

DPU (“Delivered at Place Unloaded”), which also includes the unloading of the goods from the main transport. This is a new 2020 incoterm that replaces the 2010 DAT incoterm.

And finally DDP (“Delivery Duty Paid”) which is the preferred incoterm of the buyers, in the sense that he does not have to take care of anything, the seller takes care of everything.

Summary of Incoterms 2020

In summary, on the 11 incoterms 2020 that we have just seen and for which you will find all the details on the site formation-achats.fr,

We find 1 which is an incoterm of departure.

It begins with the letter E: EXW

3 incoterms cover the pre-carriage and they all begin with the letter F, FCA, FAS and FOB, the last 2 being specific to maritime transport

4 incoterms, those beginning with the letter C, concern a paid main transport.

CPT and CIP valid for all modes of transport, CFR and CIF specific to maritime transport.

The letter I of CIP and CIF refers to the insurance which is taken in charge by the seller (Insurance in English)

And finally, the 3 incoterms that begin with the letter D cover the final destination, with their specificities: DAP, DPU and DDP.

If you wish to go further on the INCOTERMS 2020, do not hesitate to get trained on the subject with formation-achats.

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