Learning how to use freight shipping terms properly
Help ensure a smooth export transaction and avoid potentially costly mistakes. Use internationally recognized Incoterms® to clarify the tasks, costs and risks for buyers and sellers in these transactions.
Incoterms, a widely-used terms of sale, are a set of 11 internationally recognized rules which define the responsibilities of sellers and buyers. Incoterms specifies who is responsible for paying for and managing the shipment, insurance, documentation, customs clearance, and other logistical activities.
An Overview of Incoterms® 2020
The Incoterms® are a set of 11 individual rules issued by the International Chamber of Commerce (ICC) which define the responsibilities of sellers and buyers for the sale of goods in international transactions. Of primary importance is that each Incoterms rule clarifies the tasks, costs and risks to be borne by buyers and sellers in these transactions. Familiarizing yourself with Incoterms will help improve smoother transaction by clearly defining who is responsible for what and each step of the transaction.
The Incoterms® 2020 rules are updated and grouped into two categories reflecting modes of transport. Of the 11 rules, there are seven for ANY mode(s) of transport and four for SEA or LAND or INLAND WATERWAY transport.
The seven Incoterms® 2020 rules for any mode(s) of transport are:
EXW – Ex Works (insert place of delivery)
FCA – Free Carrier (Insert named place of delivery)
CPT – Carriage Paid to (insert place of destination)
CIP – Carriage and Insurance Paid To (insert place of destination)
DAP – Delivered at Place (insert named place of destination)
DPU – Delivered at Place Unloaded (insert of place of destination)
DDP – Delivered Duty Paid (Insert place of destination).
Note: the DPU Incoterms replaces the old DAT, with additional requirement for the seller to unload the goods from the arriving means of transport.
The four Incoterms® 2020 rules for Sea and Inland Waterway Transport are:
FAS – Free Alongside Ship (insert name of port of loading)
FOB – Free on Board (insert named port of loading)
CFR – Cost and Freight (insert named port of destination)
CIF – Cost Insurance and Freight (insert named port of destination)
Can I still use Incoterms® 2010 after January 1, 2020?
Yes, all contracts using any incoterms are valid if they are agreed upon by all parties to the transaction, and correctly identified on the export-related documents. Although the ICC recommends using Incoterms® 2020 beginning January 1, 2020, parties to a sales contract can agree to use any version of Incoterms after 2020. They need to clearly specify the chosen version of Incoterms being used (i.e., Incoterms® 2010, Incoterms® 2020, or any earlier version).
Incoterms Clarify Responsibilities of Parties to a Sales Transaction
For example, in each Incoterm rule a statement is provided as to seller’s responsibility to provide the goods and commercial invoice in conformity with the contract of sale. Likewise, a corresponding statement is provided which stipulates that the buyer pay the price of goods as provided in the contract of sale.
Each Incoterm rule has a statement stipulating which party is responsible for obtaining any export license or other official authorization required for export and for carrying out the customs formalities necessary for the export to proceed. Similarly, each rule has a corresponding statement as to which party is responsible for obtaining any import license or other official authorization required for import and for carrying out the customs formalities required for the import of goods. These statements also specify which party bears the cost of handling these tasks.
Similarly, each Incoterm rule specifies which party to the transaction, if any, is obligated to contract for the carriage of the goods. Another point addressed in each Incoterm rule is which party, if any, is obligated, to provide for cargo insurance coverage. These statements also specify which party bears the cost of the handling these tasks. Each rule also contains statements, among others, as to which party is responsible for packing the goods for transport overseas and for bearing the costs of any pre-shipment inspections.
A final example is cargo delivery. Each Incoterm rule specifies the seller’s obligations as for cargo delivery and clarifies when delivery takes place. Each rule also specifies when the risk of loss or damage to the goods being exported pass from the seller to the buyer by reference to the delivery provision.
What Incoterms Do Not Cover
As noted above, Incoterms are generally incorporated in the contract of sale, however they do not:
address all the conditions of a sale;
identify the goods being sold nor list the contract price;
reference the method nor timing of payment negotiated between the seller or buyer;
when title, or ownership of the goods, passes from the seller to the buyer;
specify which documents must be provided by the seller to the buyer to facilitate the customs clearance process at the buyer’s country; and
address liability for the failure to provide the goods in conformity with the contract of sale, delayed delivery, nor dispute resolution mechanisms.
Where can I learn more about the new Incoterms® 2020 rules?
The latest version of the Incoterms® 2020 rules is now published by international Chamber of Commerce (ICC) and protected by copyright. The revised rules reflect the latest developments in commercial transactions. As of January 1, 2020, all sales contracts should include reference to the Incoterms® 2020 rules. You may obtain Incoterms® 2020 rules visit the ICC website.
Below are various other freight shipping terms for reference.
Air Brake The air brake system on tractors is operated by air and consists of air lines, valves, tanks, and an air compressor.
Accessorial charges (also called assessorials)
Any additional services required outside of the standard shipping procedure require additional fees from the carrier called accessorials. These include extra services such as:
Lift gate service
Inside pick up
Collect on delivery (COD)
A return load. Instead of returning to a load’s origin with an empty trailer, a carrier will find another load (the “back haul”) going back to the original location.
Bill of Lading (BOL)
This is the legal document that shows that the carrier has received the freight as described, and is obligated to deliver that freight in good condition to the consignee. One BOL is required for each shipment.
A tractor operating without a trailer attached.
Freight that is not in packages or containers; normally hauled in tankers, grain trailers, and sometimes in regular van trailers.
A less formal name for a shipping container.
Any individual, company or corporation engaged in transporting goods.
Short for cab-over-engine, designed so that the cab sits over the engine on the chassis.
A claim for payment for goods lost or damaged while the shipment was in the carrier’s possession. Cargo claims must be filed within nine months.
Collect on Delivery (COD)
A shipment for which the transportation provider is responsible for collecting the sale price of the goods shipped before delivery. The additional administration required for this type of shipment necessitates an additional fee to cover the carrier’s cost.
A company that provides transportation services to the public in return for compensation.
Concealed loss / concealed damage
Shortage or damage not evident at delivery.
The person or place to whom the goods are addressed and the final destination where a shipment will be transferred for the last time.
A carrier that provides local pickup and delivery.
CDL (Commercial Drivers License)
The operator’s license which authorizes individuals to operate commercial motor vehicles over 26,000 pounds gross vehicle weight.
Checking in with your company/dispatcher to inform them of your progress, and any other important information.
The lights on top of the front and rear of the trailer; often referred to as the marker lights.
A standard sized metal box used to transport freight. International shipping containers are 20 to 40 feet long, and can be transported in an ocean liner, on rail cars and on public roads on a container chassis trailer. Domestic containers are up to 53 foot long, and are of lighter construction.
A type of trailer specifically designed to carry a shipping container.
The receiver, who accepts your delivery.
A common carrier is liable for shipment loss, damage, and delay with the exception of that caused by act of God, act of a public enemy, act of a public authority, act of the shipper, and the goods’ inherent nature.
Class I Carrier
A classification of carriers based upon annual operating revenues of more than $5 million.
Class II Carrier
A classification of carriers based upon annual operating revenues of $1 – $5 million.
Class III Carrier
A classification of carriers based upon annual operating revenues of less than $1 million.
Capacity, measured in cubic feet, of the interior of a trailer.
The relationship of the weight of a shipment to the physical space it occupies.
The charge made for local handling of freight. Common in tradeshow shipping.
Driving a tractor-trailer without cargo, or a paying load.
Penalty charges assessed by a carrier to a shipper or consignee for holding equipment longer than the stipulated time for loading or unloading.
A safety device that hooks to a trailer’s bumper when backed to a loading dock to prevents the trailer from pulling away while a forklift driver and anyone else is inside the trailer.
Drop and Hook
Taking a loaded trailer to a shipper/receiver, dropping the trailer and then leaving with a loaded trailer.
Freight that’s not refrigerated.
When a driver has to unload the trailer by himself.
The route on which a large amount of freight flows back and forth. Frequently just called a “Lane.”
Free on board (FOB)
The seller agrees to deliver merchandise, free of transportation expense, to the place specified by the contract.
Under this arrangement, title and risk remain with the seller until it has delivered the goods to the location specified in the contract.
Title and risk pass to the buyer at the moment the seller delivers the goods to the carrier.
A shipping document used to confirm shipment delivery and indicate payment terms (prepaid or collect) and that describes the shipment.
A company that arranges for the transportation of freight belonging to others, utilizing for-hire carriers to provide the actual transportation. Brokers do not assume responsibility for the cargo and usually do not take possession of the freight.
A freight forwarder combines less-than-truckload (LTL) or less-than-container-load (LCL) shipments into full container or truckload lots. Freight forwarders are designated as common carriers and can issue bills of lading and accept responsibility for goods.
FCL (Full Container-Load)
A full container-load shipment is when a shipper contracts for the transportation of an entire container. The vast majority of intermodal freight is contracted in this manner.
GAWR (Gross Axle Weight Rating)
The maximum weight an axle is rated to carry by the manufacturer.
GCW (Gross Combination Weight)
The total weight of a loaded combination vehicle, such as a tractor-trailer.
GVW (Gross Vehicle Weight)
The total weight of a vehicle; the vehicle’s weight, and the contents of the trailer and tractor.
GVWR (Gross Vehicle Weight Rating)
The total weight a vehicle is rated to carry by the manufacturer, including it’s own weight and the weight of the freight.
Hazardous materials as classified by the United States Environmental Protection Agency (EPA). Transportation of hazardous materials is regulated by the United States Department of Transportation.
Hundredweight / CWT
100 pounds. A common shipping weight unit.
A system that uses standard-sized containers that can be moved between different modes of transport, such as ships, trucks and trains. Freight does not need to be unloaded every time it is moved from one mode to another.
Inside Pickup / Inside Delivery
If a driver is required to go inside (beyond the front door or loading dock), to pick up or deliver a shipment, instead of remaining at the dock or truck, it is considered an inside pickup or delivery.
An engine retarder which helps to slow vehicles.
An ocean-shipping and intermodal industry term; LTL equivalent in container shipping. Container freight stations at ports serve as consolidation and deconsolidation terminals. Historically, LCL also stands for less-than-carload. Before the prominence of interstate trucking, railroads offered less-than-carload (LCL) service but this business has largely disappeared.
Retracting legs which support a trailer when it’s not connected to a tractor.
Any off-duty time while away from home.
The call made to a dispatcher from the shipper’s location once the trailer is loaded and the bills are signed.
Lift Gate Service
When the shipping or receiving address does not have a loading dock, manual loading or unloading is necessary. A lift gate is a platform at the back of certain trucks that can raise and lower a shipment from the ground to the truck. Additional fees apply for this service.
Moving freight from one point to another.
A quantity of freight less than that required for the application of a truckload rate, usually less than 10,000 pounds. These smaller loads are consolidated by an LTL carrier into one vehicle headed for multiple destinations.
LCV (Long Combination Vehicle)
Any combination of a truck and two or more trailers which operate on the Interstate System with a gross vehicle weight (GVW) greater than 80,000 pounds.
An open flatbed trailer, where the main body of the trailer is very low to the ground so that it can haul oversize or wide loads; often construction equipment, or other extremely bulky or heavy loads.
The lowest charge for a shipment after discount and/or adjustment.
This is the item number that specifically identifies each type of product that can be shipped by an LTL carrier. The National Motor Freight Traffic Association (NMFTA) assigns NMFC item #’s to all products along with a LTL freight class. The NMFC # identifies what you are shipping and its LTL freight class.
Non-vessel operating common carriers (NVOCC)
An ocean freight forwarder. NVOCCs book space in large quantities for a reduced rate, then sell space to shippers in smaller amounts.
A situation in which the driver doesn’t have to load or unload the freight.
A claim for a refund of an overcharge from the erroneous application of rates, weights and/or assessment of freight charges.
Out of Route
Carriers usually use set mileage amounts for distances between cities. If a driver goes over this amount, any miles over are considered “out of route” miles.
Extra freight which shouldn’t have been shipped.
A driver who’s in business for himself and owns and operates his own trucks, trailers, or other equipment.
Pallet / Skid
A small platform, 40×48 inches usually, on which goods are placed for handling and shipping.
Pickup and delivery.
The weight of the freight being shipped.
PRO or Tracking Number
A number assigned by the carrier to reference your shipment. It is also used for tracking your shipment.
A load which has multiple and often frequent deliveries.
Reweigh and Inspection Fee
If the carrier suspects that the weight or class of your shipment is inaccurate, they will charge a fee to reweigh and re-class your shipment.
A refrigerated trailer, where the temperature is controlled by a refrigeration unit.
A plastic or metal band (once broken, cannot be reattached) placed on the trailer door latch to ensure the doors have not been opened and the cargo is untouched.
A driver who moves and parks trailers in a terminal yard.
Shipper / Consignor
Person or organization paying for freight to be shipped from one place to another.
The number of units received is less than the quantity shown on shipping documents.
A third-party logistics company, to which logistics services are outsourced. Typically handles purchasing, scheduling and billing for freight shipped.
The weight of a container and the packing material less the weight of its content.
A document detailing rules, rates and charges to move freight and sets forth a contract for the shipper, the consignee and the carrier. Carriers are not required to publish tariffs but must be provided to a shipper on request.
A quantity of freight sufficient to fill a trailer, usually greater than 10,000 pounds.
A carrier that dedicates trailers to a single shipper’s freight, as opposed to an LTL carrier, which often transports the combined freight of several different shippers.
A rate applicable in connection with a specified volume (weight) of freight.
This information has been provided as a resource to familiarize U.S. exporters with Incoterms®. This page is not legal advice, and the information provided is not the official legal or full definition of each Incoterm®. When pursuing a specific export transaction, you are encouraged to conduct your own due diligence and to consult legal counsel as appropriate. Licensed freight forwarders may also be helpful.