What are Incoterms in Australia?

Think international shipping is just about moving goods? Without Incoterms, it can get messy. They are used to define the responsibilities of buyers and sellers in global trade to avoid confusion over who handles transport, insurance, duties, and other costs. 

For Australian businesses involved in importing or exporting goods, understanding Incoterms is essential. It provides smooth transactions and reduces the risk of costly disputes. 

In this article, we’ll explain what Incoterms are, why they matter, and how they apply specifically to trade within and from Australia.

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What Are Incoterms?

Incoterms, short for International Commercial Terms, are a set of rules created by the International Chamber of Commerce (ICC). They are standard trade terms that outline who is responsible for each part of the shipping process. Incoterms define the delivery of goods and the transfer of risk. They also outline who is responsible for costs like shipping, insurance, and customs duties.

In Australia, Incoterms are used in contracts involving imports and exports. They are particularly relevant for businesses shipping goods by sea, air, or land. The latest version, Incoterms 2020, is widely used in the logistics and freight industries..

Many Australian businesses use Incoterms without fully understanding them, leading to confusion about who is liable if something goes wrong. This misinterpretation often results in unexpected costs or disputes. For example, if goods are damaged during transport, the parties may disagree on who should bear the loss.

Understanding Incoterms is essential for smooth international transactions as they prevent misunderstandings and disputes between trading partners. Using the correct Incoterms in a contract can make a significant difference. It can impact delivery timelines, insurance coverage, and financial outcomes. 

11 Key Incoterms Explained

Each term defines the responsibilities of the buyer and seller during the shipping process. The following are the 11 key Incoterms used in Australia:

1. FOB (Free on Board)

Free On Board (FOB) means the seller delivers goods onto a vessel chosen by the buyer. The risk transfers once the goods are loaded. This term is often used in sea freight. 

Exporters of bulk goods like grain or coal commonly use FOB. It allows overseas buyers to control the shipping process from the moment the goods are loaded onto the ship. An example of this is when a Brisbane wheat exporter agrees to an FOB contract. The overseas buyer takes full responsibility once the wheat is loaded onto a ship at the Port of Brisbane.

2. CIF (Cost, Insurance and Freight)

Cost, Insurance, and Freight (CIF) includes the cost of goods, marine insurance, and freight to the destination port. The seller covers these costs. However, the buyer assumes the risk once the goods are on board the ship. 

This Incoterm is usually used in imports for manufactured goods from Asia. So if an importer in Sydney uses CIF to bring electronics from China, the Chinese supplier pays for the freight and insurance.

3. DAP (Delivered at Place)

Under Delivered at Place (DAP), the seller is responsible for arranging and paying for delivery to a named location, such as a warehouse or distribution centre. The buyer, however, takes on the cost and risk of unloading, as well as any import duties or taxes. 

DAP is ideal for door-to-door shipments where the buyer wants a streamlined process without managing international freight. This Incoterm is used to bring in high-value machinery, electronics, or medical equipment, especially when those goods need to be delivered to a specific site or project location.

4. EXW (Ex Works)

Ex Works (EXW) is the Incoterm that places the maximum responsibility on the buyer. The seller simply makes the goods available at their premises. This could be a warehouse, factory, or storage facility. From that point, the buyer handles everything: transport, export clearance, freight, insurance, and import formalities. 

EXW is used by exporters who deal with overseas buyers experienced in managing international logistics. EXW is perfect for experienced exporters because it places minimal responsibility on them, allowing them to let the overseas buyer handle most of the logistics. It allows sellers to minimise their involvement in the shipping process while giving buyers full control. However, EXW may not be suitable for newer importers who lack logistics experience.

5. FCA (Free Carrier)

Free Carrier (FCA) offers more flexibility than EXW, especially for shipments that involve more than one mode of transport. Under FCA, the seller delivers the goods to a nominated location, such as a freight terminal, port, or a carrier’s warehouse. Risk transfers to the buyer once the goods are handed over at the agreed point. This term is well suited for air freight and inland container transport, both of which are common in Australia’s wide-reaching domestic logistics network. 

Australian exporters often choose FCA when shipping goods to international partners through major ports like Sydney, Brisbane, or Fremantle. This is for shipments that require coordination with freight forwarders for inland transport or air freight. 

For example, an exporter in Melbourne might use FCA to deliver goods to the Sydney airport, where a freight forwarder takes over for air transport to an overseas destination. This simplifies logistics and minimises their responsibility.

6. CPT (Carriage Paid To)

Carriage Paid To (CPT) requires the seller to arrange and cover the cost of delivering goods to a named destination. However, the risk transfers to the buyer once the goods are handed over to the first carrier. This Incoterm is particularly helpful for managing freight expenses without taking on additional risk.

Australian exporters use CPT to carry goods to regional or remote places where there are transportation constraints.  A Sydney-based company might, for example, employ CPT to ship equipment to a Western Australian mining site. The exporter arranges transportation to a large hub and then transfers responsibility to the buyer when the products arrive.  This guarantees that shipment is predictable while limiting the exporter's liability to the point of delivery.

7. CIP (Carriage and Insurance Paid To)

Carriage and Insurance Paid To (CIP) is a variation of CPT, with the added requirement that the seller provides insurance cover for the goods during transit. The seller must arrange both transport and minimum insurance to the agreed destination. 

This Incoterm offers buyers extra peace of mind, especially when the goods are travelling long distances or through high-risk areas. Australian exporters use CIP when transporting high-value items such as electronics or machinery, or when shipping to destinations with less reliable infrastructure or complex customs procedures.  

An exporter in Melbourne, for instance, would use CIP to transfer cutting-edge medical equipment to a partner in a developing nation. The exporter pays for transportation and insurance costs until the products arrive at the target port, so that they are safeguarded during the route. This minimises risks associated with infrastructure or customs delays.

8. DPU (Delivered at Place Unloaded)

Under Delivered at Place Unloaded (DPU), the seller is responsible not only for delivering the goods but also for unloading them at the named destination. Once the goods are unloaded, the responsibility shifts to the buyer. From that point onward, the buyer handles everything, including import duties, taxes, and any further transportation or logistics needed.

DPU is especially useful for shipments involving large, heavy, or specialised items that require coordinated handling. In Australia, this Incoterm is often applied in the import of industrial machinery, mining equipment, or other goods that need to be delivered directly to job sites or regional depots.

For example, an Australian exporter uses DPU to send large excavators or drilling rigs to a mining operation in outback Queensland. The seller handles all costs and logistics up until the equipment is unloaded at the mine site. Once the machinery is unloaded, the buyer takes over by managing import duties and any further local transportation.

9. DDP (Delivered Duty Paid)

Delivered Duty Paid (DDP) places the maximum obligation on the seller. The seller manages all aspects of the shipment, including freight, insurance, customs clearance, and payment of import duties and taxes. 

The buyer receives the goods ready for use, with no need to interact with border authorities. This Incoterm is ideal for small businesses that may not have the infrastructure or knowledge to manage import processes. A local online store selling handmade jewellery will use DDP when shipping to customers in the United Kingdom. With DDP, the seller covers all costs, including shipping, customs duties, and taxes. 

This guarantees that the consumer receives their items without incurring additional fees or delays at the border. DDP simplifies the transaction and reduces the risk of unexpected costs or delays for the buyer.

10. FAS (Free Alongside Ship)

Free Alongside Ship (FAS) means the seller delivers the goods next to the vessel at the agreed port of departure. From that point, the buyer takes responsibility for loading, freight, and all other onward costs. 

FAS is only used for sea freight and is particularly well suited to bulk cargo. For example, a Western Australian wheat exporter will use FAS to transport grains to a bulk carrier ship at Fremantle port. FAS can also be used by a Newcastle mining firm to ship coal to foreign purchasers. Under FAS, the buyer assumes responsibility for managing the cost and risk of the ocean voyage after the seller has gotten the items to the dock and onto the ship.

11. CFR (Cost and Freight)

Cost and Freight (CFR) requires the seller to pay for the transportation of goods to the destination port, but the buyer assumes risk once the goods are loaded on the ship. While the seller covers the cost of freight, they are not required to provide insurance. 

This Incoterm is commonly used by exporters shipping containerised goods or bulk materials overseas. It allows businesses to offer more competitive pricing by bundling shipping costs, while still shifting the risk relatively early in the transport process. 

CFR phrases are frequently used by CBH Group, one of Australia's biggest grain exporters, when shipping wheat to foreign markets. CBH can provide purchasers with a more transparent pricing structure by paying for the grain's transportation to the final port. However, once the grain is placed into the vessel at the Australian port, the risk passes to the customer, guaranteeing that CBH's liability is kept to a minimum.

How to Choose the Right Incoterm for Your Business

Here are three practical tips to guide your decision:​

Tip #1: Evaluate Your Logistics Capabilities

If your business lacks the infrastructure to manage international shipping, consider Incoterms like Delivered Duty Paid (DDP). Under DDP, the seller handles all aspects of the delivery, including transportation, duties, and taxes, simplifying the process for the buyer. 

If you're new to importing or don’t have a logistics network in place, this approach can make things a lot easier.

Tip #2: Assess Your Risk Tolerance

Understanding where the risk transfers from seller to buyer is crucial. For instance, with Free on Board (FOB), the buyer assumes risk once the goods are loaded onto the shipping vessel. 

Conversely, Cost, Insurance, and Freight (CIF) includes insurance coverage, offering the buyer protection during transit. This makes CIF a good fit for businesses with lower risk tolerance, as it reduces financial exposure while goods are in transit. Choosing the right Incoterm isn’t just about cost, it’s also a way to manage risk for smoother, more secure transactions.

Tip #3: Clarify Responsibilities to Avoid Hidden Costs

Clearly defining responsibilities in your shipping contracts can prevent unexpected expenses. For example, under Delivered at Place (DAP), the seller delivers the goods to a specified location, but the buyer is responsible for import duties and taxes. Misunderstandings about such responsibilities can lead to delays and additional costs.

By considering your logistics, risk tolerance, and responsibilities, you can choose the Incoterm that best suits your business and supports smooth trade.

Why Incoterms Matter in Australian Trade

Choosing the correct Incoterm gives Australian businesses control over their shipping procedures.  It facilitates operational simplification, lowers risk, and guarantees adherence to regional and global trade regulations.  

You can avoid unforeseen shipping charges and disputes while making more informed logistics decisions by actively monitoring your Incoterms. Frequent evaluations also keep your company trade-ready and improve ties with international partners.

Make it a point to regularly review your Incoterms to avoid any unnecessary shipping costs and risks. This can support better decision-making and stronger business relationships.

Master Incoterms for Smoother Shipments

Simplify your international shipments and avoid disruptions. Get expert advice on the right Incoterms and optimise your shipping processes with Couriers & Freight.

Get a Quote Now