Transfer of costs & risks

in Incoterms

Definition

The term cost transfer refers to the time when the buyer assumes the financial cost of carriage, insurance, and customs formalities on importation or exportation (duties and taxes).

The term risk transfer refers to the transfer of responsibility for the goods from the seller to the buyer. This transfer implies that the consequences for any loss or damage of the goods will be assumed by the buyer.

  • the transfer of risk may occur independently of the transfer of property: the buyer may bear the risks linked to the transport of the goods before he becomes the legal owner of the goods
  • it is thus important to specify the time when the risk transfer occurs in order to know who will be responsible for the financial consequences in the case of damage.

For example: a contract signed between seller X and buyer Y stipulates that the risk transfer occurs when the goods are unloaded from the ship. If the goods fall into the water when they are being unloaded, the buyer will be liable.

Transfer of costs and risks depending on Incoterms

Each Incoterm sets a degree of participation in terms of risk and cost that is more or less advantageous for the seller or the buyer:

In this regard, Incoterms may also be classified into groups:

  • group E (EXW) – This group represents the seller's minimum obligation to simply make the packaged goods available to the buyer (at the factory of departure)
  • group F (FAS, FCA, FOB) – the seller transfers the responsibility for the goods in terms of risks and costs at the time they are handed over to the transporter previously designated by the buyer. The seller does not bear all the risks and costs linked to the main carriage
  • group C (CFR, CIF, CPT, CIP) – the seller organizes the main carriage and assumes the costs but not the risks:  it is responsible for the cost of main carriage, including any cost of transport insurance, but the buyer will be responsible for the goods in the case of any damage
  • group D (DAT, DAP, DDP) – the seller's responsibility is maximum since it assumes the risks and costs of carriage until delivery to the buyer at the designated place of destination.

The table below shows the breakdown of costs between the seller and buyer depending on the Incoterm chosen:

This table summarizes the costs repartition between the seller and the buyer depending on the incoterm choice
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