Incoterms
Summary Definition: Standardized international trade rules that clarify who is responsible for shipping, insurance, customs, and risk during the transport of goods between sellers and buyers.
What are Incoterms?
Incoterms, short for International Commercial Terms, are a globally recognized set of commercial or trade terms published by the International Chamber of Commerce (ICC) in 1936.
Most recently updated in 2020, these commercial terms define the responsibilities of buyers and sellers in international transactions, covering various key elements, such as delivery location, customs clearance, and the obligation to deliver goods.
While Incoterms are critical for international exporting and importing, they don’t serve as a complete sales contract, as they don’t govern the transfer of title or ownership of goods, nor do they cover all product liability or insurance obligations beyond what is explicitly required by the used terms.
Key Takeaways
- An Incoterm is a globally standardized rule that defines the shipping, delivery, and risk transfer responsibilities of buyers and sellers engaged in international trade.
- The 11 Incoterms in the 2020 edition are categorized by mode of transport and allocate cost, risk, and logistics duties between different parties.
- Selecting the appropriate Incoterm helps organizations manage financial exposure, prevent disputes, and ensure contractual clarity in global transactions.
The Importance of Incoterms Explained
Each Incoterm defines when the risk, cost, and responsibility for international goods transfer from the seller to the buyer. This helps ensure that both parties clearly understand their obligations.
By outlining who is responsible for these key logistics, Incoterms help eliminate ambiguity that often leads to delays or trade disputes. This clarity enables organizations to structure contracts more effectively and align expectations across borders.
For finance teams in particular, Incoterms facilitate accurate cost forecasting, enhanced risk management, and improved compliance with trade regulations. This, in turn, can streamline workflows, reduce administrative overhead, and foster greater trust between trading partners when said terms are applied consistently.
How Do Shipping Incoterms Work?
When incorporated into a sales agreement, shipping Incoterms become legally enforceable rules that clarify who is responsible for key logistical tasks, including payment for transportation, arranging customs clearance, providing insurance, and bearing the risk if goods are damaged or delayed in transit.
Each Incoterm defines the exact point at which ownership risk and delivery cost transfer from seller to buyer. For instance, under FCA Incoterms (Free Carrier), the seller covers costs until the goods are delivered to a specified location, at which point the buyer assumes all responsibility.
Conversely, under DAP Incoterms (Delivered at Place), the buyer only handles the unloading and import costs for the goods, thereby minimizing their liabilities and risk of loss if there’s any damage to the goods.
What Do the 11 Incoterms Mean?
The Incoterm 2020 update includes 11 unique terms that outline specific responsibilities for buyers and sellers during the shipment of goods.
To help organizations understand the meaning of Incoterms and apply them effectively, the following Incoterms chart provides a list of Incoterms definitions and intended uses.
The listed rules are primarily grouped by mode of transport and explain various seller and buyer roles (e.g., who pays for freight, who handles insurance, where goods are delivered, and when risk transfers from the seller to the buyer).
| Transport Type | Incoterm | Definition |
| Any | EXW (Ex Works) | The seller makes goods available at their premises, while the buyer handles all else. |
| FCA (Free Carrier) | The seller delivers goods to a named location, and the buyer takes over from there. | |
| CPT (Carriage Paid To) | The seller covers transportation costs to the destination (i.e., risk transfers to the first carrier upon handoff). | |
| CIP (Carriage and Insurance Paid To) | Similar to CPT, but the seller also pays for insurance. | |
| DAP (Delivered at Place) | The seller delivers goods to a named place, while the buyer handles unloading and import duties. | |
| DPU (Delivered at Place Unloaded) | The seller delivers and unloads the goods at the destination, while the buyer manages import clearance. | |
| DDP (Delivered Duty Paid) | The seller handles all transport, duties, and taxes, while the buyer receives the goods. | |
| Sea and Inland Waterway | FAS (Free Alongside Ship) | The seller delivers goods alongside the vessel at port, while the buyer handles loading, shipping, and any subsequent arrangements. |
| FOB (Free On Board) | The seller loads the goods onto the vessel, and the buyer is responsible from that point forward. | |
| CFR (Cost and Freight) | The seller pays for ocean freight but not insurance (i.e., risk transfers when the goods are on board). | |
| CIF (Cost, Insurance, and Freight) | Similar to CFR, but the seller also pays for minimum insurance. |
Incoterms 2020 vs. Incoterms 2010
Incoterms 2020 introduced a few meaningful refinements that impact cost allocation, risk assessment, and delivery obligations.
| Incoterms 2010 | Incoterms 2020 | Effect |
| DAT (Delivered at Terminal) | DPU (Delivered at Place Unloaded) | Incoterm DPU has a broader scope of responsibility |
| General CIF / CIP guidance | Specific CIF / CIP guidance | Created higher coverage levels for CIP Incoterms |
| Assumed carrier use | Defined carrier use | Buyer/seller-owned transport is now allowed |
| Lacked clarity on shipping documentation | New shipping documentation requirements | Clarifies when an on-board Bill of Lading is required |
Incoterm Example
A U.S.-based electronics retailer purchases goods from a German manufacturer. Under the FOB Incoterm, the manufacturer is responsible for delivering the goods to the port and loading them onto the ship. When onboard, the U.S. retailer assumes responsibility for ocean freight, insurance, customs clearance, and inland delivery.
Alternatively, if they used DDP Incoterms, the manufacturer handles the entire logistics process (including shipping, import duties, and delivery to the retailer’s warehouse), transferring both cost and risk only after the goods arrive.
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