What Incoterms are
Incoterms, short for International Commercial Terms, are standard three-letter trade terms published by the International Chamber of Commerce. They are written into sales contracts to settle, in a few letters, questions that otherwise cause disputes: who arranges and pays for transport, who handles export and import clearance, who insures the goods, and where the risk of loss or damage passes from seller to buyer.
They are not laws. They apply only if the parties choose them and name them in the contract, ideally with the edition year, such as “Incoterms 2020”. The current edition at the time of writing is Incoterms 2020, but editions are revised from time to time, so it is worth checking.
What they do and do not cover
Incoterms generally cover:
- Delivery obligations and the point at which risk transfers.
- Which party arranges and pays for carriage, and for insurance.
- Which party handles export and import customs formalities and pays the related duties.
- Which documents each party must provide.
They do not cover:
- The price or payment terms (see the article on trade payment terms).
- When ownership of the goods transfers.
- The remedies if a party breaches the contract.
- The law that applies to the contract.
Treating an Incoterm as a complete contract is a common beginner mistake.
The two groups
The eleven rules in Incoterms 2020 split into two groups.
Rules for any mode of transport:
- EXW (Ex Works). The seller makes goods available at its own premises. The buyer handles nearly everything else, including loading and export clearance.
- FCA (Free Carrier). The seller delivers goods, cleared for export, to a carrier named by the buyer, at a named place.
- CPT (Carriage Paid To). The seller pays for carriage to a named destination, but risk passes to the buyer once the goods are handed to the first carrier.
- CIP (Carriage and Insurance Paid To). Like CPT, with the seller also buying insurance for the buyer’s benefit.
- DAP (Delivered at Place). The seller delivers to a named place, ready for unloading, and bears the risk until then. The buyer handles import clearance and duties.
- DPU (Delivered at Place Unloaded). Like DAP, but the seller also unloads at the destination.
- DDP (Delivered Duty Paid). The seller delivers to the destination with import clearance and duties paid, carrying the most responsibility.
Rules for sea and inland waterway transport only:
- FAS (Free Alongside Ship). The seller delivers goods alongside the vessel at the named port.
- FOB (Free on Board). The seller delivers goods on board the vessel at the named port of shipment.
- CFR (Cost and Freight). The seller pays freight to the destination port, but risk passes once the goods are on board.
- CIF (Cost, Insurance and Freight). Like CFR, with the seller also arranging insurance.
The second group is meant for traditional port-to-port cargo. Containerized goods, which are usually handed to a carrier at a terminal before being loaded, are often better matched with the first group, such as FCA, a point the rules themselves make. This is relevant to ocean shipping and to modern intermodal transport.
Where cost and risk split
A helpful way to think about it is as a spectrum. At one end, EXW leaves almost everything to the buyer. At the other, DDP leaves almost everything to the seller. In between, the terms mark different handoff points.
Two points deserve emphasis:
- Cost and risk do not always transfer at the same place. Under CIF, the seller pays freight to the destination, but risk passes to the buyer when goods are on board at the origin port. If cargo is damaged at sea, the buyer is the one who suffers the loss, which is why the insurance matters, and why insurance is a part of the contract rather than an afterthought. Cargo damage and claims are covered in the articles on cargo damage and freight claims.
- The named place matters. “FCA” is incomplete without a location. “FCA seller’s warehouse” and “FCA port terminal” differ in who loads the truck.
Choosing a term
There is no best Incoterm, only a better fit for a given deal. Considerations include:
- Experience. A buyer new to importing may prefer terms where the seller handles more, though the price will usually reflect the extra work.
- Control. A buyer with strong carrier rates may want to arrange freight, so it may choose FCA or FOB. This also affects the visible freight rates and overall logistics costs.
- Customs capability. Import clearance should be handled by the party in the country best placed to do it. DDP puts import clearance on the seller, which can be impractical if the seller is not registered in the destination country, so DAP is sometimes more realistic.
- Mode of transport. Use sea-only terms for sea-only shipments, not for air.
- Lead times. Terms that move responsibility earlier can affect planning, including lead times.
Common mistakes
- Using a sea term for air or truck shipments.
- Naming only the term and not the place, or not naming the edition.
- Assuming that EXW means the seller has no responsibility for documents. The seller usually still has to supply the commercial invoice and help with information, and the buyer may find it hard to get an export declaration filed in the seller’s country.
- Confusing DDP with a promise that nothing can go wrong. The seller carries the cost and risk of duties, including unexpected ones.
- Assuming a term changes ownership transfer.
- Forgetting that the term affects shipping documents, because the documents differ depending on who arranges transport.
A note on practice
Businesses sometimes write a preferred Incoterm into their standard terms and reuse it without review. It is better to revisit the choice for each major market or route, especially when carrier markets or customs rules change. For a high-value contract, reading the official ICC text or taking professional advice is a sound step, since this overview simplifies the detailed obligations.