What are Incoterms?  

Blog

When businesses around the world trade with each other, they face a number of questions: Who will pay for shipping? When does the risk of the goods shift from the seller to the buyer? Who handles customs clearance? To address these questions and create a uniform understanding across borders, Incoterms was introduced as a recognised international standard.

What does Incoterms mean?

Incoterms is an abbreviation for "International Commercial Terms". It is an international standard for shipping and delivery terms that clarifies the obligations, costs and risks of parties in international trade. The terms cover who is liable in the event of damage or loss of goods, who is responsible for insurance during transportation, and when liability passes from the seller to the buyer.

Incoterms are developed and maintained by the International Chamber of Commerce (ICC) and are updated regularly to reflect the dynamic nature of global trade. The most recent update took place in 2020 and therefore we refer to Incoterms 2020.

Why are Incoterms important?

Clarity and consistency: Without a standard such as Incoterms, each contract between two parties could require individual negotiations on transportation details. This would be time-consuming and could lead to misunderstandings.

Risk Management: Incoterms establishes exactly when the risk of goods shifts from the seller to the buyer. This is crucial in determining who carries the responsibility if goods are damaged or lost during transportation.

Cost overview: Incoterms provide a clear overview of who are responsible for which costs - such as freight, insurance and customs duties.

What Incoterms exist?

There are 11 different Incoterms. They are divided into categories E, F, C and D, and are categorised based on risk transfer and delivery agreements in terms of who covers various costs during transport.

For road, rail and air transport, EXW, FCA, CPT, CIP, DPU, DAP and DDP are used.

For sea transportation, FAS, FOB, CFR and CIF are used.

EXW – Ex works: The risk passes when the seller makes the cargo available to the buyer. The buyer is responsible for the transportation and must cover freight and insurance costs.

FCA – Free carrier: The risk passes when the seller has delivered the cargo at the location where the buyer or the buyer's carrier is to pick up the cargo.

CPT – Carriage paid to: The risk passes to the buyer when the seller has delivered the cargo to the buyer's carrier.

CIP – Carriage and insurance paid to: The risk passes when the seller has delivered the cargo to the buyer's carrier, as in CPT. In CIP, the seller is also responsible for covering the transport and insurance costs.

DPU – Delivered at place unloaded: The seller is responsible for transporting the cargo to the agreed location, just like in DAP. The difference here is that the seller is responsible for unloading and the risk only passes to the buyer once this is done.

DAP – Delivered at place: The seller is responsible for transporting the cargo to the agreed location. When the cargo is ready for unloading, the risk passes to the buyer.

DDP – Delivered duty paid: The seller carries the risk until the cargo delivered to the buyer. Here, all responsibility lies with the seller, while the seller also covers all transportation and insurance costs.

FAS – Free alongside ship: The risk passes from the seller to the buyer when the seller has delivered the cargo to the dock next to the ship. From here, the buyer carries the risk for the rest of the transport. This Incoterm only applies to sea freight.

FOB – Free on board: The risk passes when the seller has loaded the cargo onto the buyer's transport vessel. From here, the risk is transferred to the buyer, who carries the risk during the rest of the transport. This Incoterm only applies to sea freight.

CFR – Cost and freight: The seller carries the risk until the ship has sailed into port with the cargo. From there, the risk passes to the buyer, while the buyer is responsible for unloading the cargo at the final destination. This Incoterm only applies to sea freight.

CIF – Cost, insurance and freight: The seller is responsible for covering the insurance costs as well as the responsibility for bringing the cargo to the port with the buyer, just like the transfer of risk in the CFR. From here, the risk passes to the buyer. This Incoterm only applies to sea freight.

When are Incoterms used?

Incoterms are used when international trade agreements are made between companies to agree on how to resolve specific transport and risk issues. Each Incoterm determines where the risk is transferred between the seller and the buyer. Therefore, the Incoterm that best applies to the transaction is chosen to avoid uncertainties.

What is the difference between Incoterms 2020 and Incoterms 2010?

The ICC, the creator of Incoterms, updates the terms every ten years. The changes are made to adapt them to the market and to ensure they continue to reflect the dynamic, global trade. The most recent change was in 2020 but contained only minor changes.

The changes in Incoterms 2020 included the following:

  • FCA was updated with additions on bill of lading liability 

  • New guidelines for insurance to be taken out by the seller - applicable for CIF and CIP 
  • DAT changed its name to DPU 
  • New transport safety requirements for each Incoterm 
  • The parties to the transaction may transport the goods with their own means of transport 

Which Incoterm should I choose?  

The choice of Incoterm can be based on the mode of transport used and how much responsibility you want to take on during transport.  

The choice of Incoterm also depends on how much responsibility the parties want during transport. For example, if the seller wants low liability, you can choose EXW. With EXW, the risk passes to the buyer as soon as the cargo leaves the seller. This means that the entire responsibility lies with the buyer, which will be associated with greater risk for the buyer. If, on the other hand, you choose Incoterm DDP, the risk remains with the seller until the cargo has been delivered to the buyer. Instead, the seller is responsible for the entire transport. 

Depending on which Incoterm the parties agree on, the buyer and seller's liability and risk will be determined based on the choice. 

Incoterms are an indispensable tool for companies that trade internationally. It gives both buyers and sellers a common language and ensures that both parties have clear expectations of the trade agreement. The next time you come across a trade agreement or shipping document, remember that behind these short terms lies a world of standardised rules that make global trade easier and more predictable. 

Download

Here you can download the Incoterms 2020 as a PDF file.

Download (PDF)

  • How to handle dangerous goods

    When your company transports dangerous goods, safety must be taken into account and a number of rules must be followed. Read more in this blog post to learn more about your responsibilities and how to comply

  •

    Customs: What you should be aware of

    There are several regulations you need to be aware of as well as customs documents that are mandatory to fill out when importing and exporting goods abroad

  •

    Handling of wooden packaging

    By using wood packaging that is approved and treated according to international standards, the risk of introducing pests is minimised

Show more