What Are Incoterms and Why Do They Matter?
The three-letter codes you see on a quote or invoice — EXW, FOB, DAP — decide who is responsible at each stage of the journey. Understanding Incoterms is the first step to avoiding surprises.
What are Incoterms?
Incoterms® (International Commercial Terms) are standard trade terms published by the International Chamber of Commerce (ICC). They define the delivery-related obligations of the seller and the buyer in international sales contracts. The version currently in force is Incoterms® 2020. In a contract, the rule, the place of delivery and the version are written together — for example “FCA Istanbul, Incoterms® 2020”.
Thanks to these three-letter codes, parties in different countries who speak different languages understand the same concepts in the same way.
What do Incoterms define?
- Where and how delivery takes place,
- The point at which the risk for the goods passes from seller to buyer,
- Which party pays for transport and insurance,
- Which party handles export and import customs clearance.
What don't Incoterms cover?
Incoterms do not replace a sales contract. When ownership of the goods passes, the payment terms, the sales price and the consequences of a breach of contract are governed by the sales contract between the parties, not by Incoterms.
The Incoterms® 2020 rules
Incoterms® 2020 contains 11 rules in two groups: rules for any mode of transport, and rules for sea and inland waterway transport only.
| Rule | Full name | In short |
|---|---|---|
| EXW | Ex Works | The seller makes the goods available at its own premises. Loading, transport and customs formalities are largely the buyer's responsibility. |
| FCA | Free Carrier | The seller clears the goods for export and hands them over to the carrier nominated by the buyer at the agreed place. |
| CPT | Carriage Paid To | The seller arranges and pays for the main carriage; the risk passes to the buyer when the goods are handed to the first carrier. |
| CIP | Carriage and Insurance Paid To | As CPT, but the seller also takes out cargo insurance; Incoterms® 2020 requires a broader level of cover. |
| DAP | Delivered at Place | The seller brings the goods to the named destination, ready for unloading. Import clearance and duties are the buyer's responsibility. |
| DPU | Delivered at Place Unloaded | Unlike DAP, the seller also unloads the goods at the destination. |
| DDP | Delivered Duty Paid | The seller bears full responsibility for bringing the goods to the destination, including import clearance and duties. |
| FAS | Free Alongside Ship | The seller places the goods alongside the vessel at the port of loading. Sea and inland waterway transport only. |
| FOB | Free on Board | The seller loads the goods on board the vessel at the port of loading; the risk passes to the buyer at that point. |
| CFR | Cost and Freight | The seller pays the freight, but the risk passes to the buyer once the goods are loaded on board at the port of loading. |
| CIF | Cost, Insurance and Freight | As CFR, but the seller also takes out cargo insurance with minimum cover. |
Why do Incoterms matter?
- Accurate costing: when it is clear from the start which costs belong to whom, quotes can be compared fairly.
- Clarity on risk: if damage occurs during the journey, it is clear which party bears the risk at that moment.
- Insurance planning: it becomes clear who should insure the goods at which stage.
- Customs planning: responsibility for export and import formalities is defined.
- Fewer disputes: a common, internationally recognised language reduces differences in interpretation.
Common mistakes
- Not stating the place: writing just “FCA” or “DAP” is not enough; the place of delivery should be as specific as possible.
- Using FOB or CIF for containerised cargo: these rules are built around loading on board a vessel. When a container is handed over at a port terminal, rules such as FCA or CIP may be more appropriate.
- Underestimating DDP: under DDP the seller is also responsible for import formalities and duties in the country of destination, which means researching registration and tax obligations there in advance.
- Overlooking export clearance under EXW: with EXW, export clearance is also the buyer's responsibility, which can be difficult in practice.
- Not stating the version: the contract should specify which version of Incoterms applies.
Incoterms also affect which documents are prepared, and by whom. We cover this in our guide to customs documents.
Frequently asked questions
Which Incoterms rule is the best?
There is no single “best” rule for every situation. The right choice depends on each party's ability to manage transport and customs, the mode of transport and the nature of the business relationship.
What is the difference between FOB and FCA?
Under FOB, delivery and the transfer of risk take place when the goods are loaded on board the vessel at the port of loading, and the rule is used for sea transport only. Under FCA, the goods are handed over to the buyer's carrier at the agreed place, and the rule can be used for any mode of transport.
Are Incoterms only used in international sales?
Incoterms are mainly used in international sales, but parties can also refer to them in domestic sales contracts if they wish.
This article is for general information only. Regulations and practices vary by country and product and may change over time; contact our team for advice specific to your shipment.
