What Are Incoterms?

If you’re new to the world of importing and shipping internationally, Incoterms ® may be unfamiliar to you. For newcomers to this industry, this can be a confusing concept to grasp. With numerous types that each have their own purpose, there’s quite a bit to learn. Knowing what Incoterms ® are will help you choose the right type when coordinating your own international shipments. 

Incoterms ® are mutually agreed upon conditions for international shipping of commercial goods. The “Inco” in Incoterms ® stands for international commerce. Each rule within Incoterms ® dictates specific obligations and responsibilities for buyers and sellers involved in international commerce. The International Chamber of Commerce (ICC) publishes and manages the Incoterms ®. 

There are many details surrounding the various rules contained within Incoterms ®. As an international buyer and/or seller, it’s important to be aware of these. Our comprehensive guide below provides you with everything you need to know. 

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Purpose of Incoterms

As noted above, the primary purpose of Incoterms ® is to serve as a means to outline responsibilities for buyers and sellers in commercial international shipments. 

Responsibilities and obligations that are covered in Incoterms ® include:

• Who is responsible for the cost of shipping the goods
• When the ownership of goods transfers from one party to the next
• Which stages of transportation each party is responsible for
• Who bears the cost of insurance
• Which party is responsible for paying import duties and fees

Before an international shipment takes place, buyers and sellers agree on these terms. This leads to a concrete understanding and agreement between the two parties about who is responsible for the various aspects of the shipment. 

In the case of damage or loss of goods in an international shipment, these terms come into play. The terms that are agreed upon will determine who is responsible for covering the cost for the loss or damage of the goods. This coverage can come from direct reimbursement from either the buyer, seller, or cargo insurance provided by one of the parties. 

Want to learn more about how to use Incoterms? Read our article to find out.

Types of Incoterms

In total, there are 11 unique rules contained within the Incoterms ®. These 11 rules come from the 2010 edition and cover various trade terms as they relate to international shipment. 7 of the terms can be applied to any mode of transportation, while 4 specifically apply to shipments that are transported via ship. 

Below are the 11 types of Incoterms ® with a brief explanation of the associated conditions:

• EXW- Ex Works: These terms are very seller friendly as the buyer is responsible for all costs and risks for the shipment. The seller is only obligated to make the goods available for pickup at the origins destination.
• FCA- Free Carrier: Not too dissimilar from EXW, this rule is favorable to sellers. In this situation, the seller is responsible for bringing the goods to the carrier and nothing more. Once the first carrier has the goods, the buyer is responsible for the remainder of the shipment.
• CPT- Carriage Paid to: This agreement has shared responsibilities related to the shipment and goods. The seller pays for the shipment from origin to agreed upon terminal before final transportation to destination. However, the ownership of goods and risk of loss transfer to the buyer once the goods are loaded at the origin. 
• CIP- Carriage and Insurance Paid to: Similar to the CPT terms, the only difference is that the seller is also responsible for the cost of insurance during shipment. The buyer still maintains all risk throughout the shipment.
• DAT- Delivered At Terminal*: As the name implies here, the goods are considered delivered once they’ve arrived at the buyer’s terminal. Up to this point, the seller assumes all responsibility for the shipment including costs, risks, and insurance. *In Incoterms ® 2020, DAT has been relabeled as DPU- Delivered At Place Unloaded.
• DAP- Delivered At Place: DAP terms are very buyer friendly in that the seller is responsible even for the final leg of journey from the terminal to the destination. 
• DDP- Delivered Duty Paid: These terms take the DAP conditions one step further. In this scenario, the seller even pays any associated duties related to the shipment.

The 4 types below are applicable specifically for shipments via ship:

• FAS- Free Alongside Ship: In this situation, costs and risks transfer from the seller to the buyer when goods have been delivered to the port where the ship will load the goods. 
• FOB- Free On Board: Only slightly different than FAS terms, FOB conditions essentially split the responsibility 50/50. The seller assumes costs and risks up to the goods being loaded onto the ship at the departure port. Once the goods have made it to the buyer’s arrival port, all responsibilities shift to the buyer.
• CFR- Cost and Freight: CFR terms extend responsibilities for the seller just slightly beyond FOB conditions. Under CFR terms, the seller covers the cost of the shipment up to the point where goods are offloaded at the arrival port.
• CIF- Cost, Insurance, and Freight: The only modification to these conditions compared to CFR terms is that the seller also pays for insurance as well up to the same point. 

As you can see, each set of terms is unique in its own way. Being aware of the specifics for each one should help guide you to selecting the right terms for your specific shipments.

If you still help understanding Incoterms ® or any other details related to importing goods, our import customs experts can help you. We offer customs consulting services where our experts can cover all of the importing basics that you need to know to get started.

Are Incoterms Mandatory?

In short, including Incoterms ® on international shipments isn’t mandatory. The decision to include Incoterms ® comes to down the preferences of the buyer and seller that are involved. It’s certainly advisable to specify Incoterm conditions on an international shipment. Doing so will protect all parties involved in case of damage or loss to a shipment. Without designating specific terms and conditions of a shipment, accountability is left up in the air. This can lead to disputes and other problems when trying to reconcile damages or loss.

Which Incoterm Should I Use?

If you’ve decided that you want to indicate specific terms and conditions, the next logical step is to determine which one best suits your needs. Again, this determination will come down to communication between the buyer and the seller. Both the buyer and seller will want what’s best for themselves, so there may be some back and forth in terms of which terms to use. Because of this, the decision on which terms should be used can take place as part of a pricing discussion long before a shipment actually takes place.

FOB terms are the most commonly used when it comes to boat shipments. This is likely due to the fact that there is essentially an equal shared responsibility for all aspects of the shipment under FOB terms. Regardless, it’s a good idea to confirm the applicable terms for your shipment and request different ones if they don’t fit your needs.

Don't fall prey to common Incoterms mistakes. Check our article to find out what mistakes you must avoid.

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