What are Incoterms?

What Are Incoterms?

Incoterms® are rules published by the International Chamber of Commerce (ICC) that divide delivery responsibilities, transport costs, customs formalities and cargo risk between buyers and sellers.

Incoterms® 2020 contains 11 rules: seven work with any transport mode, while four apply only to sea and inland waterway transport. Each rule identifies when delivery takes place and risk passes to the buyer. That point can differ from the destination to which the seller pays for transport.

Incoterms do not determine ownership transfer or payment terms. Address those separately in the sales contract.

Incoterms 2020 Comparison Table

Compare the 11 rules by transport mode, delivery point, transport costs, insurance and customs responsibilities.

Insurance: “Neither party required” means the Incoterms rule does not require either party to purchase cargo insurance. The parties can agree on insurance separately.

FCA loading: At the seller’s premises, the seller loads the collecting vehicle. At another agreed location, delivery takes place on the seller’s arriving vehicle, ready for unloading.

Costs and risk: Under CPT, CIP, CFR and CIF, the seller pays carriage beyond the point where risk normally transfers to the buyer. Check the carriage contract before allocating destination unloading and handling charges.

Customs: Clearance responsibilities apply where customs formalities are required.

DAT and DPU: DAT belongs to Incoterms 2010. It was renamed DPU in Incoterms 2020.

Interactive Incoterm Selector

Incoterms Groups E, F, C and D

The four letter groups provide a useful overview, but the exact rule and named place determine the parties’ obligations.

How to Write an Incoterm in a Contract

State the rule, the precise named place or port, and the edition:

[Rule] [named place or port and precise point], Incoterms® 2020

For example:

DAP [full warehouse address and receiving dock], Madrid, Spain, Incoterms® 2020

The named destination determines how far the seller must arrange transport under DAP. Arrival at a port does not complete delivery if the contract names an inland warehouse.

Under CPT and CIP, also identify the agreed carrier handover point. The destination named after the rule identifies where seller-paid carriage ends; risk normally transfers earlier when the goods are delivered to the carrier.

For FCA, specify whether delivery takes place at the seller’s premises or another location. That distinction affects loading and the delivery point.

What is the purpose of Incoterms?

Incoterms simplify international shipping agreements by clearly defining the following:

• Who handles costs like shipping and insurance
• When risk transfers from the seller to the buyer
• Who takes care of customs duties and other formalities

By using Incoterms, you minimize the risk of disputes and ensure both parties know their roles.

Who needs to use Incoterms?

Anyone involved in international shipping should use Incoterms, especially:

• Businesses importing or exporting goods
• Logistics managers and freight forwarders
• Customs brokers and insurance providers

For SMEs new to global trade, Incoterms provides a clear framework for managing responsibilities and costs, helping them avoid confusion and delays.

How are Incoterms selected?

Choosing the right Incoterm depends on your shipping strategy. Consider:

• Mode of transport – Some terms apply only to sea freight, while others work for any method.
• Responsibility sharing – Decide how much of the shipping process you want to handle versus outsource.
• Customs and regulations – Some countries have specific requirements that may affect your choice.

Discussing these factors with your trade partner early on can prevent costly misunderstandings later.

What happens if the wrong Incoterm is chosen?

Selecting the wrong Incoterm can lead to:

• Unexpected costs – You may end up paying for services you didn’t budget for.
• Disputes – Unclear responsibilities can cause confusion and delays.
• Customs complications – Incorrect documentation or risk assignments may hold up your shipment.

To avoid these issues, ensure both parties fully understand the Incoterm and its implications.

Cargo Insurance Under Incoterms

CIF and CIP require the seller to arrange cargo insurance covering the buyer’s risk during the insured journey.

• CIF: Institute Cargo Clauses (C), or equivalent, provide the default minimum cover.
• CIP: Institute Cargo Clauses (A), or equivalent, provide broader default cover, subject to exclusions.

The parties can agree on different coverage where permitted by the chosen rule and should record that agreement.

The other nine Incoterms rules do not require either party to purchase cargo insurance. Carrying the risk of loss or damage is different from having an obligation to insure it.

Agree separately who will arrange insurance, the journey covered, the insured value, exclusions and the claims process. Under DAP and DDP, normal delivery occurs before unloading; under DPU, it occurs after unloading.

What Are Incoterms in Logistics?

Watch this 30-second introduction to Incoterms® 2020 and learn how the rules divide delivery, transportation, costs, customs responsibilities and cargo risk between sellers and buyers.

Why are Incoterms updated?

The ICC periodically updates Incoterms to reflect changes in global trade practices. Updates address:

• New transportation methods and technology
• Shifts in customs and security regulations
• Current trends in risk management

The current edition is Incoterms® 2020. The International Chamber of Commerce periodically reviews the rules.

If you have more questions about choosing the right Incoterm, you may contact our team of specialists.