When two businesses trade internationally, there are many questions to settle before the shipment moves.
Who pays for transportation?
Who arranges insurance?
Who handles customs clearance?
When does the risk move from the seller to the buyer?
This is where Incoterms become important.
Incoterms, short for International Commercial Terms, are standardized trade terms published by the International Chamber of Commerce (ICC). They help exporters and importers understand who is responsible for specific costs, tasks, and risks during the movement of goods.
For B2B businesses, choosing the right Incoterm can make the shipping process clearer and reduce misunderstandings between buyers and sellers.
What Are Incoterms?
Incoterms are rules used in international and domestic sales contracts to define certain responsibilities between the seller and buyer.
They help clarify areas such as:
- Transportation costs
- Delivery responsibilities
- Export clearance
- Import clearance
- Insurance requirements under certain terms
- Transfer of risk
- Loading and unloading responsibilities in specific situations
Incoterms do not decide the price of the goods, payment terms, ownership of the goods, or every part of the sales contract.
They mainly help define responsibilities related to the delivery of goods.
Why Do Incoterms Matter?
International shipping involves several parties.
The seller, buyer, freight forwarder, carrier, customs broker, warehouse, and other service providers may all be involved.
Without clearly defined responsibilities, businesses may assume the other party is handling a particular cost or task.
For example, a buyer may think the seller is responsible for transportation to the final warehouse, while the seller may have only agreed to deliver the goods to the port.
Incoterms help make these responsibilities clearer.
The Main Incoterms You Should Know
The current ICC Incoterms 2020 rules contain 11 Incoterms.
They can be grouped into terms that can be used for any mode of transport and terms specifically used for sea and inland waterway transport.
Incoterms for Any Mode of Transport
These include:
- EXW – Ex Works
- FCA – Free Carrier
- CPT – Carriage Paid To
- CIP – Carriage and Insurance Paid To
- DAP – Delivered at Place
- DPU – Delivered at Place Unloaded
- DDP – Delivered Duty Paid
Incoterms for Sea and Inland Waterway Transport
These include:
- FAS – Free Alongside Ship
- FOB – Free on Board
- CFR – Cost and Freight
- CIF – Cost, Insurance and Freight
The right term depends on the transaction, cargo, transport method, and responsibilities agreed between the buyer and seller.
1. EXW – Ex Works
Under EXW, the seller generally makes the goods available at their premises or another agreed location.
The buyer takes on most of the transportation responsibilities from that point.
The buyer may be responsible for:
- Pickup
- Export arrangements
- Main transportation
- Import clearance
- Duties and taxes
- Final delivery
EXW can place significant responsibility on the buyer, so both parties should understand the practical customs and export requirements before using it.
2. FCA – Free Carrier
Under FCA, the seller delivers the goods to the carrier or another person nominated by the buyer at an agreed location.
FCA can be used with different modes of transport and is often useful when the buyer wants greater control over the main transportation.
The exact responsibilities depend on the agreed delivery location.
3. FOB – Free on Board
FOB is specifically used for sea or inland waterway transport.
The seller is responsible for delivering the goods on board the vessel at the agreed port.
Once the goods are delivered on board according to the rule, the risk transfers to the buyer.
FOB is commonly discussed in international ocean freight, but businesses should make sure it is being used for the type of shipment and delivery arrangement involved.
4. CIF – Cost, Insurance and Freight
Under CIF, the seller arranges and pays for transportation to the named destination port and also provides the insurance required under the CIF rule.
However, the transfer of risk occurs at the shipment point defined by the rule, rather than when the goods arrive at the destination.
This is an important distinction.
Paying for transportation to the destination does not necessarily mean the seller carries the risk until the cargo arrives.
5. CFR – Cost and Freight
CFR is another sea and inland waterway term.
The seller pays the cost of transporting the goods to the named destination port.
However, risk transfers earlier, when the goods are delivered on board the vessel.
This means businesses should not assume that the party paying for freight is automatically responsible for the cargo risk throughout the entire journey.
6. CPT – Carriage Paid To
CPT can be used for different modes of transportation.
The seller arranges and pays for transportation to the agreed destination.
However, the risk transfers to the buyer when the goods are handed over to the carrier, rather than when they reach the final destination.
This difference between cost responsibility and risk responsibility is important when comparing Incoterms.
7. CIP – Carriage and Insurance Paid To
CIP is similar to CPT because the seller arranges and pays for transportation to the agreed destination.
The seller also arranges insurance according to the requirements of the CIP rule.
Like CPT, risk transfers when the goods are handed over to the carrier.
8. DAP – Delivered at Place
Under DAP, the seller is responsible for arranging transportation to the agreed destination.
The goods are made available to the buyer at the destination, ready for unloading.
The buyer generally handles import clearance and related duties and taxes.
DAP can be useful when the seller wants to arrange transportation closer to the buyer’s location without taking responsibility for import clearance.
9. DPU – Delivered at Place Unloaded
DPU is similar to DAP, but there is an important difference.
Under DPU, the seller is responsible for delivering the goods and unloading them at the agreed destination.
The buyer then handles the import clearance and related requirements.
This term should be used when the seller can practically arrange the unloading at the named destination.
10. DDP – Delivered Duty Paid
DDP places significant responsibility on the seller.
The seller generally arranges transportation, export clearance, import clearance, and delivery to the agreed destination, including applicable import duties and taxes according to the rule.
For the buyer, this can mean fewer logistics responsibilities.
However, sellers need to make sure they can legally and practically handle import requirements in the destination country before agreeing to DDP.
Incoterms Comparison
| Incoterm | Main Transport | Seller’s Responsibility | Buyer’s Responsibility |
| EXW | Any mode | Makes goods available | Most transportation and customs responsibilities |
| FCA | Any mode | Delivers goods to agreed carrier/location | Main transportation and import process |
| CPT | Any mode | Pays carriage to destination | Takes risk after delivery to carrier and handles import |
| CIP | Any mode | Pays carriage and provides required insurance | Import process and risk after delivery to carrier |
| DAP | Any mode | Delivers to named destination | Import clearance, duties and taxes |
| DPU | Any mode | Delivers and unloads at destination | Import clearance, duties and taxes |
| DDP | Any mode | Handles most delivery, customs and duty responsibilities | Receives goods at destination |
| FOB | Sea/inland waterway | Delivers goods on board vessel | Main freight, import and onward delivery |
| CFR | Sea/inland waterway | Pays freight to destination port | Risk after goods are on board, plus import |
| CIF | Sea/inland waterway | Pays freight and required insurance | Import process and risk after goods are on board |
| FAS | Sea/inland waterway | Delivers goods alongside vessel | Loading, main freight and onward responsibilities |
This table is a simplified overview. The exact obligations should always be checked against the applicable Incoterms 2020 rule and the sales contract.
Incoterms Do Not Mean the Same as Shipping Services
An Incoterm does not automatically tell a freight forwarder exactly how the entire shipment should be handled.
For example, a business using DAP may still need to decide:
- Which carrier to use
- Which freight mode is suitable
- Whether the shipment is LCL or FCL
- Where the cargo should be picked up
- Which customs broker will handle import clearance
- How final delivery will be arranged
The Incoterm helps define the responsibilities between buyer and seller. The actual logistics plan still needs to be arranged.
How to Choose an Incoterm
There is no single Incoterm that works for every international shipment.
Before agreeing on one, businesses should consider:
1. Who Controls the Shipment?
Decide whether the buyer or seller should arrange the main transportation.
2. Who Handles Customs?
Make sure both parties understand who is responsible for export and import clearance.
3. Where Does Risk Transfer?
Do not look only at who pays for transportation.
Understand the point at which the risk of loss or damage transfers from seller to buyer.
4. Is Insurance Required?
Some Incoterms include specific insurance obligations for the seller. Businesses should also consider whether additional cargo insurance is appropriate for their shipment.
5. Can the Seller Handle Import Requirements?
Terms such as DDP can require the seller to manage significant responsibilities in the destination country.
The seller should confirm that it can meet those requirements before agreeing to the term.
Common Incoterm Mistakes
Businesses can run into problems when they treat Incoterms as simple shipping abbreviations.
Common mistakes include:
- Choosing an Incoterm without understanding the responsibilities
- Confusing freight payment with risk transfer
- Using a sea-only term for the wrong type of transport
- Not specifying the named place clearly
- Assuming insurance is included when it is not required under the chosen term
- Not checking import requirements
- Agreeing on an Incoterm without considering the actual logistics process
A small misunderstanding in the sales contract can create a larger issue once the shipment starts moving.
Incoterms and Freight Forwarding
Freight forwarders work with businesses to arrange the physical movement of cargo, but the agreed Incoterm helps determine which party is responsible for different parts of that process.
When requesting a freight quote, businesses should provide the agreed Incoterm along with shipment details such as:
- Origin
- Destination
- Cargo type
- Weight
- Dimensions
- Shipping mode
- Pickup requirements
- Delivery requirements
This gives the freight forwarder a clearer understanding of what services may need to be included in the quotation.
Incoterms help exporters and importers clearly understand their responsibilities when goods are being delivered.
They can clarify who arranges transportation, where risk transfers, who handles customs, and which party is responsible for certain costs.
The key is not simply knowing what EXW, FOB, CIF, DAP, or DDP stands for. Businesses should understand what each term means for their specific shipment.
Before agreeing on an Incoterm, exporters and importers should review the transport method, delivery location, customs responsibilities, insurance requirements, and risk transfer point.
A clear Incoterm can help both sides plan the shipment with fewer misunderstandings from the beginning.
