Incoterms, also known as international commercial terms, are a set of rules that buyers (consignees) and sellers (consignors) can agree upon during a commercial transaction.
They outline key responsibilities (e.g. cost, risks of loss and damage, movement of goods) of each party during the different stages of trade, including:
- Loading, unloading, delivery and terminal charges of shipment
- Customs clearance, duties and taxes
- Cargo insurance
- Import and export documentation and licenses
Why Are Incoterms Important
Incoterms are important mainly because they provide clarity for consignors and consignees during their trade dealings, offering:
- Clearly defined responsibilities
As incoterms cover various and specific aspects of trade, they are able to clearly define the tasks, costs and risks each party is responsible for. This reduces the risk of conflict between both parties (e.g. if goods are damaged or lost).
- Ease of communication
The widespread use of incoterms ensures that businesses around the world may communicate and trade effectively in spite of language or cultural differences.
- Increased efficiency
Businesses that are well-versed in incoterms are able to negotiate trade terms swiftly and more effectively.
Areas Not Covered By Incoterms
Some aspects of a trade not addressed by incoterms include:
- Conditions of a sale
- What goods are being sold and their prices
- When and how payment will be made
- When the ownership of goods will be transferred from consignor to consignee
- What documents are required for customs clearance (e.g. Bill of Lading, commercial invoice, packing slip)
However, many businesses work with freight forwarders, like M&P International Freights, to ensure most areas of their trades are satisfactory.
11 Incoterms® 2020 Rules
Official incoterms is determined by the International Chamber of Commerce (ICC). The latest set of globally recognized rules were published in the Incoterms® 2020. There are 11 rules, sorted into 2 categories:
- Rules for any mode of transport
- Rules for sea and inland waterway transport
Incoterm Rules for Any Mode of Transport
These 7 incoterms may be used for any mode of transport, such as air freight, sea freight and trucking. The most common ones include the FCA, DAP, DDP and EXW terms.
EXW (Ex Works)
EXW is typically regarded as the incoterm with the least obligation for the consignor. The consignor transports the goods to a named place of delivery (e.g. their premises, warehouse, factory).
There, the consignee assumes responsibility for:
- Loading the goods
- Cost and risks of transportation to the final destination
- Export and import clearance
| Location / Activity | Responsible for cost | Responsible for risks |
|---|---|---|
| Loading of goods | Consignee | |
| Until place of delivery | Consignor | |
| Export clearance | Consignee | |
| During passage of delivery | ||
| At place of destination | ||
| Import clearance | ||
FCA (Free Carrier)
Under FCA, the consignor is responsible for export clearances and loading the goods at their own premises or another named premise. Once loaded, the consignee assumes responsibility for:
- Cost and risks of transportation to the final destination
- Import clearance
Both parties may decide to allow the consignor to make transport arrangements at the consignee’s cost and risk. If required, the consignee may also request for the carrier to issue an on-board Bill of Lading (BoL) for the consignor to tender.
| Location / Activity | Responsible for cost | Responsible for risks |
|---|---|---|
| Loading of goods | Consignor | |
| Until place of delivery | ||
| Export clearance | ||
| During passage of delivery | Consignee | |
| At place of destination | ||
| Import clearance | ||
CPT (Carriage Paid To)
Under CPT, the consignor bears the cost of transporting goods to a named place of destination, but not the risks. They are also responsible for export clearances.
Once the consignor has handed the goods over to a carrier, the consignee assumes responsibility for:
- Risks of transportation to the final destination
- Import clearance
| Location / Activity | Responsible for cost | Responsible for risks |
|---|---|---|
| Loading of goods | Consignor | |
| Until place of delivery | ||
| Export clearance | ||
| During passage of delivery | Consignor | Consignee |
| At place of destination | Consignor | Consignee |
| Import clearance | Consignee | |
CIP (Carriage and Insurance Paid To)
Under CIP, the consignor bears the cost of transporting goods to a named place of destination, but not the risks. They are also responsible for export clearances and providing maximum (all risks) coverage insurance during transportation.
Once the consignor has handed the goods over to a carrier, the consignee assumes responsibility for:
- Risks of transportation to the final destination
- Import clearance
| Location / Activity | Responsible for cost | Responsible for risks | Responsible for all risks coverage insurance |
|---|---|---|---|
| Loading of goods | Consignor | NA | |
| Until place of delivery | NA | ||
| Export clearance | NA | ||
| During passage of delivery | Consignor | Consignee | Consignor |
| At place of destination | Consignor | Consignee | NA |
| Import clearance | Consignee | NA | |
DAP (Delivered at Place)
The DAP incoterm holds the consignor responsible for the cost and risk of transportation of goods. They are responsible for export clearances, but not for the unloading of goods at the place of destination (e.g. a port, consignee’s warehouse).
At this location, the consignee assumes responsibility for:
- Cost and risks of unloading after reaching the final destination
- Import clearance
| Location / Activity | Responsible for cost | Responsible for risks |
|---|---|---|
| Loading of goods | Consignor | |
| Until place of delivery | ||
| Export clearance | ||
| During passage of delivery | ||
| At place of destination | ||
| Import clearance | Consignee | |
| Unloading of goods | ||
DPU (Delivered at Place Unloaded)
DPU indicates the consignor’s responsibility for the cost and risks of transporting goods to the place of destination. They are also responsible for export clearances and unloading the goods.
The consignee assumes responsibility for import clearances and for the cost and risks of last mile delivery, where necessary.
| Location / Activity | Responsible for cost | Responsible for risks |
|---|---|---|
| Loading of goods | Consignor | |
| Until place of delivery | ||
| Export clearance | ||
| During passage of delivery | ||
| At place of destination | ||
| Import clearance | Consignee | |
| Unloading of goods | ||
| Last mile delivery | ||
DDP (Delivered Duty Paid)
DDP shipping indicates that the consignor is responsible for the cost and risk of transportation of goods. They are responsible for both export and import clearances.
At the place of destination, the consignee assumes responsibility for the cost and risks of unloading and last mile delivery, where necessary.
| Location / Activity | Responsible for cost | Responsible for risks |
|---|---|---|
| Loading of goods | Consignor | |
| Until place of delivery | ||
| Export clearance | ||
| During passage of delivery | ||
| At place of destination | ||
| Import clearance | ||
| Unloading of goods | Consignee | |
| Last mile delivery | ||
Incoterm Rules for Sea and Inland Waterway Transport Only
These 4 incoterms may only be used for sea freight and inland waterway transport. The most common ones include the CIF and FOB terms.
FAS (Free Alongside Ship)
Under FAS, the consignor is responsible for export clearance and the transportation of goods alongside the carrier vessel at a named port of shipment.
There, the consignee assumes responsibility for:
- Loading the goods
- Cost and risks of transportation to the final destination
- Import clearance
| Location / Activity | Responsible for cost | Responsible for risks |
|---|---|---|
| Loading of goods | Consignee | |
| Until port of shipment | Consignor | |
| Export clearance | ||
| During passage of delivery | Consignee | |
| At port of destination | ||
| Import clearance | ||
| Unloading of goods | ||
FOB (Free on Board)
Under FOB shipping, the consignor is responsible for export clearance and the transportation and loading of goods onboard the carrier vessel at a named port of shipment.
There, the consignee assumes responsibility for:
- Cost and risks of transportation to the final destination
- Import clearance
U.S. businesses also use the term to indicate rules for domestic shipments (e.g. FOB shipping point, FOB destination) and distinguish ownership of goodsintransit. However, these rules are not officially recognized as Incoterms® by the ICC.
| Location / Activity | Responsible for cost | Responsible for risks |
|---|---|---|
| Loading of goods | Consignor | |
| Until port of shipment | ||
| Export clearance | ||
| During passage of delivery | Consignee | |
| At port of destination | ||
| Import clearance | ||
| Unloading of goods | ||
CFR (Cost and Freight)
CFR indicates that the consignor bears the cost of transporting goods to a named port of destination, but not the risks. They are also responsible for export clearances.
Once the consignor has loaded the goods onboard the carrier vessel, the consignee assumes responsibility for:
- Risks of transportation to the final destination
- Cost of unloading goods
- Import clearance
| Location / Activity | Responsible for cost | Responsible for risks |
|---|---|---|
| Loading of goods | Consignor | |
| Until port of shipment | ||
| Export clearance | ||
| During passage of delivery | Consignor | Consignee |
| At port of destination (goods not unloaded from carrier) | Consignor | Consignee |
| Import clearance | Consignee | |
| Unloading of goods | ||
CIF (Cost Insurance and Freight)
Under CIF, the consignor bears the cost of transporting goods to a named port of destination, but not the risks. However, they are responsible for export clearances and contracting minimum cover insurance during the passage of delivery.
Once the consignor has loaded the goods onboard the carrier vessel, the consignee assumes responsibility for:
- Risks of transportation to the final destination
- Cost of unloading goods
- Import clearance
| Location / Activity | Responsible for cost | Responsible for risks | Responsible for minimum coverage insurance |
|---|---|---|---|
| Loading of goods | Consignor | NA | |
| Until port of shipment | NA | ||
| Export clearance | NA | ||
| During passage of delivery | Consignor | Consignee | Consignor |
| At port of destination | Consignor | Consignee | NA |
| Import clearance | Consignee | NA | |
| Unloading of goods | NA | ||
Incoterms® 2010 vs Incoterms® 2020
Incoterms® 2010 was the iteration released by the ICC before Incoterms® 2020. In the 2020 edition, several changes were implemented, including the following:
- FCA – Onboard BoL made available
Both parties may agree for the carrier to issue a BoL to the consignor. This allows for smoother transactions, for example when making payment via a letter of credit.
- CIP – Greater insurance coverage required
Consignors are required to get ‘all risks’ insurance coverage for shipped goods. In Incoterms® 2010, only minimum coverage was required.
- DPU – Renamed from DAT
DAT (delivered at terminal) was renamed to DPU (delivered at place unloaded) to cover a broader range of delivery locations.
There is no Incoterms® 2021 or 2022. The ICC typically reviews and updates incoterms every 10 years, hence the most updated set of rules are the Incoterms® 2020. However, rules from previous editions (e.g. Incoterms® 2010) may still be used if it is clearly stated in the contract.