International traders and shippers need to understand Incoterms for successful operations. Standard terms show specific details regarding responsibility distribution during shipping activities, including transportation duties, customs clearance, methods for payment, and risk management.
This guideline provides all necessary Incoterm information while showing its effect on shipment costs and helping users find suitable delivery terms.
What Are Incoterms in Shipping?
Incoterms serve as "International Commercial Terms" while providing eleven standardized global shipping and trading rules for commercial operations. The International Chamber of Commerce, through Incoterms, developed a standardized system to clarify seller-buyer duties when conducting international trade across borders.
The shipping process requires specific clarifications according to Incoterms, where organizations determine which stage they will handle and what each party pays for, including such aspects as:
- Who arranges the transport?
- Each party is responsible for coverage of specific costs, along with shipping fees and insurance expenses.
- Who handles customs clearance?
- The party that buys the goods becomes responsible for all risks at this point.
- The Incoterms serve B2B business contracts as tools to eliminate misunderstandings and disputes that occur during shipping operations.
Why Are Incoterms Important in Shipping?
The process of shipping includes multiple steps, along with expenditures, and contains various safety risks. Incoterms establish an international trade standard that enables worldwide purchase and sales communication between buyers and sellers.
Such agreements help create straightforward boundaries between parties so trade becomes faster and safer with reduced complexity. The Incoterms 2020 version provides official rules to traders, and it is available on the ICC (International Chamber of Commerce) website.
Main Roles and Rules in Incoterms
The main responsibilities outlined by Incoterms assist sellers and buyers in preventing misunderstandings throughout shipment operations.
- Risk Transfer: The transfer of ownership risk follows specific conditions specified by Incoterms, which indicate exactly when actual ownership shifts from seller to buyer.
- Insurance Requirements: Incoterms CIP and CIF establish detailed requirements for insurance coverage, while other versions contain no such specifications.
- Ownership of Goods: Incoterms do not specify the timing of goods ownership transfer to buyers since sellers must set this detail in separate sales agreements.
- Legal Impact: A sales contract that incorporates an Incoterm automatically creates a legally binding agreement between parties. The appropriate selection of these delivery terms is important because it overcomes conflicts and decreases financial expenses.
Types of Incoterms by Transport Mode
Shipping contracts utilize Incoterms within two distinct categories that depend on transport methods.
For Any Mode of Transport
The set of 7 Incoterms operates regardless of what transport method a seller chooses, between road, rail, air, sea, or any hybrid shipping combination.
- 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)
For Sea and Inland Waterway Transport Mode
The following four Incoterms provide specific shipping rules for ocean and river transport only.
- FAS (Free Alongside Ship)
- FOB (Free On Board)
- CFR (Cost and Freight)
- CIF (Cost, Insurance and Freight)
Detailed List of All 11 Incoterms
A basic overview of each of the 11 Incoterms shows how both the seller and buyer participate during shipping logistics.
EXW – Ex Works
Under EXW, the seller needs to prepare goods for collection at their warehouse or factory. Once the seller makes the goods ready for collection at the specified location, the buyer becomes responsible for all further costs and bears all associated risks. Exporters and importers commonly collaborate with freight forwarders to handle their complete shipment, starting from factory pickup.
FCA – Free Carrier
The seller delivers products to the selected carrier pick-up point under FCA Free Carrier terms. The risk passes from seller to buyer when the carrier receives delivery of the goods.
CPT – Carriage Paid To
Under this term, the seller becomes responsible for delivering goods to a designated destination while paying all transportation expenses. A buyer becomes fully responsible for goods after the agreed delivery point is reached.
CIP – Carriage and Insurance Paid To
The seller takes the same responsibility to deliver the goods securely and intact as with CPT, while also bearing the cost to obtain insurance from the ship to the destination.
DAP – Delivered at Place
Under DAP, the seller needs to organize the entire shipment for delivery of goods to a specified location before risk passes to the buyer at the physical destination. Risk transfers fully to the buyer when delivery occurs under the DDP incoterm.
The seller performs export clearance duties but the buyer becomes responsible for all customs charges and taxes during the import process.
DPU – Delivered at Place Unloaded
The seller needs to organize transportation, shipping and must deliver goods arriving at a specified delivery place through DPU incoterm. The seller must both deliver the goods and perform their unloading at the specified place. Risk passes from the seller to the buyer when the unloading of goods takes place.
DDP – Delivered Duty Paid
DDP delivers complete shipment responsibility to sellers who must pay customs fees while providing doorstep delivery to the buyer's location. Sellers under this incoterm have the highest level of responsibility for product delivery.
FAS – Free Alongside Ship
The seller in FAS incoterm bears the costs of picking up goods at the factory for export approval and bringing them to the ship loading points for delivery. The moment goods arrive beside the ship, ownership shifts to the buyer, who must handle shipment transfer through transport stages.
FOB – Free On Board
It involves sellers who must prepare goods for shipping before sailing from the shipping port, with responsibility for shipment delivery to that vessel. The transfer of responsibility from the seller to the buyer occurs when goods enter a vessel, since the buyer maintains ownership during the entire freight journey.
CFR – Cost and Freight
With CFR, the seller needs to transport goods to their origin port while also ensuring they are loaded onto their vessel. After loading the goods onto vessels, the seller is responsible for transporting them to their final port, but the seller will not bear any responsibility for the destination delivery.
Once the origin port accepts the goods, the buyer replaces the seller as the party responsible for the product's value and potential loss.
CIF – Cost, Insurance, and Freight
When buyers select CIF, they must add insurance expenses to their shipping costs because the seller arranges insurance to protect items from port departure to arrival at the designated port.
Conclusion
The selection of appropriate Incoterms in 2025 can help exporters and importers avoid surprises by determining the correct choice before finalizing their sales contracts. Incoterms help both parties prevent unexpected expenses and simplify contract procedures.
An incoterm selection enables you to unite with your supplier regarding shipping procedures because multiple parties participate in the process. Global standards ensure service and duty payments occur quickly and provide legal protection to suppliers along with carriers, and buyers.
