Incoterms explained

What Incoterms are and what they cover

Incoterms are a set of widely used rules (issued by the International Chamber of Commerce, or ICC) that clarify where costs and responsibilities sit between buyers and sellers in international trade. You’ll see each one written with three letters and a place name, such as FOB Rotterdam, to spell out exactly how far the seller is obligated to go. Their main job? Defining who pays for shipping, insurance, and the process of getting goods from seller to buyer, and at which moment risk shifts between them.

It’s worth remembering that Incoterms handle delivery, transport, insurance, customs clearance for import and export, and the assignment of costs for those steps. They don’t specify price, payment timing, or the moment when legal ownership passes from seller to buyer. That part stays in your broader sales contract. Right now, most contracts use the 2020 rules set by the ICC, so it’s important to mention the edition you’re working with in the agreement itself.

The main Incoterm rules and where risk passes

• EXW (ex works): The buyer picks up the goods from the seller's location and takes on nearly the entire risk and cost from there.
• FCA (free carrier): The seller hands over the goods to the carrier (nominated by the buyer) at a chosen spot. That’s when the risk changes sides.
• FOB (free on board): The seller covers loading the goods onto the ship at the departure port. It applies to shipments on water, by sea or via inland waterways.
• CIF (cost, insurance and freight): The seller pays for shipping and for minimum insurance up to the destination port. Still, the moment goods are loaded, the risk moves to the buyer.
• DAP (delivered at place): The seller delivers the shipment to a named location. The buyer then has to deal with import entry and duties.
• DDP (delivered duty paid): The seller covers just about everything: transportation, risk, and import charges, right up to the chosen destination.

How Incoterms affect payment and risk

Incoterms play a real role in shaping payment timing and exposure to loss, a lot can ride on which term you pick. If your contract uses FOB, for example, and the goods are damaged as they’re being loaded, the loss sits with the seller. Once the goods are safely on the ship, the buyer assumes risk. So, it makes sense to arrange your payment methods to line up with these shifts, to keep both sides protected.

Incoterms also state who’s responsible for clearing goods through customs. You’ll still need to check the import laws where your goods enter, as Incoterms don’t override national requirements or set duties or taxes.

Your payment arrangements and Incoterm must match up. Suppose you’re using a letter of credit; your paperwork must confirm the delivery term required by that credit. For more detail on how payment types connect with Incoterms, have a look at the trade payment methods guide. And make sure both the proforma and commercial invoices show the same Incoterm so there’s no dispute or delay.

Frequently asked questions