Incoterms: What are they and what do they mean to your business?

If you’re looking to embark on the global trade of goods, whether importing or exporting, you will be more than likely to come across “Incoterms” in your sales negotiations.


What are Incoterms?

“Incoterms” or International Commercial Terms are a set of pre-defined trade codes compiled by the International Chamber of Commerce (ICC), which can be used as a basis for sales contracts.  Although there are no legal obligations to use incoterms, they clearly establish the ‘point of delivery’ within a contract, helping avoid any confusion or misunderstanding in regards to both buyer and seller responsibilities and costs associated with worldwide trade.

Although first introduced in 1936, the ICC have not been ignorant to changes in global economy, and have periodically updated the incoterms to reflect trade developments, with the current revision – Incoterms 2020, which came force on 1 January 2020 – being the 9th version of the terms to be approved.

Incoterms 2020

Considerations in using Incoterms

Whilst most costs associated with your international transactions are covered by the Incoterms, VAT is not, and as such, it’s important to specify from the outset, whether payment will be the responsibility of the buyer or seller. And be wise to the fact that Insurance provided as part of CPT, CIP and CIF terms offers minimal amount of coverage. From a commercial perspective, it’s unlikely the insurance offered is sufficient enough to cover the cost of your goods, so seek the advice of a marine insurance specialist on options available to yourself for your products.

Ensure you are not being duped into utilising a term of contract that sits in favour of your trade partner. Look to strike a deal for a contract under trading terms that provide you the best value and, should it be your requirement, the ability to maintain the control of goods throughout the supply chain. A freight forwarder will be able to advise you of the most suitable term to negotiate your sales contract upon, to meet your business needs.


So, what are the Incoterm Rules, and what do they actually mean?

There are eleven incoterms in total, each consisting of a three digit code.  Seven of these are applicable terms for transportation via any mode of transport, whilst the other four are specific to trade conducted by sea and inland waterways.


EXW (Ex Works)

FCA (Free Carrier)

CPT (Carriage Paid To)

CIP (Carriage and Insurance Paid)

DPU (Delivered at Place Unloaded)

DAP (Delivered at Place)

DDP (Delivered Duty Paid)

Specific Incoterms Applicable to Sea and Inland waterways

FAS (Free Alongside Ship)

FOB (Free On Board)

CFR (Cost and Freight)

CIF (Cost, Insurance and Freight)


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