What are Incoterms?

When a seller quotes "FOB" or "DAP", they are using an Incoterm. It saves long explanations, because both sides know what the shorthand covers.

Why Incoterms matter

Selling products across borders raises the same questions every time. Who books the truck or the ship? Who pays for it? If the goods are damaged on the way, whose loss is it?

Incoterms give a common answer. They do not cover everything in a contract, such as the price or when title to the goods passes, but they settle the delivery questions in a few letters.

This is a general explanation, not legal advice. For a contract, read the ICC's own text and check that your chosen rule fits the shipment.

The 11 rules in Incoterms 2020

The rules fall into two groups.

Rules for any mode of transport

• EXW (Ex Works): the buyer collects from the seller's premises and carries almost all cost and risk from there.
• FCA (Free Carrier): the seller hands the goods to the buyer's carrier at a named place.
• CPT (Carriage Paid To): the seller pays for carriage to a named destination, but risk passes earlier, when the goods are handed to the first carrier.
• CIP (Carriage and Insurance Paid To): like CPT, with the seller also paying for insurance.
• DAP (Delivered at Place): the seller delivers to the named place, ready for unloading, and carries risk until then.
• DPU (Delivered at Place Unloaded): like DAP, but the seller also unloads.
• DDP (Delivered Duty Paid): the seller delivers to the named place and takes on the most, including import clearance and duties.

Rules for sea and inland waterway only

• FAS (Free Alongside Ship): the seller places the goods alongside the vessel at the named port.
• FOB (Free on Board): the seller loads the goods on the vessel.
• CFR (Cost and Freight): the seller pays freight to the destination port, and risk passes once the goods are on board.
• CIF (Cost, Insurance and Freight): like CFR, with the seller also paying for insurance.

How to read them

Two things change as you go from EXW towards DDP. The seller does more and pays more. And the point where risk passes moves further along the journey.

So the seller's price under DDP should be higher than under EXW, since it includes more work. That is why the Incoterm must be stated next to the price on a quote, with a named place.

An example from product sales

A packaging manufacturer quotes 20 pallets of cartons to a customer in another country. Quote one is FCA at the factory, so the buyer's forwarder collects. Quote two is DAP at the buyer's warehouse, so the manufacturer books the truck and carries the transit risk. The second price is higher. The rep shows both, the buyer chooses, and the choice is written on the sales order.

Related terms

• Sales quote: where the Incoterm and price are stated together.
• Pro forma invoice: often used in export paperwork.
• Lead time: affected by who arranges transport.
• Purchase order: the buyer's order, which should repeat the agreed term.

How PromptLab handles it

PromptLab has no Incoterm field and no shipping or customs features. What it does is keep the commercial record together: the quote with its lines, the customer's price list, the sales order, and the account's documents and email. Write the agreed term in the quote and the order notes, and anyone on the account can find it.

Frequently asked questions

Who publishes Incoterms?

The International Chamber of Commerce (ICC). It updates them every so often, and the current edition is Incoterms 2020.

How many Incoterms are there?

Incoterms 2020 has 11 rules: seven for any mode of transport and four for sea and inland waterway only.

Which Incoterm is best for the seller?

EXW asks the least of the seller, and DDP asks the most. The best choice depends on the route, your experience with exports and what the buyer needs. Many sellers pick a middle rule such as FCA or DAP.

Do Incoterms replace the sales contract?

No. They cover delivery, costs and risk only. Price, payment, quality and the transfer of ownership need to be covered elsewhere in the contract.

Should I use FOB for containers?

The ICC advises that FOB, FAS, CFR and CIF are meant for sea and inland waterway, and that FCA and the other rules suit containerised goods better. Check the ICC text before choosing.