Incoterms

What are Incoterms?

Incoterms are a set of rules or regulations published by the International Chamber of Commerce (ICC) to encourage and regulate international commerce and trade. Incoterms are formally known as international commercial terms and are recognized worldwide.

The terms are set out to clarify and differentiate the respective obligations of buyers and sellers and limit or eliminate possible misunderstanding in foreign trade contracts. The ICC developed Incoterms in 1936, updating them over the years to accommodate variations and changes in trade practices.

Understanding Incoterms

According to the International Trade Administration, as of 2020, eleven (11) individual rules were issued by the International Chamber of Commerce (ICC), i.e., Incoterms. The rules describe the duties of buyers and sellers in international buy-and-sell transactions. It is of paramount importance that every Incoterms rule outline the costs, risks, and obligations to be incurred by the buyers and sellers, respectively.

Familiarization with Incoterms aid in the enhancement of transaction easing, as they set out and clearly outline the responsibilities of the parties involved in the transaction, according to phase.

Furthermore, the Incoterm regulations are revised as frequently as necessary and are divided into two groups, based only on the method of delivery. The eleven rules consist of seven rules applicable to any mode of transportation and four rules that apply to sea and inland waterway transport.

Incoterms Applying to Any Mode of Transport

The following Incoterm rules apply to any mode of transport:

• EXW – Ex Works (insert place of delivery)
• CIP – Carriage and Insurance Paid To (insert place of destination)
• CPT – Carriage Paid to (insert place of destination)
• DAP – Delivered at Place (insert named place of destination)
• DPU – Delivered at Place Unloaded (insert place of destination)
• DDP – Delivered Duty Paid (insert place of destination)
• FCA – Free Carrier (Insert named place of delivery)

Incoterms Applying to Sea and Inland Waterway Transport

The following Incoterm rules apply to sea and inland waterway transport:

• CFR – Cost and Freight (insert named port of destination)
• CIF – Cost Insurance and Freight (insert named port of destination)
• FAS – Free Alongside Ship (insert name of port of loading)
• FOB – Free on Board (insert named port of loading)

Understanding How Incoterms Work

As mentioned earlier, Incoterms elucidate the respective responsibilities of parties in a sales transaction. Each Incoterm rule comprises a statement that depicts the seller’s obligation on the provision of goods and a commercial invoice, compliant with the contract of sale. In conjunction, an accompanying statement comprises the buyer’s obligation to pay the price of the purchased goods, as stipulated in the contract of sale.

Each Incoterm rule comprises a statement that outlines and identifies the party responsible for sourcing an export and/or import license (depending on whether the party is the buyer or the seller) and carrying out the necessary export or import customs regulations. The statement also specifies the parties responsible for tasks stipulated above (e.g., obtaining official authorization for import/exports, etc.).

Moreover, Incoterms outline which party is responsible for contracting for the carriage of the goods being purchased, cargo insurance coverage, packing of the goods, pre-shipment inspections, cargo delivery, etc.

Incoterms Limitations

Incoterms are normally included in the contract of sale of a transaction; however, they do not cover all the factors and elements of the transaction. For example, all the conditions of the sales transaction, specifications of the goods being sold, the contract value, reference of the payment methods or time, when the transfer of ownership of the goods will be passed from the selling party to the purchasing party, etc.

The updated Incoterm rules are always published on the ICC website and can be referenced for more clarity.

Additional Resources

CFI is the official provider of the global Commercial Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

• Delivered at Frontier (DAF)
• Delivered Ex Ship (DES)
• Freight Expense
• International Trade
• See all economics resources