# Incoterms: Definition, Examples, Rules, Pros & Cons

![Incoterms](https://www.investopedia.com/thmb/Cl8-4ahwydLZCVl93bdpfls5glE=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/incoterms_final-7ae029836ab948fda48dbba261fbfcdd.jpg)

*— Katie Kerpel / Investopedia*

## What Are Incoterms?

To facilitate commerce around the world, the International Chamber of Commerce (ICC) publishes a set of Incoterms, officially known as international commercial terms. Globally recognized, Incoterms prevent confusion in foreign trade contracts by clarifying the obligations of buyers and sellers.

Parties involved in domestic and [international trade](https://www.investopedia.com/insights/what-is-international-trade/) commonly use Incoterms as a kind of shorthand to help understand one another and the exact terms of their business arrangements. Some Incoterms apply to any means of transportation, while others apply strictly to transportation across water.

### Key Takeaways

*   International commercial terms—Incoterms for short—clarify the rules and terms that buyers and sellers use in international and domestic trade contracts.
*   The International Chamber of Commerce (ICC) developed Incoterms in 1936 and updates them periodically to conform to changing trade practices.
*   Examples of Incoterms for modes of transportation include Delivered at Place Unloaded (DPU), Delivered Duty Paid (DDP), and Ex Works (EXW).
*   Incoterms were updated for 2020, and although only one term changed, there are notable differences in security costs.
*   The terms are standardized, but certain buyers and sellers prefer individual terms over others. As such, which terms will be used is a matter of negotiation.

## Understanding Incoterms

The [International Chamber of Commerce (ICC)](https://www.investopedia.com/terms/i/international-chamber-of-commerce-icc.asp) developed Incoterms in 1936 and updates them periodically to conform to changing trade practices. The ICC’s mission is to promote open markets and ensure global economic prosperity through trade.

Because the ICC is a networked business organization that reaches more than 45 million companies in more than 170 countries, it is seen as having unparalleled expertise in establishing rules to guide international trade.

While adherence to its Incoterms is voluntary, the ICC-established rules are commonly used by buyers and sellers as a regular part of trade transactions.

Incoterms provide a universal set of rules and guidelines that help facilitate trade. In essence, they provide a common language that traders can use to set the terms for their trades. Buyers and sellers can use Incoterms in a variety of activities necessary to conduct business.

Typical activities that call for the use of Incoterms include filling out a [purchase order](https://www.investopedia.com/terms/p/purchase-order-lead-time.asp), labeling a shipment for transport, completing a certificate of origin, or documenting a [free carrier agreement (FCA)](https://www.investopedia.com/terms/f/fca.asp).

> **Important**
>
> Because the ICC regularly updates Incoterms, contracts should specify which version they are using (e.g., Incoterms 2020).

## Incoterms Rules for Any Mode of Transport

Some common examples of Incoterms rules for any mode of transportation include [Delivered Duty Paid (DDP)](https://www.investopedia.com/terms/d/delivery-duty-paid.asp), Delivered at Place (DAP), and Ex Works (EXW). The seven Incoterms for any mode of transport are:

*   CIP: Carriage and Insurance Paid to
*   CPT: Carriage Paid to
*   DAP: Delivered at Place
*   DPU: Delivered at Place Unloaded
*   DDP: Delivered Duty Paid
*   EXW: Ex Works
*   FCA: Free Carrier

DPU, for example, indicates that the seller delivers the goods to a terminal and assumes all the risk and transportation costs until the goods have arrived and been unloaded. After that, the buyer assumes the risk and transportation costs of the goods from the terminal to the final destination.

DDP indicates that the seller assumes all the risk and transportation costs. The seller must also clear the goods for export at the shipping port and import at the destination. Moreover, the seller must pay export and import duties for goods shipped under DDP.

Under Incoterm [Ex Works (EXW)](https://www.investopedia.com/terms/e/exw.asp), the seller is only required to make the goods available for pickup at the seller’s business location or another specified location. Under EXW, the buyer assumes all the risk and transportation costs.

In 2010, the two main categories of Incoterms were updated and classified by modes of transport. The first classification applies to any mode of transport, while the second classification only applies to sea and inland waterway transport.

## Incoterms Rules for Sea and Inland Waterway Transport

The ICC has specific Incoterms rules for inland waterway and sea transport, such as Cost, Insurance, and Freight (CIF) and [Free on Board (FOB)](https://www.investopedia.com/terms/f/fob.asp). The Incoterms for sea and inland waterway transport are:

*   CFR: Cost and Freight
*   CIF: Cost, Insurance, and Freight
*   [FAS: Free Alongside Ship](https://www.investopedia.com/terms/f/fas.asp)
*   FOB: Free on Board

Free on Board (FOB) shipment terms, for example, indicate that the seller delivers the goods to a vessel and covers all costs until they are loaded on the vessel. The seller also pays for the main carriage. Once on board, the buyer assumes all responsibility for the goods and subsequent costs in the delivery and importation process.

[Cost, Insurance, and Freight (CIF)](https://www.investopedia.com/terms/c/cif.asp) terms indicate that the seller must deliver the goods to a designated port and load them on a specified vessel. The seller pays for insurance and assumes responsibility for the goods until they are unloaded for the vessel. However, the buyer pays for main carriage and all subsequent costs.

## What Do Incoterms Not Cover?

There are specific instances that Incoterms will not cover. Incoterms do not:

*   Address all the conditions of a sale 
*   Identify the goods being sold nor list the contract price
*   Reference the method or timing of payment negotiated between the seller and buyer   
*   Determine when the title, or ownership of the goods, passes from the seller to the buyer  
*   Specify which documents must be provided by the seller to the buyer to facilitate the customs clearance process in the buyer’s country  
*   Address liability for the failure to provide the goods in conformity with the contract of sale, delayed delivery, or dispute resolution mechanisms

Due to the omission of certain sale conditions, working only with Incoterms can be constricting. All parties involved in any contract should make sure that the applicable instances above are addressed before signing the contract; this ensures a smooth business transaction, as many legal matters can arise when the parties are working only with Incoterms.  

## Incoterms 2010 vs. Incoterms 2020

Although the 2010 Incoterms were updated in 2020, there are no major differences between the two. There was only one change in terminology: The 2010 term Delivered at Terminal (DAT) was clarified to the 2020 term Delivered at Place Unloaded (DPU). This was done to include all places of unloading, not just those in terminals. In both instances, there are 11 terms.

Things become more involved when you move past the terms themselves. For example, the amount of freight insurance required under the CIP term has been increased. However, this does not affect the CIF term.

Incoterms 2020 covers situations where either the buyer or seller transports goods using their own vehicles. In 2010, it was assumed that these services were provided by a third-party carrier. There is also a change in the way that the FCA rule handles the bill of lading.

In addition, security-related cost responsibilities have changed. These can be associated with export clearance processes as well as the import clearance process. The Incoterms revision clarified that the most common cost headings are those associated with transport that are the responsibility of the arranging party.

Security costs associated with export clearance will be borne by the seller [other than for Ex Works cases](https://www.investopedia.com/ask/answers/041515/what-are-differences-between-ex-works-exw-and-free-board-fob.asp). Security costs associated with import will be borne by the buyer, except for DDP cases. Additionally, security and insurance requirements were raised.  

## Advantages and Disadvantages of Incoterms

The single greatest advantage of using Incoterms is the standardization and specificity of complicated international trade aspects. Having a system that eliminates ambiguity between nations has made trading much simpler, especially when negotiating terms.

This saves time and money that would have previously been spent on lawyers, who would draft terms basically breaking down Incoterms into different languages.

A notable disadvantage of Incoterms is that buyers and sellers often have different preferences when using them. Sellers, for example, may choose CIF because they understand their shipments better than buyers do.

Buyers, in contrast, may prefer FOB for the same reasons. However, the terms themselves are not the issue, and it becomes more a matter of negotiation over which terms to use versus the clarity of the terms themselves.

Pros

*   Easily understood terms
    
*   International standardization
    
*   Updated and clarified by an international body (ICC)
    

Cons

*   Differences between buyer and seller preferences when choosing terms
    
*   Certain terms can expose one party to inflated costs
    

## Can I Still Use Incoterms 2010 After Jan. 1, 2020?

Yes, it is still acceptable to use the 2010 Incoterms. However, both buyer and seller should agree in writing to use either the 2010 or 2020 Incoterms version.

## What Are the 11 Incoterms?

The 11 Incoterms are Carriage and Insurance Paid to (CIP); Carriage Paid to (CPT); Cost and Freight (CFR); Cost, Insurance, and Freight (CIF); Delivered at Place (DAP); Delivered at Place Unloaded (DPU); Delivered Duty Paid (DDP); Ex Works (EXW); Free Alongside Ship (FAS); Free Carrier (FCA); and Free on Board (FOB).

## Why Are Incoterms Used?

Incoterms are used to clarify business terms in international trade. The many benefits of Incoterms outweigh the negatives for most transactions, which is why many trade agreements are facilitated using Incoterms. There are still preferences between parties and the terms themselves must be negotiated before an agreement is finalized.

## The Bottom Line

Incoterms are helpful terms used to facilitate international trade. They are separated by [modes of transport](https://www.investopedia.com/terms/t/transloading.asp) between any mode, and those specifically involving water transport. The terms categorize responsibility between the buyer and seller, but there are some aspects of trade that the terms do not cover, such as the goods being sold or future liability responsibilities. For this reason, Incoterms should be used to help clarify agreements, but should not be the entirety of the agreement.

> **Article Sources**
>
> 1.  International Chamber of Commerce. “[Incoterms® Rules History](https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-rules-history/).”
>     
> 2.  International Chamber of Commerce. “[About ICC](https://iccwbo.org/about-icc-2/).”
>     
> 3.  U.S. International Trade Administration. “[Know Your Incoterms](https://www.trade.gov/know-your-incoterms).”
>     
> 4.  International Chamber of Commerce. “[Incoterms 2010](https://iccwbo.org/wp-content/uploads/sites/3/2010/01/ICC-Introduction-to-the-Incoterms-2010.pdf).” Pages 1–2. 
>     
> 5.  ICC Academy. "[Incoterms® 2020 vs 2010: What’s Changed?](https://icc.academy/incoterms-2020-vs-2010-whats-changed/)"
>     
> 6.  International Chamber of Commerce. "[Incoterms 2020](https://iccwbo.org/business-solutions/incoterms-rules/incoterms-2020/#block-accordion-3)." Click "What Are the Different Levels of Insurance Coverage in CIF and CIP?"
>     
> 7.  Quicargo. "[Incoterms 2020](https://quicargo.com/incoterms/)."
>     
> 8.  International Chamber of Commerce. "[Incoterms 2020](https://iccwbo.org/business-solutions/incoterms-rules/incoterms-2020/#block-accordion-1)." Click "Why Has the FCA Incoterms Rule Been Revised?"
>     
> 9.  Air & Surface Logistics. "[Incoterms 2020 - Summary of Changes](https://airandsurface.com/incoterms-2020/)."
>     
> 10.  The Ils Company. "[Incoterms](https://www.ilscompany.com/incoterms/)."