Incoterms® meaning explained
Incoterms® are rules, that define the terms of trade for the sale of goods all around the world.
Entering the world of global trade and ocean shipping means understanding your roles and responsibilities in importing or exporting goods. That requires an understanding of the meaning of Incoterms®. At Twill, we offer detailed information around Incoterms®, including what they are and a list of the 11 main Incoterms®. You can download our informative eBook below or read on for more information.
What are Incoterms®?
Incoterms® are the essential terms of trade. They are rules – set by the International Chamber of Commerce – that define the terms of trade for the sale of goods all around the world. You can think of them as the common language of trade – and by understanding meaning of Incoterms® better, you will be better equipped in importing and exporting goods with parties around the world.
Different Incoterms® meet different needs for buyers and sellers – whether you're taking control of your cargo straight from the seller’s warehouse or at the final port of destination – there’s an Incoterm® to suit your situation. They're helpful because they mean you don't have to spend all your time negotiating and agreeing on every detail of risk and responsibility during a cargo's journey.
The definition of shipping Incoterms® and what they cover
Whether you are handling a bill of lading, creating a packing list for a shipment, a customs invoice or commercial invoice, or preparing a certificate of origin at a port – Incoterms® support you along the way.
✅ What Incoterms® do cover
They do define the obligations and costs between a buyer and seller
They do define the point at which the risk for cargo passes between buyer and seller
They provide understanding for carriers, freight forwarders, customs brokers and others involved in shipping your goods.
❌ What Incoterms® don’t cover
They don’t cover the passage of title or ownership
They don’t cover payment – this is negotiated separately.
They don’t cover insurance – only two Incoterms®, CIF (Cost, Insurance and Freight) and CIP (Carriage and Insurance Paid), outline insurance as the seller’s responsibility.
What are the 11 Incoterms®?
So what are the different Incoterms®? Well, there are some specific to sea and inland waterway transport – and others that apply to any mode of transport. There are a total of 11 Incoterms® used in shipping. Refer to our comprehensive Incoterms® list below to learn more:
Incoterms® for sea and inland waterway transport:
1. FOB (Free on Board)
FOB shipping means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. They are responsible for all costs up until that point. Once the shipment is boarded, the buyer assumes risks and costs.
2. FAS (Free Alongside Ship)
The FAS Incoterm® indicates that the seller delivers when the goods are placed alongside the vessel (e.g., on a quay or a barge) chosen by the buyer. The risk of loss of or damage to the goods passes to the buyer when the goods are alongside the ship.
3. CFR (Cost and Freight)
CFR shipping follows the same procedure as “Free On Board”, but the seller must contract for and pay the costs of freight necessary to bring the goods to the named port of destination.
4. CIF (Cost, Insurance and Freight)
With the CIF Incoterms®, the seller delivers the goods, cleared for export, onboard the vessel at the pot of the shipment. He also pays for the transport of the goods to the port of destination. Additionally, the seller contracts for insurance cover against the buyer’s risk of loss or damage to the goods during the carriage.
Incoterms® for any mode of transport:
5. DAP (Delivered at Place)
The DAP term in shipping means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.
6. EXW (Ex Works)
Ex Works means that the seller delivers when it places the goods at the disposal of the buyer at the seller’s premises or at another named place (i.e., works, factory, warehouse, etc.).
7. FCA (Free Carrier)
Free Carrier means that the seller delivers the goods to a carrier or another person nominated by the buyer, at the seller’s premises or another named place. With FCA shipping terms, the parties are well-advised to specify, as clearly as possible, the point within the named place of delivery, as the risk passes to the buyer at that point.
8. DDP (Delivered Duty Paid)
The DDP Incoterms® – “Delivered Duty Paid” – means that seller bears all the costs and risks involved in bringing the goods to the place of destination and has an obligation to clear the goods not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.
9. CPT (Carriage Paid To)
The CPT term means the seller delivers the goods to the carrier or another person nominated by the buyer. The seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.
10. CIP (Carriage And Insurance Paid To)
This is the same as “Carriage Paid To” but the seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.
11. DPU (Delivered At Place Unloaded)
Using a DPU Incoterm® means the seller bears all risk involved in bringing the goods to the place of destination and unloading them there. The risk is transferred to the buyer when this has been done and customs clearance has been completed.
Please note: At Twill, we are not offering all Incoterms® globally. For example, EXW and DDP are not offered in most countries. If you want to know which Incoterms® are offered in your region, please reach out to a local Twiller.
Incoterms® and the Incoterms® 2020 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above. The Incoterms® Rules are protected by copyright owned by ICC. Further information on the Incoterms® Rules may be obtained from the ICC website iccwbo.org.
The risk factor with Incoterms®
As you can see from the individual definitions, picking the right Incoterm® and avoiding any Incoterms® mistakes depends on your product and the level of risk that you, or the seller, are willing to take on during its journey. If a seller decides the price they've agreed with you is profitable, they’ll be willing to take on more risk.
Equally, if you’re a buyer from a large company, for example, you may have your own teams who handle processes like customs – in which case you’ll be willing to take on more risk and responsibility. This will keep costs lower.
All of this means that your contracts with suppliers are very important – if you pay more, you can take on less risk.
Twill is here to help with Incoterms®
So how does Twill fit into the world of Incoterms®? Well, we can help you, but we cannot decide on your behalf. That means we can’t decide which Incoterm® you should use, but we can offer advice on which might suit your specific needs.
If you want to know more about Incoterms® in specific regions, read about the most important Incoterms® when shipping to and from China; as well as the Incoterms® when shipping to and from USA and Canada.
Incoterms also help us in our job because if an issue does occur – for example, if your cargo didn’t get on the vessel it was scheduled to board – then Incoterms® let us know who takes responsibility for any risks or extra costs involved.