Shipping internationally? One of the key terms you’re likely to come across is “Incoterms®.” These three-letter acronyms are vital. They define the responsibilities, costs, and risks associated with shipping goods worldwide. Getting them wrong can lead to costly disputes and delays during customs clearance.
This guide decodes what Incoterms® are, breaks down the definition in plain language, and explains how a strong understanding of these shipping terms can protect your business and enhance your global operations.
Incoterms® is a globally recognised set of standardised rules for international commercial transactions. The term itself is an abbreviation for “International Commercial Terms.” These rules were established by the International Chamber of Commerce (ICC) to provide a uniform “language” for global trade.
The Incoterms® rules are used worldwide in international and domestic contracts for the delivery of goods1. They clarify responsibilities between the buyer and the seller for costs, risk, and cargo insurance.
The Incoterms® rules detail the meaning of a series of commercial terms, each designated by three letters. These terms reflect the practice followed by companies when drawing up contracts for the sale of goods. The ICC regularly updates the rules, with the most recent version being Incoterms® 2020.
Understanding the Incoterms® definition is critical for any small business engaging in international trade. They’re the essential framework that protects your bottom line and ensures compliance, especially when shipping from Ireland to global destinations.
Risk management: Incoterms® clearly outline the exact point at which risk transfers from the seller to the buyer. This protects the seller from liability for loss or damage once the goods are passed to the carrier or placed at the designated location.
Cost clarity: They specify who pays for transportation, cargo insurance, export and import formalities, and the payment of duties and taxes. Knowing this beforehand prevents unexpected fees and allows for accurate pricing strategies.
Facilitating customs clearance: Using the correct shipping terms is essential for creating accurate shipping documents. When the responsibility for customs clearance is clearly defined, the process is smoother, reducing the risk of your shipment being delayed at the border.
While universally beneficial, Incoterms® offer clear advantages and potential pitfalls that small businesses should be aware of.
Pros
Within global trade, Incoterms® provide several benefits:
Standardisation: Incoterms® ensure a uniform “language” for international transactions. With all parties working to the same definitions and guidelines, the risk of disputes arising from misinterpretations is reduced.
Clarity: Incoterms® outline who is responsible for transportation, cargo insurance, export and import formalities, payment of duties and taxes, and at what point risk transfers from the seller to the buyer. This helps all parties meet their obligations.
Efficiency: Incoterms® clearly define the contractual responsibilities of a buyer and a seller, enabling smoother communication and transactions across borders.
Cons
Despite the standardisation, Incoterms® carry potential risks if misunderstood:
Misuse: Using the wrong term or failing to specify the correct version (e.g., using Incoterms® 2010 when the contract implies 2020) can lead to legal disputes and financial liability.
Hidden costs for the buyer: Terms that place minimal responsibility on the seller (such as EXW) can leave the buyer facing unexpected costs, including high local handling fees or complex export procedures in the origin country.
Unsuitability: Some Incoterms® shipping terms are only suitable for certain modes of transport (e.g., the four sea-specific rules), and using them incorrectly can void insurance or create legal risk.
The 11 Incoterms® rules are grouped based on the modes of transport they cover. Seven are designed for any mode of transport, while four are specifically for sea and inland waterway transport. The table below provides an overview of how the rules are categorised.
DELIVERED DUTY PAID (DDP) officially means that the seller delivers the goods to the buyer when the goods are placed at the disposal of the buyer, cleared for import, on the arriving means of transport, ready for unloading, at the named place of destination or at the agreed point within that place, if any such point is agreed. The seller bears all risks involved in bringing the goods to the named place of destination or to the agreed point within that place. In this Incoterms® rule, therefore, delivery and arrival at destination are the same.
DELIVERED AT PLACE (DAP) officially means that the seller delivers the goods – and transfers risk – to the buyer 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 or at the agreed point within that place, if any such point is agreed. The seller bears all risks involved in bringing the goods to the named place of destination or to the agreed point within that place. In this Incoterms® rule, therefore, delivery and arrival at destination are the same.
DELIVERED AT PLACE UNLOADED (DPU) officially means that the seller delivers the goods – and transfers risk – to the buyer when the goods, once unloaded from the arriving means of transport, are placed at the disposal of the buyer at a named place of destination or at the agreed point within that place, if any such point is agreed. The seller bears all risks involved in bringing the goods to and unloading them at the named place of destination. In this Incoterms® rule, therefore, the delivery and arrival at destination are the same. DPU is the only Incoterms® rule that requires the seller to unload goods at destination. The seller should therefore ensure that it is in a position to organise unloading at the named place. Should the parties intend the seller not to bear the risk and cost of unloading, the DPU rule should be avoided and DAP should be used instead.
EX WORKS (EXW) officially means that the seller delivers the goods to the buyer when it places the goods at the disposal of the buyer at a named place (like a factory or warehouse), and that named place may or may not be the seller’s premises. For delivery to occur, the seller does not need to load the goods on any collecting vehicle, nor does it need to clear the goods for export, where such clearance is applicable.
FREE CARRIER (FCA) means that the seller delivers the goods to the buyer in one or other of two ways:
Whichever of the two is chosen as the place of delivery, that place identifies where risk transfers to the buyer and the time from which costs are for the buyer’s account.
CARRIAGE PAID TO (CPT) officially means that the seller delivers the goods – and transfers the risk – to the buyer by handing them over to the carrier contracted by the seller or by procuring the goods so delivered. The seller may do so by giving the carrier physical possession of the goods in the manner and at the place appropriate to the means of transport used. Once the goods have been delivered to the buyer in this way, the seller does not guarantee that the goods will reach the place of destination in sound condition, in the stated quantity or indeed at all. This is because risk transfers from seller to buyer when the goods are delivered to the buyer by handing them over to the carrier; the seller must nonetheless contract for the carriage of the goods from delivery to the agreed destination.
CARRIAGE AND INSURANCE PAID TO (CIP) officially means that the seller delivers the goods – and transfers the risk – to the buyer by handing them over to the carrier contracted by the seller or by procuring the goods so delivered. The seller may do so by giving the carrier physical possession of the goods in the manner and at the place appropriate to the means of transport used. Once the goods have been delivered to the buyer in this way, the seller does not guarantee that the goods will reach the place of destination in sound condition, in the stated quantity or indeed at all. This is because risk transfers from seller to buyer when the goods are delivered to the buyer by handing them over to the carrier; the seller must nonetheless contract for the carriage of the goods from delivery to the agreed destination.
FREE ALONGSIDE SHIP (FAS) means that the seller delivers the goods to the buyer when the goods are placed alongside the ship (e.g. on a quay or a barge) nominated by the buyer at the named port of shipment or when the seller procures goods already so delivered. The risk of loss of or damage to the goods transfers when the goods are alongside the ship, and the buyer bears all costs from that moment onward.
FREE ON BOARD (FOB) means that the seller delivers the goods to the buyer on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods transfers when the goods are on board the vessel, and the buyer bears all costs from that moment onwards.
COST AND FREIGHT (CFR) officially means that the seller delivers the goods to the buyer on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods transfers when the goods are on board the vessel, such that the seller is taken to have performed its obligation to deliver the goods whether or not the goods actually arrive at their destination in sound condition, in the stated quantity or, indeed, at all. In CFR, the seller owes no obligation to the buyer to purchase insurance cover: the buyer would be well-advised therefore to purchase some cover for itself.
COST INSURANCE AND FREIGHT (CIF) officially means that the seller delivers the goods to the buyer on board the vessel or gains the goods already so delivered. The risk of loss of or damage to the goods transfers when the goods are on board the vessel, such that the seller is taken to have performed its obligation to deliver the goods whether or not the goods actually arrive at their destination in sound condition, in the stated quantity or, indeed, at all.
The ICC updates the Incoterms® rules regularly to reflect changes in international shipping practices. The key difference between Incoterms® 2010 and Incoterms® 2020 lies in their approach to modern shipping needs and practices.
The 2020 revision(2) brought several significant changes:
New rule: DAP (Delivered at Place) and DAT (Delivered at Terminal) were simplified and renamed. DPU (Delivered at Place Unloaded) replaced DAT and is now the only rule requiring the seller to unload the goods.
Insurance coverage: Under CIP, the seller must now purchase a higher level of insurance (Clause A) compared to Incoterms® 2010 (Clause C).
Security requirements: The 2020 rules placed greater emphasis on security requirements related to transport and cost allocation.
FCA and Bills of Lading: The FCA rule was updated to allow the issuance of a Bill of Lading with an onboard notation, which is often required by banks for payment under a Letter of Credit.
As an SME selling to customers cross-border, you should review the Incoterms® definitions (provided by the ICC) and agree on Incoterms® for international transactions with your respective buyers. Choosing the right shipping terms is essential for balancing risk, cost, and control.
DHL Express has also put together an Incoterms® guide to help you better understand the different terms.
The most common Incoterms® used by e-commerce businesses that deal with individual consumers (B2C) are DAP (Delivered at Place) and DDP (Delivered Duty Paid). These terms ensure the customer receives the goods with minimal hassle. DDP is often preferred as the seller handles all costs, providing a better customer experience.
Yes, you can still use Incoterms® 2010. The Incoterms® rules do not expire. However, it’s vital that your sales contract clearly specifies the version you’re using (e.g., "DAP Incoterms® 2010") to prevent misunderstandings and legal disputes.
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