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.
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.
These terms are suitable for container transport, air freight, road transport, or any combination of transport modes.
Incoterms® | Full Name | Brief Definition | Responsibilities | Use Case |
DDP | Delivered Duty Paid | The seller delivers the goods, cleared for import, at the named destination. | Seller: Maximum responsibility; bears all risks and costs, including import duties and taxes. Buyer: Takes delivery at the named place. | E-commerce selling, where the customer wants a final, total price (DDP is typically used when the seller handles all customs clearance). |
DAP | Delivered at Place | The seller delivers the goods on the arriving means of transport ready for unloading at the named place of destination. | Seller: All costs and risks until arrival at the named place (e.g., the buyer's depot). Buyer: Responsible for unloading and import customs clearance (duties/taxes). | Standard door-to-door shipping where the seller doesn't handle final import fees. |
DPU | Delivered at Place Unloaded | The seller delivers the goods unloaded at the named place of destination. | Seller: All costs and risks, including the cost of unloading at the named destination. Buyer: Import customs clearance (duties/taxes). | Used when the seller has the means to safely unload at the destination. |
EXW | Ex Works | The seller makes the goods available at their premises (e.g., factory or warehouse). | Seller: Minimum responsibility; only needs to make goods available. Buyer: All costs and risks from pickup onwards, including loading and customs clearance. | Domestic sales, or when the seller wants no involvement in logistics. |
FCA | Free Carrier | The seller delivers the goods to a carrier named by the buyer at a named place. | Seller: Export customs clearance and delivery to the main carrier. Buyer: Main carriage cost, risk from loading onto the main carrier onwards. | Most common and flexible rule for containerised international shipping. |
CPT | Carriage Paid To | The seller contracts for carriage to a named destination. | Seller: Pays main carriage cost; export formalities. Buyer: Risk transfers immediately when goods are handed to the first carrier. | Seller pays shipping but risk transfers early. |
CIP | Carriage and Insurance Paid To | Same as CPT, but the seller must also procure cargo insurance for the buyer. | Seller: Pays main carriage cost and insurance; export formalities. Buyer: Risk transfers immediately when goods are handed to the first carrier. | Seller offers max protection before final destination (cost and insurance are included). |
These terms are specifically for non-containerised ocean transport, often used for bulk or heavy cargo.
Incoterms® | Full Name | Brief Definition | Responsibilities | Use Case |
FAS | Free Alongside Ship | The seller delivers the goods alongside the vessel nominated by the buyer at the named port of shipment. | Seller: Delivery to the port quayside; export customs clearance. Buyer: Main carriage, risk from alongside the ship onwards. | Bulk cargo where goods are delivered next to the vessel. |
FOB | Free On Board | The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. | Seller: Delivery on board the vessel; export customs clearance. Buyer: Main carriage, risk once goods are loaded on board the vessel. | Traditional rule for ocean freight; common for general cargo. |
CFR | Cost and Freight | The seller pays the cost of transport to the named port of destination. | Seller: Pays cost of carriage; export customs clearance. Buyer: Risk transfers once goods are loaded on board the vessel. | Used when the seller manages shipping cost but not the risk or insurance. |
CIF | Cost Insurance and Freight | Same as CFR, but the seller must also procure insurance against the buyer's risk of loss or damage during carriage. | Seller: Pays cost of carriage and insurance; export customs clearance. Buyer: Risk transfers once goods are loaded on board the vessel. | Seller manages cost, risk transfers at origin, and insurance is mandatory. |
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 revision2 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.
Absolutely. The chosen Incoterms® directly determine who is responsible for providing the necessary documentation and paying the duties and taxes. If you agree to terms like EXW, the buyer handles the export customs clearance, which can be challenging for inexperienced overseas buyers. If you use DDP, the seller handles all import-related customs clearance and fees, resulting in a much smoother delivery for the customer.
For easy international shipping, open a DHL Express Business Account.
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