What are Incoterms?

Understanding Incoterms in 2025

Incoterms, short for International Commercial Terms, are the universal language of international trade. They establish clear guidelines for delivery, risk, and cost allocation between trading parties. These terms have evolved to meet the changing needs of global commerce. The most recent version, Incoterms 2020, replaced the previous 2010 edition and is the current standard that businesses must follow in 2025.

Understanding Incoterms 2020 is crucial for companies operating in the global marketplace because these terms directly impact contract negotiations, shipping costs, insurance requirements, and legal liability. In today’s climate of tariff uncertainties, Incoterms help businesses navigate cross-border transactions with greater confidence and less financial risk. Modern contract management software often incorporates Incoterms to ensure compliance and reduce disputes.

This comprehensive guide will explore the Incoterms definition, compare different versions, examine their advantages and limitations, and provide detailed explanations of each term to help businesses make the right decisions about international trade agreements.

• Understanding Incoterms in 2025
• Incoterms in 2010 vs 2020
• Advantages and Disadvantages of Incoterms
• Key Categories of Incoterms
• Incoterms for Any Mode of Transport
• Incoterms for Sea and Inland Waterway Transport
• How to Choose the Right Incoterms
• What Do Incoterms Not Cover?
• Streamline Incoterm Compliance with Icertis

Incoterms in 2010 vs 2020

The transition from Incoterms 2010 to 2020, published by the International Chamber of Commerce (ICC), introduced several significant changes that businesses must understand for effective contract lifecycle management. The most important update was the replacement of DAT (Delivered at Terminal) with DPU (Delivered at Place Unloaded), which expanded delivery options beyond traditional terminals to include any agreed location.

Incoterms 2020 also introduced enhanced security requirements, reflecting the increased focus on supply chain security in international trade. The updated version provides clearer guidance on insurance coverage levels, particularly for CIP and CIF terms, requiring higher insurance coverage to better protect buyers. Additionally, the 2020 revision improved clarity around bill of landing requirements and expanded explanatory notes to help traders understand when and how to use each term appropriately.

Businesses must use Incoterms 2020 to minimize legal and financial risks, as outdated terms can lead to disputes, unexpected costs, and compliance issues. Using current terms ensures that all parties have the same understanding of their obligations and reduces the likelihood of costly misunderstandings during international transactions.

Advantages and Disadvantages of Incoterms 

Using Incoterms offers significant benefits for international trade. However, businesses must also understand their limitations to avoid potential pitfalls, especially in today’s climate of shifting tariff responsibilities. Companies must consult with their legal teams to craft the precise terms that will help them stay on top of changing market conditions, reduce risks, and increase operational efficiency.

The main advantages of Incoterms are:

• Standardized communication: Eliminates ambiguity between international trading partners by providing universally recognized terminology that means the same thing regardless of language or location.
• Clear risk allocation: Defines precisely when responsibility and risk transfer from seller to buyer, helping both parties understand their liability exposure throughout the shipping process.
• Cost transparency: Establishes who pays for transportation, insurance, customs duties, and handling charges, enabling accurate budget planning and pricing decisions.
• Reduced legal disputes: Well-defined obligations minimize misunderstandings and disagreements that could lead to costly litigation or damaged business relationships.
• Smoother customs clearance: Standardized terms help customs officials understand the nature of transactions more efficiently and apply the appropriate procedures.
• Better insurance planning: Clear risk allocation helps businesses determine the appropriate coverage levels and avoid gaps or overlaps in protection.

The potential drawbacks of Incoterms are:

• Complexity for newcomers: The nuances between similar terms can overwhelm new traders who may struggle to understand which term best fits their specific situation.
• Misapplication risks: Using inappropriate terms can result in unexpected costs, legal exposure, or operational complications that could have been avoided with proper selection.
• Limited scope: Incoterms only address delivery, risk, and cost allocation. They don't cover payment terms, product quality, or breach of contract remedies, which must be handled through separate purchase agreement provisions and terms and conditions.

Key Categories of Incoterms

Incoterms are organized into two main categories based on the mode of transport used for shipping goods. Understanding these categories helps businesses select the most suitable terms for their specific shipping requirements and reduces the risk of choosing incompatible terms that could lead to legal complications.

Rules for Any Mode of Transport

These Incoterms apply to all types of transportation, making them the most flexible options for modern international trade. These terms account for the complexity of supply chains, where goods often travel via multiple transportation modes before reaching their final destination.

Businesses appreciate this versatility because it simplifies contract negotiations and reduces the need to specify different terms for different portions of the shipping journey.

Rules for Sea and Inland Waterway Transport

These terms are specifically designed for situations where goods are delivered directly to the ship's rail or loaded onto the vessel, making them most appropriate for bulk commodities, heavy machinery, or other cargo that cannot be containerized.

Incoterms for Any Mode of Transport

The any-mode terms include EXW, FCA, CPT, CIP, DAP, DPU, and DDP, each offering different levels of seller responsibility and buyer control. These terms work well for containerized shipments, air freight, and land transport, where the specific vessel or vehicle may change during transit. Companies using contract AI solutions often prefer these terms because they provide clear, standardized language that automated systems can process effectively.

These terms progress from minimal seller responsibility (EXW) to maximum seller responsibility (DDP), with various intermediate options that balance obligations between the parties. Contract intelligence systems enable businesses to analyze which terms are most effective for specific trading relationships and types of shipments.

EXW (Ex Works)

EXW places minimal responsibility on the seller, who only needs to make the goods available at their premises or another specified location. The buyer assumes all risks and costs from the moment goods are ready for collection, including export clearance, transportation, insurance, and import procedures. This term gives buyers maximum control over the shipping process, but also places the greatest burden on them.

FCA (Free Carrier)

FCA is when the seller delivers goods to a carrier chosen by the other party at a specified location, which can be the seller's premises, a terminal, or another agreed-upon point. The seller handles export clearance and bears risk until goods are handed over to the designated carrier. This term provides a good balance of responsibilities and is often preferred over EXW because it clarifies the delivery point more precisely.

CPT (Carriage Paid To)

CPT is when the seller arranges and pays for transportation to the named destination. The risk transfers to the buyer when goods are handed over to the first carrier. This creates a situation where the seller pays for shipping, but the buyer bears the risk during transit, making insurance considerations particularly important.

CIP (Carriage and Insurance Paid To)

CIP builds on CPT by requiring the seller to also arrange and pay for insurance covering the buyer's risk during transportation. Under Incoterms 2020, CIP requires minimum Institute Cargo Clauses (A) coverage, providing broader protection than the basic coverage required for CIF terms. This makes CIP attractive for valuable or sensitive cargo where comprehensive insurance is essential.

DAP (Delivered at Place)

DAP requires the seller to deliver goods ready for unloading at the named destination, bearing all costs and risks until that point, except for import clearance and duties. The buyer's main responsibilities are import procedures, duty payments, and unloading the goods from the arriving transport vehicle.

DPU (Delivered at Place Unloaded)

DPU is where the seller is responsible for unloading goods at the destination. The seller bears all costs and risks until goods are unloaded at the named place, which can be a terminal, warehouse, or other agreed location. The buyer handles import clearance and duties, but receives goods that are ready for immediate collection.

DDP (Delivered Duty Paid)

DDP comes with maximum seller responsibility, requiring the seller to deliver goods cleared for import and ready for the buyer to collect. The seller handles all export procedures, transportation, insurance, import clearance, and duty payments. This term offers buyers the ultimate convenience but places significant obligations and risks on sellers.

Incoterms for Sea and Inland Waterway Transport

Four Incoterms apply exclusively to sea and inland waterway transport: FOB, CFR, CIF, and FAS. Maritime terms often involve concepts like "ship's rail," which reflect traditional shipping practices, although some of these have been updated in recent revisions to better reflect modern port operations. Contract analytics software can help businesses track the performance of different Incoterms to determine which works best for specific trade routes and cargo types.

FOB (Free on Board)

FOB requires the seller to deliver goods by placing them on board the vessel at the named port of shipment, with the risk transferring to the buyer once the goods pass the ship's rail. The buyer arranges and pays for ocean freight, insurance, and all subsequent transportation, while the seller handles export clearance and delivery to the ship. This term is widely used in bulk commodity trading and container shipping, where buyers want control over ocean freight arrangements and have established relationships with shipping lines or freight forwarders.

CFR (Cost and Freight)

CFR requires the seller to arrange and pay for ocean transportation to the named destination port. However, risk transfers to the buyer when goods are loaded onto the vessel. This creates a split between cost responsibility and risk, with sellers paying for shipping while buyers assume the risk of loss or damage during transit. CFR is common in bulk trade, where sellers have better access to shipping capacity or preferential freight rates, but buyers want to control their insurance arrangements based on their own risk assessment.

CIF (Cost, Insurance, and Freight)

CIF builds on CFR by requiring the seller to also arrange marine insurance covering the buyer's risk during ocean transport, though, under Incoterms 2020, this requires only minimum Institute Cargo Clauses (C) coverage. The seller pays for ocean freight and basic insurance, while the buyer assumes risk from the point of loading and handles import procedures at the destination. CIF is popular for large-volume shipments and traditional bulk shipping because it provides buyers with basic insurance coverage while allowing sellers to leverage their relationships with insurers to obtain competitive rates.

FAS (Free Alongside Ship)

FAS requires the seller to place goods next to the ship at the specified departure port, typically putting them on the quay or dock where they can be loaded by the ship's equipment. Risk transfers when the goods are placed near the ship, and the seller is responsible for export clearance up to the point of dockside delivery. This term has limited but specific use cases, working best for heavy or bulky cargo that requires specialized loading equipment and procedures, which are better managed by the buyer or shipping line.

How to Choose the Right Incoterms

Selecting the appropriate Incoterms requires careful consideration of several key factors, including your company's logistics capabilities, risk tolerance, cost control preferences, and familiarity with the destination markets. The right choice can significantly impact your total costs, risk exposure, and operational efficiency.

• Assess your logistics experience: Choose terms that match your international shipping capabilities, rather than overextending into unfamiliar territory that could lead to costly mistakes.
• Consider transport method requirements: Use maritime-specific terms (FOB, CFR, CIF, FAS) only for actual ship transport while choosing any-mode terms for containerized, air, or multimodal shipments.
• Calculate total delivered costs: Compare the complete cost under different terms, including transportation, insurance, duties, and handling charges, rather than focusing only on the quoted price.
• Match terms to risk tolerance: Choose terms that place risk responsibility with the party best equipped to manage and insure against potential losses during transit.
• Review your insurance capabilities: Select terms that align with your ability to obtain appropriate coverage at competitive rates, especially for high-value or sensitive cargo.
• Analyze payment timing preferences: Coordinate Incoterm selection with your cash flow needs and payment term negotiations to optimize working capital management.
• Consider customs expertise: Assign import/export clearance responsibilities to the party with better knowledge of local regulations and established relationships with customs brokers.

What does Incoterms mean for your specific business? It depends largely on these operational capabilities and strategic preferences, making careful evaluation essential for successful international trade.

What Do Incoterms Not Cover?

While Incoterms address delivery, risk allocation, and cost responsibility, they don't cover many other important aspects of international sales contracts. Payment terms, including when and how buyers must pay, are completely outside the scope of Incoterms and must be specified separately in sales agreements. Similarly, Incoterms don't address product quality standards, warranty provisions, or remedies for defective goods.

Incoterms also don't cover breach of contract situations, force majeure events, or dispute resolution procedures. Transfer of title and ownership may follow different rules than risk transfer, depending on applicable laws. Currency of payment, interest on late payments, and banking arrangements require separate agreements between the parties.

Other excluded areas include product liability, intellectual property rights, compliance with trade regulations beyond basic import/export clearance, and specific documentation requirements beyond what's needed for customs clearance. Companies must address these issues through comprehensive sales contracts that incorporate Incoterms as just one element of the overall agreement.

Streamline Incoterm Compliance with Icertis

Managing Incoterms across multiple contracts and trading relationships can become complex, especially for companies that handle numerous international transactions. The Icertis platform helps businesses automate Incoterm selection, monitor compliance, and ensure consistent application across their contract portfolio. The platform's AI-powered analysis can identify potential risks and inconsistencies in Incoterm usage while providing insights into how different terms perform across various trade routes and partner relationships.

The Icerits platform also integrates Incoterm management with broader contract lifecycle processes, ensuring that shipping terms align with payment conditions, delivery schedules, and risk management requirements. With advanced analytics and automation, businesses can more easily manage Incoterm compliance while improving accuracy and reducing the risk of disputes in their international trade operations.

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