What Is Incoterms?
Also known as: Incoterms 2020, international commercial terms, FOB, EXW, DAP
Definition
Incoterms are standard trade terms published by the International Chamber of Commerce that define who arranges and pays for transport, insurance and customs, and where risk passes from seller to buyer. Examples are EXW, FOB, CIF, DAP and DDP.
Incoterms Explained
Each Incoterm is a three-letter code with a named place, for example FCA Chicago or DAP Rotterdam. The code answers three questions: who contracts and pays for carriage, who handles export and import clearance, and at which point risk of loss passes.
Incoterms 2020 has eleven rules. Some apply to any mode (EXW, FCA, CPT, CIP, DAP, DPU, DDP) while others are for sea and inland waterway only (FAS, FOB, CFR, CIF). Using FOB for containerized goods is a classic mistake, because FCA fits better when the seller hands over at a terminal.
ERPs store the Incoterm on the sales order, purchase order and shipment, together with a named place. SyteLine has terms and ship-via fields on orders, Infor LN carries delivery terms on orders, and NetSuite offers an Incoterm field on transactions. The value flows to documents such as the commercial invoice and BOL, and to landed cost calculations.
Incoterms do not transfer title, set payment terms or replace a contract. They are only part of the sales terms.
Why It Matters
- Wrong terms cause disputes over damage claims, freight cost and customs liability.
- Landed cost and margin depend on which party pays freight and duty.
- Export documents and filings require correct terms and named place.
- Insurance coverage depends on who bears risk at each leg.
In Practice
An exporter sells at EXW factory. The buyer arranges pickup and bears risk from the dock, but the seller may still need to supply export data. If the same seller moves to DDP, it now pays freight, clears import and pays duty, so the quote must include those costs or margin turns negative.
Frequently Asked Questions
How many Incoterms are there?
The 2020 edition has eleven rules, grouped by mode of transport. Always state the edition and the named place in the contract.
What is the difference between FOB and FCA?
FOB applies to sea transport and passes risk when goods are on board the vessel. FCA passes risk when goods are handed to the buyer's carrier at a named place, which suits containers.
Do Incoterms say who owns the goods?
No. They cover delivery, costs and risk. Ownership transfer and payment are governed by the contract and applicable law.
Related Terms
Landed Cost
Landed cost is the total cost of bringing purchased goods into inventory, combining the supplier price with freight, insurance, customs duty, tariffs, brokerage, and handling, so inventory is valued at what the material truly cost to acquire.
Bill of Lading (BOL)
A bill of lading (BOL) is the document a carrier issues to confirm it received goods for shipment. It acts as a receipt, a contract of carriage and, in some forms, a document of title. ERPs print it from the shipping transaction.
EAR (Export Administration Regulations)
EAR (Export Administration Regulations) is the US Commerce Department regulation, at 15 CFR Parts 730-774, that controls the export, reexport, and transfer of dual-use commercial items, software, and technology through the Commerce Control List.
ITAR
ITAR (International Traffic in Arms Regulations) is the US State Department regulation, at 22 CFR Parts 120-130, that controls the export of defense articles, defense services, and related technical data listed on the United States Munitions List.
Third-Party Logistics (3PL)
Third-party logistics (3PL) means outsourcing warehousing, transportation or order fulfillment to a specialist provider. The manufacturer's ERP stays the system of record for orders and cost, and exchanges inventory, shipment and receipt data with the 3PL.
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