Incoterms Explained: Responsibilities in International Shipping
This guide answers common questions about Incoterms: what they are, who pays for shipping and customs, and how to choose the right term for your shipment.
Incoterms determine who pays for shipping, who handles customs, and who bears the risk if something goes wrong. Get them wrong, and you might face unexpected costs, disputes, or delays.
They're confusing because there are 11 different terms, each with specific rules about responsibilities. The same term can mean different things depending on whether you're shipping by sea, air, or land.
What Are Incoterms?
Incoterms are standardized terms that define responsibilities between sellers and buyers in international trade. They answer three questions: who pays for shipping, who handles customs, and who bears the risk during transport.
The International Chamber of Commerce (ICC) publishes these rules and updates them periodically. The current version is Incoterms 2020, which replaced Incoterms 2010.
Think of Incoterms as a contract clause that says "the seller is responsible until point X, then the buyer takes over." The point where responsibility transfers is called the "delivery point." Before that point, the seller pays costs and bears risks. After that point, it's the buyer's responsibility.
Incoterms don't cover everything. They don't specify who owns the goods, when payment is due, or what happens if goods are damaged. Those details go in your sales contract. Incoterms only cover the logistics of getting goods from seller to buyer.
Most Commonly Used Incoterms
While there are 11 Incoterms, most shipments use one of five: EXW, FOB, CIF, DAP, or DDP. Here's when to use each and what they mean in practice.
EXW (Ex Works)
EXW means the seller makes goods available at their location. The buyer handles everything from there: pickup, shipping, customs, delivery. The seller's responsibility ends when goods are ready for collection.
Seller responsibilities: Make goods available at their premises, provide basic packaging, allow buyer to inspect goods.
Buyer responsibilities: Arrange pickup, handle all shipping costs, clear export customs (if required), clear import customs, pay all duties and taxes, handle delivery to final destination.
When to use: When the buyer has logistics expertise and wants maximum control. Common in B2B transactions where buyers have established shipping relationships.
Watch out for: Export customs clearance. Under EXW, the buyer handles export customs even though they're in a different country. This can be complicated if the buyer doesn't have a presence in the seller's country. Many sellers end up helping with export clearance even though they're not required to.
FOB (Free On Board)
FOB applies only to sea freight. The seller delivers goods to the port and loads them onto the ship. Once goods cross the ship's rail, responsibility transfers to the buyer.
Seller responsibilities: Get goods to the port, clear export customs, load goods onto the ship, pay costs up to the ship's rail.
Buyer responsibilities: Pay for sea freight, handle import customs, pay duties and taxes, handle delivery from destination port.
When to use: Common in sea freight shipments, especially when buyers want to control shipping costs and carrier selection.
Watch out for: FOB only works for sea freight. If you're shipping by air, use FCA (Free Carrier) instead. Also, "FOB destination" isn't a valid Incoterm. FOB always means the origin port.
CIF (Cost, Insurance, and Freight)
CIF also applies only to sea freight. The seller pays for shipping and insurance to the destination port, but responsibility transfers when goods cross the ship's rail at origin.
Seller responsibilities: Get goods to origin port, clear export customs, pay for sea freight, pay for insurance to destination port, load goods onto ship.
Buyer responsibilities: Handle import customs, pay duties and taxes, handle delivery from destination port, bear risk during sea transport (even though seller pays for it).
When to use: When buyers want sellers to handle shipping arrangements but are comfortable managing import customs themselves. Less common than it used to be, as DAP has become more popular.
Watch out for: The risk transfer point. Even though the seller pays for shipping and insurance, the buyer bears the risk if goods are damaged during sea transport. This confuses many people. Also, CIF only covers basic insurance. Buyers often need additional coverage.
DAP (Delivered At Place)
DAP works for any transport mode. The seller delivers goods to a named destination, but the buyer handles import customs and pays duties.
Seller responsibilities: Get goods to the named destination, clear export customs, pay all shipping costs, handle delivery to destination.
Buyer responsibilities: Clear import customs, pay duties and taxes, unload goods (if needed), handle delivery from destination point.
When to use: Very common for e-commerce and B2B shipments. Works with FedEx, DHL, UPS, and other carriers. Good balance between seller and buyer responsibilities.
Watch out for: Specify the exact destination clearly. "DAP New York" could mean the airport, a warehouse, or a street address. Be specific. Also, the buyer must be ready to handle import customs. If they can't, use DDP instead.
DDP (Delivered Duty Paid)
DDP works for any transport mode. The seller handles everything: shipping, export customs, import customs, duties, taxes, and delivery to the final destination.
Seller responsibilities: Everything. Shipping, export customs, import customs, duties, taxes, delivery to final destination.
Buyer responsibilities: Receive goods at the destination. That's it.
When to use: When buyers want a simple experience and sellers have the ability to handle import customs. Common in e-commerce where sellers want to offer "all-inclusive" pricing.
Watch out for: Sellers need to understand import regulations in the buyer's country. This can be complex. Also, sellers need a way to pay duties and taxes in the destination country, which may require local representation or a customs broker. If something goes wrong with customs, the seller is responsible, not the buyer.
Choosing the Right Incoterm
The right Incoterm depends on your situation. Here's how to think about it for different scenarios.
E-commerce Shipments
For e-commerce, DAP or DDP work best. DAP is common because it's simple: sellers handle shipping, buyers handle customs. DDP is used when sellers want to offer "duties included" pricing, but it requires sellers to understand import regulations in every destination country.
Avoid EXW for e-commerce. Buyers typically don't have logistics expertise, and the complexity causes problems. FOB and CIF don't work because e-commerce usually ships by air or express courier, not sea freight.
Sample Shipments
For samples, DAP is usually the simplest. The seller ships the sample, and the buyer handles import customs. Since samples often have low or zero value, customs clearance is usually straightforward.
DDP can work if the seller wants to handle everything, but it's often unnecessary for low-value samples. EXW might work if the buyer has a freight forwarder who can handle pickup and shipping.
B2B Transactions
B2B transactions use all Incoterms depending on the relationship. EXW is common when buyers have logistics teams. FOB is standard for sea freight. DAP works well for air freight and express courier shipments.
The choice often comes down to who has better logistics capabilities and who wants to control costs. Larger buyers often prefer EXW or FOB to control shipping. Smaller buyers may prefer DAP or DDP for simplicity.
FedEx, DHL, UPS Shipments
For express courier shipments (FedEx, DHL, UPS), DAP or DDP are the practical choices. These carriers handle door-to-door delivery, which aligns with DAP and DDP.
FOB and CIF don't apply because they're for sea freight only. EXW could work, but it's uncommon because express couriers typically handle the full shipping process. When using these carriers, DAP is the default choice unless you specifically want DDP.
Common Mistakes with Incoterms
These mistakes cause disputes, unexpected costs, and delays.
Mistake 1: Incoterm and Transport Mode Mismatch
FOB and CIF only work for sea freight. If you're shipping by air, use FCA or DAP instead. Using FOB for an air shipment creates confusion about responsibilities.
Similarly, EXW works for any transport mode, but it's rarely used for express courier shipments because couriers handle the full process. Using EXW with FedEx or DHL creates unnecessary complexity.
Mistake 2: Missing Incoterm on Commercial Invoice
Customs needs to know the Incoterm to understand who's responsible for duties and taxes. If the invoice doesn't specify the Incoterm, customs may assume the buyer is responsible for everything, which can cause delays or incorrect duty assessments.
Always include the Incoterm in the "Terms of Sale" field on your commercial invoice. Be specific: "DAP New York, USA" is better than just "DAP."
Mistake 3: Assuming Incoterm Covers Everything
Incoterms only cover logistics responsibilities. They don't specify payment terms, ownership transfer, or what happens if goods are damaged. Those details need to be in your sales contract.
For example, DDP means the seller pays duties, but it doesn't mean the buyer pays the seller for those duties. The sales contract needs to specify whether duties are included in the price or charged separately.
Mistake 4: Not Specifying the Delivery Point
Incoterms require a named place. "DAP" isn't enough. You need "DAP [specific address or location]." Without a specific location, there's confusion about where responsibility transfers.
For DAP and DDP, specify the exact address. For FOB and CIF, specify the port name. For EXW, specify the seller's address.
How Incoterms Appear on a Commercial Invoice
On a commercial invoice, the Incoterm appears in the "Terms of Sale" field. This field tells customs who's responsible for shipping costs and duties.
The format should be: "[Incoterm] [Named Place]". For example:
- DAP New York, USA
- DDP London, UK
- FOB Port of Los Angeles, USA
- EXW Shanghai, China
Customs uses this information to determine who should pay duties. If the invoice says DDP, customs knows the seller has already paid duties. If it says DAP, customs knows the buyer needs to pay.
Some invoices also include the Incoterm version (e.g., "DAP New York, USA (Incoterms 2020)"), but this isn't required. The version matters for legal purposes, but customs usually doesn't need it on the invoice.
How Tools Like DocInvo Can Help
Invoice generators like DocInvo include Incoterm fields in their templates, which helps ensure the Incoterm is included on your commercial invoice. The structured format reduces the chance of forgetting to specify the delivery point.
Having a dropdown of common Incoterms can also help you choose the right one if you're unsure. However, the choice of which Incoterm to use should be based on your sales agreement, not the tool.
The main benefit is consistency. If you're creating multiple invoices, using a template ensures the Incoterm is always in the same format and location, which makes it easier for customs to find and process.
Conclusion
Incoterms define who pays for shipping and who bears risks during transport. The five most common terms—EXW, FOB, CIF, DAP, and DDP—cover most international shipments. Choosing the right one depends on your transport mode, who has logistics expertise, and who wants to control costs.
Common mistakes include using sea-freight terms (FOB, CIF) for air shipments, forgetting to specify the delivery point, and assuming Incoterms cover everything in your sales contract. Avoid these by matching the Incoterm to your transport mode and being specific about the named place.
Always include the Incoterm on your commercial invoice in the "Terms of Sale" field. Customs needs this information to process your shipment correctly.
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