What are Incoterms (International Commercial Terms)?

Incoterms are a set of 11 internationally recognized trade rules published by the International Chamber of Commerce that define buyer and seller responsibilities for costs, risks, and logistics in international trade. These three-letter terms spell out who pays for shipping, who arranges insurance, who handles customs responsibilities, and where risk transfer happens. They appear in sales contracts and commercial invoices across more than 140 countries, and according to the ICC, Incoterms appear in roughly 90% of international sales contracts.

For importers, exporters, and anyone involved in international trade, the Incoterm on a contract directly affects shipping and insurance costs, customs duties, landed cost, customs valuation, and compliance. This guide explains what Incoterms are, how they work, how the 11 rules differ, which terms are used most often, and how to choose the right one for a transaction.

Important: Incoterms do not govern ownership transfer, payment terms, or the sales contract itself. They only address costs, risks, and logistics responsibilities.

What Are Incoterms?

The ICC first published Incoterms in 1936 to reduce confusion in global trade. The current version, Incoterms 2020, took effect January 1, 2020 and is available in more than 30 languages.

Incoterms 2020 includes 11 rules in two categories. Seven apply to any transport mode. Four apply exclusively to sea and inland waterway transport. Each rule is a three letter trade term followed by a named location (for example, “FOB Los Angeles”). This bypasses language barriers and reduces legal disputes by detailing each party’s obligations.

For US importers, the Incoterm on the invoice determines what gets included in customs value declared to CBP. Choosing the right term is a compliance decision as much as a commercial one.

How Do Incoterms Work?

Every Incoterm answers three questions: who pays, who arranges logistics, and who bears the risk.

Cost Allocation

Incoterms split costs between buyer and seller at defined points. These costs include freight costs, transportation costs, insurance costs, packing costs, customs clearance fees, and customs duties. Under EXW, the buyer pays for everything from the seller’s loading dock onward. Under DDP, the seller absorbs all costs incurred through final delivery, including import duties in the buyer’s country.

Risk Transfer

Risk transfer is the point where responsibility for loss or damage shifts from seller to buyer. Each Incoterm defines this precisely. Under FOB, risk transfers when goods are loaded on board the vessel. Under CPT (carriage paid to), the seller pays freight to the destination, but risk transfers at handover to the first carrier. This split between cost responsibility and risk transfer catches many importers off guard.

Customs and Shipping Responsibilities

Incoterms assign customs responsibilities. Under most terms, the seller handles export clearance while the buyer handles import clearance. Under DDP, the seller takes on import customs clearance, navigating government regulations in the importing country. For US imports, this means working with a licensed customs broker and ensuring proper HTS classification.

The 11 Incoterms at a Glance

The table below covers all 11 Incoterms 2020 rules. The six major Incoterms used most frequently are marked with an asterisk.

Incoterm	Full Name	Transport Mode	Who Pays Freight?	Risk Transfers At	Seller Arranges Insurance?
EXW*	Ex Works	Any	Buyer	Seller’s premises	No
FCA*	Free Carrier	Any	Buyer	Handover to carrier	No
CPT	Carriage Paid To	Any	Seller	Handover to carrier	No
CIP	Carriage and Insurance Paid To	Any	Seller	Handover to carrier	Yes (all-risk)
DAP	Delivered at Place	Any	Seller	Destination (before unloading)	No
DPU	Delivered at Place Unloaded	Any	Seller	Destination (after unloading)	No
DDP*	Delivered Duty Paid	Any	Seller	Destination (before unloading)	No
FAS	Free Alongside Ship	Sea/inland waterway	Buyer	Alongside vessel at port	No
FOB*	Free on Board	Sea/inland waterway	Buyer	On board vessel	No
CFR*	Cost and Freight	Sea/inland waterway	Seller	On board vessel	No
CIF*	Cost, Insurance, and Freight	Sea/inland waterway	Seller	On board vessel	Yes (minimum cover)

EXW (Ex Works)

EXW places maximum obligation on the buyer. The seller makes goods available at their premises. The buyer arranges pickup, export clearance, international shipping, and import customs clearance. For cross border trade, EXW can complicate matters because the buyer must handle export formalities in the seller’s country.

Free Carrier (FCA)

FCA requires the seller to deliver goods to a carrier named by the buyer. If delivery happens at the seller’s premises, the seller loads the goods. FCA has largely replaced FOB in modern practice for containerized freight.

Carriage Paid To (CPT)

Under CPT, the seller pays for carriage to a named destination. Risk transfers to the buyer at handover to the first carrier. The seller’s cost responsibility extends further than the seller’s risk responsibility.

CIF (Cost, Insurance, and Freight)

CIF covers the seller’s payment of cost, insurance, and freight to the destination port. Insurance paid by the seller must meet minimum Institute Cargo Clauses (C). The seller must obtain the cover and provide the insurance policy to the buyer as part of the shipping documents. CIF applies only to sea and inland waterway transport and is widely used in commodity trading. In India, duty is calculated against the CIF value of imported merchandise.

Delivered Duty Paid (DDP)

DDP places maximum obligations on the seller. The seller covers all transportation costs, customs clearance, customs duties, and taxes in the importing country. The buyer’s only responsibility is unloading. DDP is the simplest option for importers who want one price. Sellers must account for all actual costs in their selling price, including duties that may fluctuate.

FOB, FAS, CFR, CIP, DAP, and DPU

FOB (Free on Board) requires the seller to deliver goods on board the vessel. Risk transfers at loading. FOB is commonly misused for air freight despite being designed for sea transport. In South Africa, duties are calculated against the FOB value.

FAS (free alongside ship) is used for bulk cargo in sea and inland waterway transport. Risk transfers when goods are placed alongside the vessel.

CFR works like CIF without insurance. CIP mirrors CPT but requires all risk insurance cover under Institute Cargo Clauses (A). DAP requires the seller to cover all carriage expenses to the destination. DPU goes further: the seller must unload goods at the destination, bearing all risks until unloading is complete.

How Incoterms Affect Customs Valuation and Landed Cost

Customs Valuation Methods

The customs value of imported merchandise determines how much you pay in customs duties. Under US law (19 CFR Part 152, Subpart E), CBP applies six methods in a strict hierarchy:

1. Transaction value (the price paid or payable for the goods)
2. Transaction value of identical merchandise
3. Transaction value of similar merchandise
4. Deductive value (unit price sold in the greatest aggregate quantity to an unrelated buyer, minus certain costs)
5. Computed value (raw materials + general expenses + profit, calculated using data from the seller’s country)
6. Fallback value (a reasonable method based on available information)

Transaction value is used in the vast majority of entries. Transactions between related persons receive extra scrutiny. CBP may reject transaction value if the relationship influenced the price paid, requiring the importer to show the value closely approximates a test value from unrelated party sales at about the time of export.

The computed value method builds customs value from raw materials, production costs, packing costs, general expenses, and profit margins typical for the same class of goods. It requires sufficient information from the foreign producer and is rarely used.

Landed Cost and the Incoterms Connection

Your total landed cost is the complete expense of getting a product from seller to warehouse. The landed cost formula:

Landed cost = product price + freight costs + customs duties + insurance costs + handling + regulatory fees

The Incoterm on your purchase order determines which costs are embedded in the price paid and which hit your books separately. Under CIF, the invoice price includes freight and insurance. Under FOB, those costs are yours to arrange.

This distinction matters for customs valuation. If you buy FOB, the freight and insurance you pay separately may still need to be added to the transaction value when calculating customs duties. If you buy CIF, those costs are already in your declared value. Getting this wrong means overpaying duties or triggering audits.

The landed cost is not the same as COGS. COGS may include product cost and freight, but it does not always capture customs duties, insurance, handling fees, or port charges. Total landed cost captures all of these.

Choosing the Right Incoterm

• For importers: DDP offers the simplest experience but gives you less control over freight costs and customs compliance. FCA or FOB give you more control and often lower total costs if you have strong logistics and customs visibility.
• For exporters: EXW minimizes responsibilities but creates friction for international buyers. FCA is the more practical choice, especially for containerized cargo.
• For ocean freight: Use FOB, CFR, or CIF. For air freight and multimodal shipments, use FCA, CPT, CIP, or DAP. Parties should clearly express their intentions when modifying standard Incoterms. Variations like “FOB plus insurance” must be spelled out in the sales contract.

Frequently Asked Questions (FAQs)

What are Incoterms? 

Incoterms are 11 standardized trade terms from the International Chamber of Commerce that define cost, risk, and responsibility between buyers and sellers in international trade.

What is the difference between FOB and CIF? 

Under FOB, risk and cost transfer when goods load on board the vessel. Under CIF, the seller also pays freight and insurance to the destination port, though risk still transfers at loading.

What is the difference between DDP and DAP? 

DAP requires the seller to deliver goods to the destination but the buyer handles import customs clearance and duties. DDP means the seller handles everything, including customs duties.

How do Incoterms affect landed cost calculations? 

The Incoterm determines which costs sit inside the invoice price and which the buyer pays separately. This directly impacts how you calculate landed cost and declare customs value.

Is landed cost the same as COGS?

No. Landed cost includes product price, freight, customs duties, insurance, handling, and regulatory fees. COGS is an accounting term that may not capture all of these.

Does the USA use Incoterms? 

Yes. US customs regulations reference transaction value, which is shaped by the Incoterm on the commercial invoice. Importers should maintain a valid customs bond tied to their estimated duties.