Incoterms® are an essential part of international trade, clarifying responsibilities between buyer and seller and helping goods to cross borders smoothly. But there’s a lot more to them than that.

Used correctly, Incoterms® are also a tool for business success. Whether that’s helping conclude negotiations more quickly, enabling you to manage risks and costs, or giving you an edge against competitors, employing the right strategies with them can bring big benefits to your business.

But what does that involve? And what else do you need to know about Incoterms®? Follow this masterclass to find out.

Incoterms®, or International Commercial Terms, are a set of trade terms published by the International Chamber of Commerce. Each is comprised of three letters, and they are used to determine which party is responsible for specific elements of a shipment – such as the costs and risks – at a given point in its journey.

It’s a good idea to use Incoterms® on all your shipments, as they help to provide clarification (and reduce misunderstandings) on a range of issues including where the goods should be delivered, who’s liable for loss or damage at specific points of the journey, and who’s responsible for paying import duties and taxes. They are agreed by the buyer and the seller before the goods are shipped and should be included on the commercial invoice.

However, it’s important to realise that they don’t cover all aspects of a shipping contract. Factors such as transfer of ownership, payment terms, and any additional conditions of sale are not included within the Incoterms®, so these must be agreed separately.

There are 11 terms in total, which are updated periodically. The last update was made in 2020. The table below shows each term and indicates whether the buyer or seller is responsible for shipping costs*, risk and/or insurance at key points along the journey.

*Customs fees such as duties and taxes are only the seller’s responsibility when using DDP
**Sea and inland waterways only

The seller is responsible for making the goods available for collection, with all responsibilities transferring to the buyer once they’ve been collected.

Similar to DAP, the seller is responsible for all costs up to the point of delivery at the named place of destination. However, with DDP, the seller is also responsible for import customs clearance, including paying any applicable duties and taxes.

The seller is responsible for delivering the goods cleared for export to a named location or carrier, chosen by the buyer. Once done, responsibility passes to the buyer.

The seller bears all responsibilities until the goods are placed alongside the buyer’s ship, at which point the buyer assumes all responsibilities. The seller, however, must ensure the goods are cleared for export.

The seller is responsible for costs up to the place of destination. This is negotiated by the two parties but could be a port or airport, or the buyer’s premises. However, risk and the responsibility for obtaining any insurance transfers to the buyer upon delivery to the main carrier in the export country.

Under this Incoterm®, the seller is responsible until the goods are loaded onto the buyer’s ship, at which point all responsibilities pass to the buyer. The seller is responsible for export clearance.

This is similar to CPT but with the additional requirement for the seller to obtain and pay for insurance to the named place of destination.

The seller is responsible for delivering the goods on board the vessel and cleared for export, and must also pay the cost for them to be shipped to the destination port. The buyer assumes risk once the goods are delivered onto the vessel, however (including if insurance is required), and all other responsibilities once they arrive at the destination port.

The seller is responsible for all costs, risk and insurance up to the point of delivery at the buyer’s premises or other named place of destination. However, import clearance, including payment of any duties and taxes, is the buyer’s responsibility.

Similar to CFR, under this Incoterm® the seller is also responsible for arranging insurance for the goods until they reach the destination port.

The seller is responsible for costs, risk and insurance to the point of delivery, while also bearing responsibility for unloading the goods once they have arrived at their destination. As with DAP, any customs duties and taxes are the responsibility of the buyer.

As Incoterms® are used and recognised all over the world, they can act as an easily understood framework for negotiations and help you to come to a deal more quickly.

International shipping attracts a range of costs, and you can use Incoterms® to manage your exposure to them. Firstly, they help to ensure you (or your customer) don’t end up being responsible for something you weren’t expecting, as well as enabling you to plan your overall costs more accurately.

But it’s not simply about trying to reduce your exposure to costs. In some cases, it may be more advantageous to take responsibility, as that enables you to manage costs to suit you. A good example of this is if you are importing goods from a supplier. If you are responsible for shipping costs, you may be able to select a route or carrier that’s more cost-effective than your supplier would have done. As they would likely add their costs to your invoice, taking responsibility for shipping could be the best approach.

On the other hand, the supplier you are buying from may have better relationships with transportation providers than you do, which could give it access to better deals. And you having to arrange shipping, and delivery also comes with its own costs in terms of time and effort. Whatever you agree, it’s important to consider the cost implications fully.

Incoterms® are key in managing your exposure to risk. It’s important to understand where in the shipping process you become liable for the goods, as this enables you to evaluate the risk and plan accordingly.

For example, if goods are lost, damaged or stolen on route, the specific Incoterms® used will determine which party is responsible. If it is your supplier, they will be responsible for making it right. If it’s you, you will likely still have to pay for the goods.

Similarly, if you are the seller and there are unforeseen delays on route, your customer may demand compensation if you are responsible for shipping and carry the risk. Another scenario could see you, as a buyer, no longer wishing to accept goods from your supplier if shipping delays meant they didn’t meet the agreed delivery date. Your ability to do this would likely depend on the Incoterms® you had agreed.

While risk management is closely related to cost controls, it should be considered separately – not least because for some Incoterms® the transfer of responsibility for costs and risk happens at different times. And when agreeing on an Incoterms®, it’s important to remember that – while carriers will pay compensation in certain circumstances – this can be limited and may not cover the full price of the goods. It’s important that your insurance levels are sufficient for the amount of risk you are exposed to.

Taking responsibility for shipping may enable you to optimise your supply chain, as it could allow you to select routes, ports, airports or carriers that are preferable or advantageous to your business.

For example, if you are aware of particular delays on one route, or high costs at a particular port, then owning the responsibility may enable you to avoid these so the goods arrive more quickly and more cost-effectively.

In addition, being in control of the process gives greater supply chain visibility, which may allow you to hold less buffer stock, make better planning decisions, or identify (and potentially mitigate) any problems that occur on route.

There are several ways in which using Incoterms® can increase your competitiveness. Optimising costs can allow you pass on savings to customers, for example, while controlling the supply chain can enable you to offer more accurate and reliable delivery times.

Incoterms® can also allow you to be more appealing to customers. For example, could taking on more of the risk make you more attractive as a seller? Could agreeing to deliver DDP help make the difference with inexperienced customers?

By offering a choice, you may be able to tailor any deals in ways that suit your customers and drive more business.