Incoterms is a set of standard rules that defines the sharing of delivery, risk, transportation, insurance, customs and expenses between the buyer and the seller in international trade. It clarifies where the goods are delivered, who pays the transportation cost, at which point the risk passes to the buyer, and which party bears the customs responsibility. When the right delivery rule is selected in export and import transactions, the parties conclude a clearer contract and the logistics process proceeds more smoothly. In current practice, there are 11 delivery rules, and these rules are evaluated in two main groups according to different modes of transportation.
Which Incoterms Terms Are Currently Valid?
The currently valid structure is the Incoterms 2020 rules. As of January 1, 2020, it is recommended to clearly state the current rules in contracts. The terms are divided into two groups. The first group consists of rules that can be used in all modes of transportation. EXW, FCA, CPT, CIP, DAP, DPU and DDP are included in this group. The second group consists of rules suitable for sea and inland waterway transportation. FAS, FOB, CFR and CIF are used in this area. When selecting Incoterms delivery terms, the type of product, mode of transportation, and the operational strength of the buyer and seller should be considered together.
What Are the Incoterms Terms?
Incoterms delivery terms consist of a total of 11 terms. Each term sets the limit of risk and expense between the parties at a different point.
- EXW is the delivery in which the seller makes the goods ready for the buyer at their own premises.
- FCA is the rule under which the seller delivers the goods to the designated carrier.
- CPT is the structure in which the seller pays the transportation cost but the risk passes to the buyer at the first carrier.
- CIP is similar to CPT, with insurance arranged by the seller.
- DAP is the delivery under which the seller brings the goods to the place of destination.
- DPU is the rule under which the seller delivers the goods after unloading them at the designated location.
- DDP is the structure with the broadest responsibility, under which the seller delivers including import taxes.
- FAS is the sea transportation rule under which the goods are delivered alongside the ship.
- FOB is the delivery under which the risk passes to the buyer when the goods are loaded onto the ship.
- CFR is the sea transportation rule under which the seller pays the freight.
- CIF is similar to CFR, with insurance arranged by the seller.
Why Are Incoterms Delivery Terms Important?
Incoterms delivery terms clarify the duties of the parties in international trade. Writing only the product price in the contract is not sufficient. At which point the goods will be delivered, to whom the transportation cost will belong, by whom the insurance will be arranged and where the risk will be transferred must be clear. When the wrong delivery rule is selected, the buyer may face unexpected tax, freight or customs costs. The seller may also be held responsible for a process that they do not control. A clear delivery rule allows the sales price to be calculated more accurately. For example, the EXW price and the DDP price are not the same. This is because under DDP, the seller bears much more expense. Selecting the right term is critical for logistics planning, customer expectations and cost management.
Delivery Terms Used in All Modes of Transportation
The rules suitable for all modes of transportation can be used in road, air, rail, sea and combined transportation operations. EXW, FCA, CPT, CIP, DAP, DPU and DDP are included in this scope. In shipments where exports begin by truck, continue by ship and are then completed again by road, this group provides a more flexible structure. Among Incoterms delivery terms, FCA is a balanced option frequently used for multimodal transportation. The seller handles the export procedures, and the buyer undertakes the main transportation. DAP and DDP, on the other hand, provide an easier delivery experience for the buyer. CIP can be considered for high-value products because it carries an insurance obligation. DPU is the only delivery rule under which the seller assumes the unloading responsibility. The change of the term DAT to DPU has made it clearer that delivery can also be made at different points outside of a terminal.
Sea and Inland Waterway Delivery Terms
The delivery rules specific to sea and inland waterway transportation are divided into FAS, FOB, CFR and CIF. FAS works through the delivery of the goods alongside the ship. FOB is the structure under which the seller's responsibility is largely completed when the goods are loaded onto the ship. Under CFR, the seller pays the freight, and the risk passes to the buyer at the port of loading. CIF is the version of CFR with the insurance obligation added. Among Incoterms delivery terms, the sea transportation rules give more accurate results in bulk cargo, project cargo and classic ship shipments. Always using FOB in container transportation may not be the right approach. The goods are often delivered to the terminal rather than directly to the ship after leaving the seller. In this case, FCA can provide a clearer place of delivery.
Key Points That Changed With Incoterms 2020
One of the most well-known changes with Incoterms 2020 is the update of the term DAT to DPU. DPU more clearly explains that delivery can be made not only at a terminal but also at another location determined by the parties, after unloading. Within FCA, there is also an arrangement that allows the buyer in sea transportation to require the carrier to issue a bill of lading containing an on-board notation to the seller. On the insurance side, the distinction between CIP and CIF has become more pronounced. While a broader coverage expectation comes to the agenda under the CIP rule, CIF continues to be used with different scope under the sea transportation structure. Incoterms 2020 establishes a clearer framework regarding security requirements and the distribution of related expenses to the parties.
How Are Buyer and Seller Responsibilities Divided?
The choice of delivery rule changes the balance of responsibility between the buyer and the seller. EXW is one of the terms that gives the seller the lowest responsibility. The seller makes the goods ready at their own premises. The buyer undertakes the transportation, loading, export, insurance and import procedures. DDP, on the other hand, is the rule under which the seller bears the broadest burden. The seller manages extensive processes, including customs and taxes, to ensure the product reaches the address in the buyer's country. Intermediate rules such as FCA, CPT, CIP and DAP provide a more balanced division of duties between the parties. While the seller undertakes some transportation and customs procedures, the buyer plans the remaining part. When selecting Incoterms, the operational capability of the parties should be taken into account. Giving EXW to a buyer with weak customs knowledge may cause problems in practice. Using DDP can also be risky if the seller does not have a tax registration in the buyer's country.
Transfer of Risk and Sharing of Costs
The most commonly confused issue among Incoterms delivery terms is the distinction between risk and cost. Under some rules, the seller pays the transportation cost, but the risk passes to the buyer earlier. CPT and CIP are good examples of this situation. The seller pays the freight up to the designated place of destination. However, the risk passes to the buyer with delivery to the first carrier. Parties who are not aware of this distinction may have incorrect expectations in the event of damage. Under the FOB, CFR and CIF rules, the risk passes to the buyer when the goods are loaded onto the ship. Under DAP and DDP, the risk remains with the seller until the moment of delivery at the place of destination. The sharing of costs is decisive in the price calculation. When the delivery rule changes, the offer price also changes. The same product reaches different cost levels under EXW, FCA, DAP or DDP terms.
How Is the Right Delivery Term Selected?
The right delivery term is selected based on the type of product, the mode of transportation, the experience of the parties and customer expectations. EXW or FCA can be considered in transactions involving small, low-risk products and where the buyer's transportation capacity is high. If the seller is desired to manage the transportation organization, CPT, CIP or DAP can be evaluated. If the buyer expects an easy door-to-door delivery, DAP or DDP options can be brought to the forefront. For high-value products, the issue of insurance must be considered separately. If the seller is to arrange the insurance, CIP or CIF may be suitable. For sea transport bulk cargo, FOB, CFR and CIF become more meaningful. In combined transportation, FCA, CPT, CIP, DAP and DDP provide a more flexible solution. The place of delivery must be clearly stated in the contract; only the country or city name should not be considered sufficient. The warehouse, terminal, port, factory or exact address must be specified.
How Should Incoterms Delivery Terms Be Written in the Contract?
The delivery rule, place of delivery and rule year should appear together in the contract. An example usage can be as follows: FCA Istanbul Airport, Incoterms 2020. DAP Berlin Buyer Warehouse, Incoterms 2020. FOB Izmir Port, Incoterms 2020. This form of writing makes it clear which rule set the par
