What are Incoterms?

You have probably asked yourself what happens if a product were to break or get lost when sent between two countries. When this happens, the delivery is not subject to Swedish laws, but rather global regulations for trade – Incoterms. In this article, you’ll learn more about the purpose of Incoterms and how you as a business owner must consider them.

What are Incoterms?

Incoterms is an abbreviation of International Commercial Terms, a set of rules that cover international transportation and business. These rules have been approved by all countries and describe who is responsible for a delivery depending on where in the transport chain the shipment is. The International Chambre of Commerce is responsible for providing and updating the rules, to ensure that they are always current despite the constant changes and developments in global trade.

Why are Incoterms needed?

When a product is sent from one country to another, it will typically be placed on a pallet, shipped using various modes of transport, and pass through several customs borders and warehouses. During this process, many things can go wrong, and to ensure that everyone involved understands what rules apply in different situations, the Incoterms were created. Incoterms help the sender and receiver, seller and buyer, have clear rules to stick to, which in turn helps to avoid conflicts regarding costs and who is responsible.

How should business owners use Incoterms?

If you import products or have customers abroad, it’s your responsibility to find out what rules apply to your deals.

Here’s what to do:

  • Find out what terms fit your company and business model.
  • Ensure that the delivery terms are included in your purchase agreements.
  • Double check that you and your business partner agree on what terms apply.
  • Specify locations as specifically as you can.
  • Remember that the Incoterms regulations are only an addition to the full purchase agreement.

Common Incoterms explained

EXW – Ex-Works

The product is delivered by the seller to a specified location, usually a warehouse that belongs to the seller. When the product has been taken to the location, the buyer inherits the risks associated with transportation, and covers all costs during the transport process. It’s up to the buyer to sign customs declarations and load the product.

DAP – Delivery At Place

The seller delivers the product to an agreed location, and covers all costs and risks. When the product has arrived, responsibility carries over to the buyer.

Learn more about DAP here.

DDP – Delivery Duty Paid

The seller covers all costs, including customs fees, until the product has been left at an agreed location. The seller is also responsible for making sure the products are ready to be unloaded, and covers any other costs.

Learn more about DDP here.

DPU – Delivery At Place Unloaded

The seller is responsible for delivering the product and unloading it at an agreed location, and handles all customs declarations. The buyer pays all fees and takes responsibility after unloading is complete.

Learn more about DPU here.

CIP – Carriage And Insurance Paid To

The seller is responsible for all costs, including shipping and insurance, until the product reaches the first transporter. The risk is then transferred to the buyer, and the seller does not guarantee that the product is delivered in good condition.

Learn more about CIP here.

FCA – Free Carrier

The seller is responsible for delivering the product to a transporter hired by the buyer. When the product has been handed over, the risk is transferred from seller to buyer, and the buyer covers all costs that follow.

Learn more about FCA here.

CPT – Carriage Paid To

The seller is responsible for export and shipping to an agreed location, but the risk is assumed by the buyer when the product is handed to the first transporter.

Learn more about CPT here.

Learn more about logistics

Learn more about everything related top logistics on our Logistics page, which links to our many articles on the subject.

Frequently asked questions about Incoterms

Who writes the Incoterms?

The global organisation International Chambre of Commerce first created the Incoterms in 1936. They are still responsible for updating the rules as markets change.

Why are Incoterms important?

Incoterms simplify sales between countries and cultures, and mitigates the risk of conflict regarding purchase and delivery terms.

Who needs to know what the Incoterms are?

If you conduct business with other nations, you need to know about Incoterms. This applies both if you import or export.

When were the incoterms last updated?

The latest version of Incoterms was published in 2020.