Incoterms

Incoterms - short for International Commercial Terms - are eleven standardized trade rules published by the International Chamber of Commerce (ICC) that define how costs, risk, and logistics responsibilities are allocated between buyer and seller in international transactions. The current version, Incoterms 2020, came into effect on 1 January 2020. Every international purchase order or supplier contract that involves the physical movement of goods should reference a specific Incoterm, because without one, both parties may carry different assumptions about who arranges freight, who pays for insurance, and at what point in the journey the buyer becomes responsible for a loss or delay.

What Each Incoterm Specifies

Four core aspects of any cross-border transaction are defined by an Incoterm rule: who pays for transportation, at what point risk transfers from seller to buyer, who handles customs clearance and import duties, and who provides the necessary trade documentation. Incoterms do not address the sale price, payment method, when title to the goods passes, or how disputes are resolved - those remain separately negotiated terms.

The eleven Incoterms 2020 rules fall into two groups. Seven apply to any mode of transport - road, rail, air, or sea: EXW, FCA, CPT, CIP, DAP, DPU, and DDP. Four apply exclusively to sea and inland waterway transport: FAS, FOB, CFR, and CIF.

The spectrum of obligation runs from EXW (Ex Works), where the seller places goods at their premises and the buyer takes full responsibility from that point onward, to DDP (Delivered Duty Paid), where the seller covers all costs and risks through to delivery at the buyer's named destination with import duties paid.

The Four Terms Most Common in Importing Practice

Of the eleven rules, four appear most frequently for businesses that import goods:

• EXW (Ex Works): The seller makes goods available at their premises. The buyer arranges and pays for export clearance, all freight, insurance, and import duties. Maximum buyer control, but also maximum buyer cost and logistical responsibility.
• FOB (Free on Board): The seller loads goods on the named vessel. Risk and freight responsibility pass to the buyer from that point. The buyer arranges insurance and import clearance. Sea freight only.
• CIF (Cost, Insurance and Freight): The seller pays freight and provides cargo insurance to the named destination port. Risk transfers to the buyer when goods are loaded at origin, not on arrival. The buyer still handles import clearance and duties. Sea freight only.
• DDP (Delivered Duty Paid): The seller manages all freight, customs clearance, import duties, and delivery to the buyer's named address. The buyer receives a predictable total cost with no additional logistics charges. Applicable to any mode of transport.

When comparing quotes from multiple suppliers, all must be quoted against the same Incoterm. A quote on EXW terms and one on DDP terms are not directly comparable - the price gap reflects different logistics scope, not different product value.

Teams using Zigaflow can record the agreed Incoterm on each purchase order, keeping delivery obligations and cost responsibilities visible across every supplier transaction.