What Are Incoterms? And Why Getting Them Wrong Could Be Costly

International trade moves fast. The last thing you want slowing you down is a misunderstanding over a contract term.

Incoterms, short for International Commercial Terms, are 11 globally recognised trade terms published by the International Chamber of Commerce (ICC). They define who is responsible for costs, risks and logistics at every stage of a shipment. Used correctly they protect both parties. Used incorrectly they can lead to unexpected costs, uninsured cargo and costly delays. This guide is our way of making sure you know all 11, so you can avoid the mistakes we at ISL see all too often.

Most mistakes come down to three things: assuming the other party is covering a cost or risk they are not, using the wrong term for the mode of transport, or agreeing a term without fully understanding what it means for that specific shipment.

The consequences are real. Unexpected invoices, uninsured cargo and customs delays are all avoidable with the right knowledge upfront. Choosing the right Incoterm is not a formality. It is a commercial decision that affects your costs, your risk and your relationship with your trading partner.

Incoterms 2020 Responsibility Matrix

The table below shows who is responsible for each stage of a shipment under each Incoterm. S = Seller, B = Buyer.

If you are unsure which term is right for your next shipment, feel free to reach out to ISL’s team at info@isltrinidad.com. We work with businesses globally every day, and getting these decisions right is exactly the kind of thing we are here for. For more on how cargo insurance fits into your shipment, find out about ISL’s Cargo Insurance services HERE

The 11 Incoterms 2020 Explained

EXW - Ex Works:

The seller makes goods available at their premises. The buyer takes on full responsibility from that point – loading, inland transport, export clearance, freight, insurance and import clearance. This term places maximum obligation on the buyer and minimum on the seller.

FCA - Free Carrier:

The seller delivers goods to a named carrier or location nominated by the buyer. Risk transfers to the buyer once the goods are handed to the carrier. FCA is flexible and can be used for any mode of transport.

FAS - Free Alongside Ship:

The seller delivers goods alongside the vessel at the named port of shipment and is responsible for export clearance. Risk transfers to the buyer from that point, including loading, freight and insurance. FAS is used exclusively for sea or inland waterway transport.

FOB - Free On Board:

The seller delivers goods on board the vessel at the named port of shipment and handles export clearance. Risk transfers to the buyer once the goods are on board. FOB is one of the most commonly used terms in Caribbean trade but should not be used for containerized cargo, where FCA is more appropriate.

CFR - Cost and Freight:

The seller pays freight to the named destination port but risk transfers to the buyer once goods are loaded onto the vessel at origin. The buyer is responsible for arranging insurance and handling import clearance.

CIF - Cost, Insurance and Freight:

Similar to CFR, but the seller is also required to arrange cargo insurance for the voyage. The ICC sets this at minimum cover only. Risk still passes to the buyer at the point of loading.

CPT - Carriage Paid To:

The seller pays freight to the named destination but risk transfers to the buyer at the first carrier handover point, not on arrival.

CIP - Carriage and Insurance Paid To:

CPT with the addition of cargo insurance paid by the seller. Under Incoterms 2020, CIP requires a significantly higher level of insurance cover than CIF.

DAP - Delivered At Place:

The seller delivers goods to the named destination ready for unloading, bearing all risks and costs to that point. The buyer handles import clearance, duties and unloading.

DPU - Delivered At Place Unloaded:

The only Incoterm that requires the seller to unload the goods at the destination. The seller bears all risks and costs of delivery and unloading.

DDP - Delivered Duty Paid:

The seller takes maximum responsibility, delivering goods fully cleared for import with all duties and taxes paid.

Key Abbreviations

The following abbreviations appear frequently in shipping documentation and contracts. Use this section as a reference alongside your paperwork.

Abbreviation	Definition
ANF	Arrival Notification Form. Advice to the consignee of goods coming forward.
B/L	Bill of Lading. Acts as a receipt for cargo and contains the terms of the contract of carriage. It is also a document of title to the goods.
BAF	Bunker Adjustment Factor. A freight adjustment factor to reflect the current cost of bunkers.
BIMCO	Baltic and International Maritime Council. A Copenhagen-based organization to which many shipowners and brokers belong, providing advisory services and standard charterparty documents.
C&D	Collect and Delivery. Carriage from and to a customer's premises.
C&E	Customs and Excise.
C&F	Cost and Freight. A conventional port-to-port Incoterm, more correctly known as CFR.
CAF	Currency Adjustment Factor. Adjusts freight to reflect currency exchange fluctuations.
CFR	Cost and Freight. See Incoterms section above.
CFS	Container Freight Station. A place for the packing and unpacking of LCL consignments.
CIF	Cost, Insurance and Freight. See Incoterms section above
CIP	Carriage and Insurance Paid To. See Incoterms section above.
C/O	Certificate of Origin. A document certifying the country of origin of goods, normally issued or signed by a Chamber of Commerce or Embassy.
COD	Customer's Own Delivery. The customer collects the cargo from or delivers it to the CFS or container yard
COU	Clip On Unit. A portable refrigeration unit
CPT	Carriage Paid To. See Incoterms section above
CY	Container Yard. A collection and distribution point for FCL consignments.
DAP	Delivered At Place. See Incoterms section above.
DDP	Delivered Duty Paid. See Incoterms section above.
DGN	Dangerous Goods Note
DOT	Department of Trade. Governmental department with responsibilities for shipping and trade.
DPU	Delivered At Place Unloaded. See Incoterms section above.
ETA	Estimated Time of Arrival. Indicates the date and hour the carrier expects the cargo, vessel or container to arrive at a nominated point or port.
ETD	Estimated Time of Departure. See ETA.
EXW	Ex Works. See Incoterms section above.
FAS	Free Alongside Ship. See Incoterms section above.
FCA	Free Carrier. See Incoterms section above.
FCL	Full Container Load. An arrangement whereby the shipper utilises all the space in a container which they pack themselves.
FMC	Federal Maritime Commission. US Federal Authority governing sea freight.
FOB	Free On Board. See Incoterms section above.
GA	General Average.
H/L	Heavy Lift.
IMDG Code	International Maritime Dangerous Goods Code. Contains IMO recommendations for the carriage of dangerous goods by sea.
IMO	International Maritime Organisation. A UN body charged with the duty of making safety and anti-pollution conventions and recommendations concerning sea transport.
LCL	Less than Container Load. When a parcel is too small to fill a container, it is grouped by the carrier at a CFS with other compatible goods for the same destination.
L/I	Letter of Indemnity. Sometimes called a letter of guarantee. It allows the consignee to take delivery of goods without surrendering the original bill of lading when it has been delayed or become lost.
MMO	Multi Modal Operator.
M/R	Mate's Receipt. A receipt given to the party that delivers the cargo to the ship, stating the quantity and condition of the cargo and where it was stowed.
O/H	Overheight. A container with goods protruding above the top of the corner posts.
OOG	Out of Gauge. Goods whose dimensions exceed those of the container in which they are placed.
O/W	Overwidth. A container with goods protruding beyond the sides of the container or flat rack onto which they are packed.
RO-RO	Roll On Roll Off. A ferry type vessel onto which goods and containers can be driven, usually via a ramp.
SDR	Special Drawing Rights. A basket of currencies designed to iron out currency exchange fluctuations in international valuations, used to express limitations under the Hague-Visby Rules and the MSA Limitation Convention.
SOB	Shipped On Board. An endorsement on the received-for-shipment bill of lading confirming that the goods have been loaded on board.
TEU	Twenty-Foot Equivalent Unit. 1x20ft = 1 TEU, 1x40ft = 2 TEU.
THC	Terminal Handling Charge. A charge for handling containers at ocean terminals.
VGM	Verified Gross Mass. From 1st July 2016, shippers are required to provide the VGM of each shipment to their ocean carrier and the terminal operator. Ocean carriers are not permitted to load a container without a VGM.

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