Incoterms® Explained: A Complete Guide to Shipping Terms and Best Practices (2025)

Incoterms®, or International Commercial Terms, are a standardized set of trade terms issued by the International Chamber of Commerce (ICC) to define the roles of buyers and sellers in international transactions. These rules clearly outline responsibilities related to shipping, insurance, customs clearance, and risk transfer during the movement of goods across borders.

Traditionally reviewed every decade, the most recent revision remains Incoterms® 2020, which continues to be the latest version as of 2025. While no updates have been introduced since then, the current terms remain widely accepted and form a critical foundation for global trade practices.

This article provides a complete overview of Incoterms®—explaining their purpose, why they matter, and how to use them strategically. We’ll explore the different categories of Incoterms®, practical guidance for choosing the right one, and important considerations businesses should keep in mind when applying them in real-world logistics scenarios.

What Are Incoterms®?

Incoterms® are globally accepted contractual terms used in international trade to define each party’s responsibilities for the delivery of goods. They help avoid confusion and ensure legal clarity by providing a common framework for interpreting contract obligations.

What Are Incoterms® in Shipping?

In shipping, Incoterms® define who is responsible for costs, insurance, transport, risk, and customs procedures throughout each segment of the supply chain. They determine when risk transfers from seller to buyer and who arranges key logistics tasks along the way.

Why Is It Important to Know Your Incoterms®?

Ensuring Clarity and Certainty

By removing ambiguity from trade contracts, Incoterms® ensure that both buyer and seller clearly understand their responsibilities. This is especially critical when working across different legal systems and languages. A precise Incoterm selection eliminates miscommunication and supports dispute-free transactions.

Lowering Costs

Incorrect or unclear use of Incoterms® may lead to duplicated efforts, unexpected surcharges, or costly logistics gaps. Selecting the most appropriate term allows businesses to control key cost drivers such as insurance, last-mile delivery, and customs duties.

Reducing Risks

Each Incoterm specifies the point at which risk transfers from seller to buyer. Understanding this clearly allows companies to better plan for insurance coverage, loss prevention, and inventory risk during transit.

Two Main Categories of Incoterms®

The 7 Incoterms® for All Modes of Transportation

These Incoterms® apply across sea, air, road, or rail transport modes:

• EXW (Ex Works): The seller makes goods available at their premises; the buyer is responsible for all transport, costs, and risks thereafter.
• FCA (Free Carrier): The seller delivers goods to a named place or carrier; beyond that, the buyer assumes risk and logistics.
• CPT (Carriage Paid To): The seller pays for transport to a destination, but risk shifts once goods are handed over to the first carrier.
• CIP (Carriage and Insurance Paid To): Similar to CPT, but the seller also covers insurance up to the named destination.
• DAP (Delivered at Place): The seller delivers goods ready for unloading at the buyer’s location; the buyer handles import clearance and duties.
• DPU (Delivered at Place Unloaded): The seller delivers and unloads goods at the destination; buyer takes over from there. (This replaces the older term DAT.)
• DDP (Delivered Duty Paid): The seller handles everything, including transport, customs clearance, and import duties. The buyer receives the goods ready to use.

Popular Incoterms for B2B Sellers

EXW and FCA are frequently adopted by B2B exporters, particularly in India. They provide clarity by shifting risk and transport responsibilities to the buyer early in the process, offering sellers more control over pricing and export procedures.

Popular Incoterms for B2C Sellers

DAP and DDP are commonly used in cross-border e-commerce and B2C logistics. These terms offer a smoother customer experience by simplifying delivery and cost structures, especially for sellers who want to provide door-to-door solutions.

The 4 Incoterms® Solely for Sea and Inland Waterway Transport

These terms are specifically used for goods shipped by sea or inland waterway:

• FAS (Free Alongside Ship): The seller delivers goods alongside the vessel at the port of departure. The buyer takes over loading and shipping.
• FOB (Free on Board): The seller covers costs and risk until the goods are loaded on the vessel; the buyer assumes responsibility from that point onward.
• CFR (Cost and Freight): The seller pays for the voyage to the destination port, but risk transfers once goods are loaded.
• CIF (Cost, Insurance, and Freight): Similar to CFR, with insurance included by the seller for buyer protection during transit.

Limitations of Incoterms®

While Incoterms® provide a standardized framework for delivery obligations, they are not a complete sales contract. Here’s what they do not cover:

• Payment Terms: Incoterms® do not specify when or how payment for the goods should occur. These terms must be established separately in the sales agreement.
• Product Specifications and Pricing: The quality, quantity, and pricing of goods fall outside Incoterms® and should be managed in the commercial contract.
• Transfer of Title or Ownership: Although Incoterms® define when risk transfers, they do not determine when the legal ownership of goods changes hands.
• Dispute Resolution and Legal Jurisdiction: Incoterms® do not address contract breaches or litigation procedures. Separate clauses should define legal remedies and applicable law.
• Customs Documentation Obligations Beyond Transport: While some Incoterms® imply which party arranges for export/import clearance, they do not ensure complete documentation is submitted correctly.

Therefore, Incoterms® should always be used in conjunction with a well-drafted commercial contract that addresses these gaps and outlines broader legal and financial obligations.

Conclusion

In the ever-evolving world of global trade, understanding and correctly applying Incoterms® remains essential for any business involved in international shipping. These standardized terms bridge the gap between buyers and sellers by clearly defining logistical responsibilities, reducing confusion, and enhancing operational efficiency.

By selecting the most appropriate Incoterms® for your shipment—based on cargo type, transport mode, risk tolerance, and customer expectations—you not only protect your business from costly errors but also unlock greater flexibility and control across your supply chain. Combined with a clear understanding of their limitations, Incoterms® become a powerful tool when complemented by comprehensive commercial contracts and regulatory compliance.

This is where platforms like FreightAmigo come into play. FreightAmigo’s digital logistics solution empowers businesses with smart tools and real-time insights to confidently choose and apply Incoterms® that best match their shipping strategy. From built-in Incoterm guidelines during quote comparison, to automated documentation checks and expert support, FreightAmigo streamlines the decision-making process and minimizes the risk of misinterpretation. It turns a complex framework into a manageable part of everyday shipping.

Whether you’re an exporter, importer, or logistics professional, making informed use of Incoterms®—paired with the right digital tools—can dramatically improve coordination, cost management, and customer satisfaction. As international commerce continues to grow in complexity, mastering these foundational terms with the support of innovative platforms isn’t just smart—it’s a competitive advantage.