When you’re new to the world of shipping, the terminology can feel overwhelming. Experienced shippers, buyers, and sellers may even sound like they’re speaking a foreign language.
One set of terms that causes considerable confusion are Incoterms®. This set of rules, created by the International Chamber of Commerce (ICC), defines the responsibilities of buyers and sellers around the delivery of goods. The ICC updates this set of rules every ten years, with the most recent update—the aptly named Incoterms 2020 rules—released in 2020.
The Incoterms rules form a crucial part of any agreement between buyers and sellers by dictating who will pay for loading and unloading costs, customs export procedures, insurance, import costs, and more. By understanding the Incoterm rule defined in a contract, buyers and sellers can get a firm grasp on their costs and, ultimately, their margins. However, without this understanding, one party may end up footing the bill for more than they bargained for.
In this article, we’ll get you up to speed on Incoterms—what they are, what they mean, what to look for, and what to avoid. We’ll also give you a detailed walkthrough of the five most common Incoterms rules. Armed with this information, you’ll both be able to speak the secret language of shippers and sellers and become a savvy negotiator who knows how to protect your bottom line.
What Are Incoterms?
Incoterms are a set of rules created by the ICC to establish who’s responsible for shipping, insurance, and tariffs in a contract between a buyer and a seller.
In the simplest terms, Incoterms can reduce confusion between buyers and sellers. By defining eleven different costs in a three-letter designation, the Incoterms rules quickly define who will pay for what.
Note: Even though the Incoterms rules were updated in 2020, some parties may still use the Incoterms 2010 rules. (Or an earlier version!) Make sure that both parties to your contract are working from the same version.
You can see a full run-down of all eleven Incoterms in the following chart:
[Download This Chart as a PDF]
Here’s how these Incoterms come into play: As a buyer defining your agreement with your seller, you’ll negotiate two elements:
- The three-letter Incoterms designation, which you can decode with the chart above.
- The named place for the final destination, which ensures delivery to a location where you can access your freight, either to pick it up or arrange for further transport. (Note: It’s important to get very specific, especially in cities with multiple ports. Otherwise, you may spend a day chasing your delivery around.)
Before signing any contracts, make sure to review both of these elements carefully. If you make a mistake—or agree to terms that you’re not comfortable with—you could end up paying a lot more than you’d budgeted for. You’ll understand why as we dive into the five most common Incoterms you’ll encounter.