Incoterms 101: The Ultimate Guide to Understanding Your International Commercial Terms

The transportation industry is brimming with jargon; terminology, acronyms and abbreviations that are unique to the business of freight movement. To an outsider — someone who doesn’t work in it every day — the sheer amount of things to learn and variables to manage can be overwhelming. 

And, when transportation’s complexities make it difficult to understand the prices you’re paying or the things you need to do to make your shipment a success, your questions should never go unanswered. 

Incoterms make a massive indent on the supply chains of businesses around the world as they work to move cargos expeditiously. But what are they? Why are incoterms important? And, most importantly, what does each incoterm mean for you? 

Here at Anderson Trucking Service (ATS), we’ve been helping companies decipher their incoterms for decades now. As a result, we understand the profound place they hold in the transportation world and what each of them means. 

In this article, we’ll answer all of your incoterm-specific questions so that you have no trouble understanding your transportation terms of sale going forward. 

What Are Incoterms?

Developed, updated and released by the International Chamber of Commerce (ICC), incoterms, or “international commercial terms” as they’re officially named, set the terms of sale between a buyer and seller of international goods. Broken into two main categories (based on the transactions they apply to), incoterms — of which there are 11 — are recognized globally and help clearly define the financial obligations and assumption of risk on both sides of a transaction. 

Today, incoterms — originally adopted in 1936 — are used as shorthand by companies around the globe to set ground rules for their contracted arrangements.  

Why Do Incoterms Matter?

With 197 countries in the world, each boasting a unique set of rules and regulations, moving cargo between them can often be confusing. The International Chamber of Commerce originally developed incoterms to simplify this process and to promote global economic prosperity and trade — a goal that incoterms have achieved. 

Without their assistance, international business transactions would be far more complex. 

Budgeting for these transactions would be more difficult for all parties involved and, without understanding which charges must be paid by who — and which party assumes the risk of cargo damage, theft or mishap when — supply chains would stall. 

For this reason, it’s important that you firmly understand each incoterm and what they mean for you should you encounter them. With this knowledge, there will be little to no confusion as to what’s expected of you on each transaction. And, in turn, the transportation of your cargo will go smoothly from A to B. 

What Do Incoterms Determine?

Incoterms are used to specify which party (buyer or seller) will pay for the various aspects of, and charges associated with a load’s transport. For the vast majority of shipments, the corresponding incoterm covers the following 11 charges:

1. Freight packaging
2. Loading charges
3. Delivery to port/place
4. Export duties and taxes
5. Origin terminal charges
6. Loading on-carriage costs
7. Carriage charges
8. Insurance costs
9. Destination terminal charges
10. Delivery to the destination location
11. Import duties and taxes

Often, determining and communicating who’s responsible for paying for each of these fees can be difficult to do at the point of sale. As such, the universally recognized shorthand of the 11 incoterms makes a valuable addition to this process.

What Are The 11 Incoterms In 2022?

The 11 incoterms used for international freight shipping transactions, organized based on the responsibility shouldered by the seller (from least to most), are:

1. Ex Works (EXW)
2. Free Carrier (FCA)
3. Free Alongside (FAS)
4. Free On Board (FOB)
5. Cost and Freight (CFR)
6. Cost, Insurance and Freight (CIF)
7. Carriage Paid To (CPT)
8. Carriage and Insurance Paid To (CIP)
9. Delivered at Terminal (DAT)
10. Delivered at Place (DAP)
11. Delivered Duty Paid (DDP)

To break these down a bit further, in 2010 these incoterms were separated into two categories based on the method used to transport them. 

Category 1: Incoterms Used For Any Mode of Transport

These seven Incoterms apply to any mode of freight transportation, whether by land, rail, sea or air:

• Ex Works (EXW)
• Free Carrier (FCA)
• Carriage Paid To (CPT)
• Carriage and Insurance Paid To (CIP)
• Delivered at Terminal (DAT)
• Delivered at Place (DAP)
• Delivered Duty Paid (DDP)

Category 2: Incoterms Solely Used for Sea/Inland Waterway Transport

These four incoterms solely apply to freight transported via sea and/or waterway and won’t be seen on shipments transported in other ways:

• Free Alongside Ship (FAS)
• Free On Board (FOB) 
• Cost and Freight (CFR)
• Cost, Insurance and Freight (CIF)

Regardless of which mode of transport your shipment will utilize, it’s important that you understand what you’re responsible for (as the buyer or seller) as defined by each incoterm.

Ex Works (EXW) Incoterm

This incoterm places the least amount of responsibility on the seller's shoulders. Aside from the packaging of the product(s) being transported everything else must be arranged and covered by the purchaser of the cargo, including:

• Loading charges
• Delivery to port/place
• Export duties and taxes
• Origin terminal charges
• Loading on-carriage costs
• Carriage charges
• Insurance costs
• Destination terminal charges
• Delivery to the destination location
• Import duties and taxes

Free Carrier (FCA) Incoterm

Next to Ex Works, the FCA incoterm requests the least from the seller of each product. Under its definition, the “Free Carrier” incoterm stipulates that the seller of the freight cover charges and arrangements up to the moment it arrives at the export location stipulated by the buyer. The free carrier incoterm breaks charges down as follows:

• Freight packaging –Seller
• Loading charges -Seller
• Delivery to port/place -Seller
• Export duties and taxes -Seller
• Origin terminal charges - Buyer
• Loading on-carriage costs - Buyer
• Carriage charges - Buyer
• Insurance costs - Negotiable
• Destination terminal charges - Buyer
• Delivery to the destination location - Buyer
• Import duties and taxes - Buyer

Free Alongside Ship (FAS) Incoterm

When included in an international trade contract, the FAS incoterm — an incoterm that applies solely to sea/waterway transportation — signifies that the seller of cargo must pay for the movement of goods from the moment it leaves their facility until its safely situated alongside its selected vessel for loading. FAS incoterms dole out duties, charges and fees as follows:

• Freight packaging – Seller
• Loading charges - Seller
• Delivery to port/place - Seller
• Export duties and taxes - Seller
• Origin terminal charges - Seller
• Loading on-carriage costs - Buyer
• Carriage charges - Buyer
• Insurance costs - Negotiable
• Destination terminal charges - Buyer
• Delivery to the destination location - Buyer
• Import duties and taxes - Buyer

Free On Board (FOB) Incoterm

The “Free On Board” incoterm specifies that the seller of a product will arrange for its packaging, transportation to the port and safe loading onto its selected marine vessel — paying for all fees, duties and taxes along the way. After the freight in question is properly loaded and secured to the ship transporting it, the buyer takes over all subsequent arrangements/charges. Here is the breakdown of responsibility for the FOB incoterm:

• Freight packaging – Seller
• Loading charges - Seller
• Delivery to port/place - Seller
• Export duties and taxes - Seller
• Origin terminal charges - Seller
• Loading on-carriage costs - Seller
• Carriage charges - Buyer
• Insurance costs - Negotiable
• Destination terminal charges - Buyer
• Delivery to the destination location - Buyer
• Import duties and taxes - Buyer

Cost and Freight (CFR) Incoterm

CFR is another incoterm that only applies to transactions where a shipment will be transported to its destination location via marine vessel. Under its definition, CFR incoterms require the party selling the freight to handle its transportation expenses and accommodations until it reaches its destination terminal/port. The “Cost and Freight” incoterm defines responsibilities as:

• Freight packaging – Seller
• Loading charges - Seller
• Delivery to port/place - Seller
• Export duties and taxes - Seller
• Origin terminal charges - Seller
• Loading on-carriage costs - Seller
• Carriage charges - Seller
• Insurance costs - Negotiable
• Destination terminal charges - Buyer
• Delivery to the destination location - Buyer
• Import duties and taxes - Buyer

Cost, Insurance and Freight (CIF) Incoterm

Another incoterm that’s only applicable to sea/waterway waring goods, CIF incoterms require the same commitment from the seller as a CFR incoterm would, with the added stipulation that the party selling the freight pay its insurance costs. As such, the breakdown of charges for the CIF incoterm is:

• Freight packaging – Seller
• Loading charges - Seller
• Delivery to port/place - Seller
• Export duties and taxes - Seller
• Origin terminal charges - Seller
• Loading on-carriage costs - Seller
• Carriage charges - Seller
• Insurance costs - Seller
• Destination terminal charges - Buyer
• Delivery to the destination location - Buyer
• Import duties and taxes - Buyer

Carriage Paid To (CPT) Incoterm

An incoterm that can be applied to any shipment, the CPT marking on an international contract requires the party selling a product to handle the payments and arrangements associated with transporting it until it reaches its destination terminal facility. “Carriage Paid To” incoterms separate responsibilities accordingly:

• Freight packaging – Seller
• Loading charges - Seller
• Delivery to port/place - Seller
• Export duties and taxes - Seller
• Origin terminal charges - Seller
• Loading on-carriage costs - Seller
• Carriage charges - Seller
• Insurance costs - Negotiable
• Destination terminal charges - Seller
• Delivery to the destination location - Buyer
• Import duties and taxes - Buyer

Carriage and Insurance Paid To (CIP) Incoterm

Similar the the “Carriage Paid To” incoterm, the CIP incoterm lays the burden of responsibility on the seller up until products reach the buyer’s designated destination terminal. That said, CIP incoterms also state that the seller will take care of all cargo insurance costs. 

• Freight packaging – Seller
• Loading charges - Seller
• Delivery to port/place - Seller
• Export duties and taxes - Seller
• Origin terminal charges - Seller
• Loading on-carriage costs - Seller
• Carriage charges - Seller
• Insurance costs - Seller
• Destination terminal charges - Seller
• Delivery to the destination location - Buyer
• Import duties and taxes - Buyer

Delivered at Terminal (DAT) Incoterm

Just like the “Carriage Paid To” incoterm, the “Delivered at Terminal” lays responsibility onto the seller until freight arrives at its designated destination terminal. However, DAT incoterms specify that a seller will take on risk until its destination carrier is loaded — a risk shouldered by the buyer in  CPT incoterms. 

• Freight packaging – Seller
• Loading charges - Seller
• Delivery to port/place - Seller
• Export duties and taxes - Seller
• Origin terminal charges - Seller
• Loading on-carriage costs - Seller
• Carriage charges - Seller
• Insurance costs - Negotiable
• Destination terminal charges - Seller
• Delivery to the destination location - Buyer
• Import duties and taxes - Buyer

Delivered at Place (DAP) Incoterm

When a DAP incoterm is utilized, the buyer of a product is only responsible for paying its import duties, taxes and fees. Everything else — from its packaging until final delivery — is paid for by the seller. 

• Freight packaging – Seller
• Loading charges - Seller
• Delivery to port/place - Seller
• Export duties and taxes - Seller
• Origin terminal charges - Seller
• Loading on-carriage costs - Seller
• Carriage charges - Seller
• Insurance costs - Negotiable
• Destination terminal charges - Seller
• Delivery to the destination location - Seller
• Import duties and taxes - Buyer

Delivered Duty Paid (DAP) Incoterm

The DAP incoterm is the most intensive for the seller of a product. With the exception of cargo insurance — the purchaser of which varies by situation — the transportation goods that have the “Delivered Duty Paid” incoterm associated with them is fully paid for and managed by the seller. 

• Freight packaging – Seller
• Loading charges - Seller
• Delivery to port/place - Seller
• Export duties and taxes - Seller
• Origin terminal charges - Seller
• Loading on-carriage costs - Seller
• Carriage charges - Seller
• Insurance costs - Negotiable
• Destination terminal charges - Seller
• Delivery to the destination location - Seller
• Import duties and taxes -  Seller

Incoterms Chart of Responsibility

Let’s Talk About Your Freight Rates

Now that you understand what incoterms are, how they impact freight shipping across the world and what each of them mean for both buyers and sellers, you’re one step closer to maximizing your transportation spend. 

While having a firm understanding of international commercial terms and the important role they play in the movement of your goods is important, understanding your freight rates will take a bit more effort. 

You see, every shipment — whether around the globe or across town — is priced based on a variety of factors. Knowledge of these factors and the things that influence them helps shippers take their budgets further as they control what they can. 

Check out our Pricing Page, and the accompanying pieces of content for some insights into what you should expect to pay for your next shipment. And, should you have any questions about your freight rate or how ATS can help you move your next load, don’t hesitate to reach out. We’re happy to help you in any way you need.