What is Incoterms?

Incoterms (International Commercial Terms) are a globally standardized set of trade rules published by the International Chamber of Commerce (ICC) that define the responsibilities, costs, and risks assumed by buyers and sellers in international trade transactions. First published in 1936 and most recently updated in 2020, Incoterms specify exactly when the seller’s obligations end and the buyer’s begin regarding transportation, insurance, customs clearance, import/export duties, and risk of loss or damage during transit. They are referenced by three-letter codes (FOB, CIF, DDP, EXW, etc.) and are incorporated into purchase orders, sales contracts, and invoices worldwide.

Why It Matters

Without Incoterms, every international transaction would require lengthy negotiation over who pays for shipping, who handles customs, who bears the risk if goods are damaged in transit, and at what point ownership transfers. Incoterms eliminate this ambiguity by providing pre-defined frameworks that both parties understand. This reduces contract disputes, accelerates deal-making, and ensures that both buyer and seller accurately account for their true costs.

For e-commerce businesses expanding into cross-border selling, understanding Incoterms is essential for accurate pricing, landed cost calculations, and customer experience. Choosing the wrong Incoterm can result in unexpected duties charged to customers at delivery (leading to refused shipments), uninsured goods during transit, or cost assumptions that destroy profit margins on international orders.

How It Works

The 11 Incoterms 2020 rules are divided by the mode of transport they cover:

• EXW (Ex Works): The seller makes goods available at their premises. The buyer bears all transportation costs and risks from that point forward. Minimum obligation for the seller.
• FOB (Free on Board): The seller delivers goods onto the shipping vessel at the port of origin. Risk transfers to the buyer once goods are on board. One of the most commonly used terms in ocean freight.
• CIF (Cost, Insurance, and Freight): The seller pays for transportation and insurance to the destination port. Risk transfers to the buyer when goods are loaded onto the vessel at origin, but the seller covers insurance for the voyage.
• DAP (Delivered at Place): The seller delivers goods to a named destination, bearing all transportation costs and risks. The buyer is responsible for import customs clearance and duties. Commonly used in e-commerce for international shipments.
• DDP (Delivered Duty Paid): The seller bears all costs and risks until goods reach the buyer’s location, including import duties and taxes. Maximum obligation for the seller but provides the smoothest experience for the buyer—no surprise charges at delivery.

These are the five most commonly used Incoterms. The full set of 11 includes additional variations (FCA, CPT, CIP, FAS, CFR, DPU) covering specific logistics scenarios and transport modes.

How Nventory Helps

Nventory supports international order management by enabling businesses to configure shipping and cost calculations based on the applicable Incoterms for each trade lane or customer. By understanding whether the seller is responsible for shipping to the destination port (FOB, CIF) or all the way to the buyer’s door (DAP, DDP), Nventory accurately calculates landed costs, applies appropriate duty estimates, and ensures that fulfillment workflows match the contractual obligations of each international shipment.