Incoterms
Incoterms (International Commercial Terms) are standardised trade clauses issued by the International Chamber of Commerce (ICC) that define in the sales contract who between seller and buyer bears transport costs, insurance and customs, and at which point the risk of loss of the goods passes to the buyer. With three-letter codes such as EXW, FCA, CPT or DAP they create a globally uniform language for delivery terms.
Incoterms (International Commercial Terms) are a set of standardised trade clauses issued by the International Chamber of Commerce (ICC) that set out in the sales or delivery contract which obligations the seller and buyer carry when goods are delivered. Each clause – abbreviated with three letters such as EXW, FCA, CPT, CIP, DAP, DPU or DDP – answers three core questions: who organises and pays for transport, who bears insurance and customs formalities, and at which geographically defined point the risk of accidental loss of or damage to the goods passes from the seller to the buyer.
The distinction matters: Incoterms govern exclusively the logistical and cost-related obligations around delivery. They say nothing about the transfer of ownership, the purchase price, the payment term or the applicable law – these points must be regulated separately in the contract. The clauses are not a law; they become binding only through an express agreement in the contract, usually stating a named place and the rules version, for example "FCA Hamburg, Incoterms 2020". The version currently in force dates from 2020; older versions such as Incoterms 2010 remain valid if the parties expressly name them.
At a glance
- Standardised ICC trade clauses for domestic and international deliveries of goods
- Govern transport costs, insurance, customs obligations and the passing of risk – three-letter codes such as EXW, FCA, DAP, DDP
- Current version: Incoterms 2020, with eleven clauses in two groups
- Do NOT govern: transfer of ownership, purchase price, payment and applicable law
- Stored in the ERP as a delivery term in the customer, supplier and order master data – the basis for freight, customs and documents
How Incoterms work
Each Incoterms clause distributes the obligations along the transport chain between seller and buyer and fixes two critical points: the transfer of costs (up to where the seller bears the costs) and the passing of risk (from when the buyer bears the risk of loss and damage). Both points can, but need not, coincide. The range extends from a minimal seller obligation to the seller taking on almost all tasks.
At one end stands EXW (Ex Works): the seller merely makes the goods available on its premises; everything else – loading, transport, export and import handling, customs – is organised and paid for by the buyer. At the other end stands DDP (Delivered Duty Paid): here the seller delivers the goods cleared for import to the named destination and bears all costs and risks including import duty and import VAT. In between lie clauses such as FCA (Free Carrier), where risk passes on handover to the first carrier, or DAP (Delivered at Place), where the seller delivers to the destination but import clearance remains with the buyer.
The eleven Incoterms 2020 clauses in two groups
Incoterms 2020 comprise eleven clauses, split into two groups. Seven apply to any mode of transport (including multimodal): EXW, FCA, CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP, DPU (Delivered at Place Unloaded) and DDP. Four clauses apply exclusively to sea and inland waterway transport: FAS (Free Alongside Ship), FOB (Free On Board), CFR (Cost and Freight) and CIF (Cost, Insurance and Freight). A key change compared with 2010: DAT (Delivered at Terminal) was renamed DPU and broadened, so that the goods are delivered unloaded at any named place – not only at a terminal. In practice: containers belong to FCA, CPT or CIP, not to FOB or CIF, even though the latter are often used incorrectly out of habit.
Why Incoterms matter
Without a common language for delivery terms, expensive misunderstandings quickly arise in international trade: who pays the sea freight, who the insurance, who is liable if a container goes overboard in a storm, and who handles import clearance? Incoterms answer these questions clearly and reliably with three letters – across language, legal and national boundaries. That reduces the potential for disputes, speeds up contract negotiations and makes offers comparable, because it is clear which cost components are included in the price.
For pricing, the clause chosen has a direct impact on cost. An EXW price is a pure ex-works price for the goods; a DDP price includes transport, insurance, export and import duty right to the buyer's door. Anyone who confuses clauses in purchasing or sales miscalculates – for instance because unexpected freight costs or import charges arise. The passing of risk is also decisive under insurance and liability law: if the goods are lost after risk has passed, the buyer remains obliged to pay even though it has received nothing. The right clause therefore protects both sides and should be chosen deliberately and to match the mode of transport.
Incoterms in the ERP system
In the ERP system, Incoterms are a fixed part of the master data as a delivery term. They can be stored per customer and per supplier, so that when an order or a purchase order is created the agreed clause together with the named place is automatically pre-filled. During order processing the Incoterms clause then controls the calculation of freight costs, the assignment of transport and insurance line items and the selection of the appropriate shipping method. This way it is already visible at the quotation stage whether freight costs are included in the price or charged separately.
Incoterms are particularly relevant for customs and foreign-trade processes. The clause determines who is responsible for export and import handling and feeds into document creation: the commercial invoice, delivery note, export accompanying document and packing list all state the agreed clause. It is also decisive for determining the customs value, because the value to be declared can differ by freight and insurance components depending on the clause. ERP systems with a foreign-trade module or connected customs software transfer the Incoterms entry directly into the electronic customs declaration (in the EU via ATLAS) and into the Intrastat declaration for intra-Community movements of goods.
Master data, documents and shipment tracking
For Incoterms to work cleanly in the ERP, the clause must be maintained unambiguously as a field – ideally via a selection list with the eleven valid codes plus a mandatory entry of the named place. Only then can freight and customs items be assigned automatically and error-free. The responsibilities for shipment tracking also derive from the delivery term: if the seller bears the risk up to the destination (for example under DAP or DDP), it must actively monitor the transport; under EXW or FCA its responsibility ends much earlier. A consistently maintained Incoterms field is thus the basis for correct prices, documents, customs declarations and a clear allocation of liability.
Distinction: Incoterms vs. payment and ownership terms
In everyday use, Incoterms are often confused with other parts of a contract. A common misconception is that they govern the transfer of ownership – which they expressly do not. When ownership of the goods passes (for example under retention of title until full payment) is governed by the agreed sales contract and the applicable national law, not by the Incoterms clause. Incoterms govern only costs, risk and logistical obligations.
Just as little do Incoterms make statements about payment terms, payment deadlines or payment securities such as the letter of credit. The delivery term (Incoterm) and the payment term are two separate dimensions of a contract: one describes the logistics of the goods, the other the flow of money. The VAT treatment also follows its own rules – while the clause gives hints as to who owes import VAT, the tax assessment of exports and intra-Community supplies is governed by tax law, not by the Incoterm. A contract should therefore always state the delivery term, the payment term and the retention of title separately and explicitly.
DACH specifics and practice
In the German-speaking region, Incoterms are used both in cross-border and in purely domestic business, even though they were originally developed for international trade. For deliveries within Germany, Austria or Switzerland the customs clauses recede into the background, while the passing of risk remains relevant. The relationship to the respective national law must be noted: in Germany the rules of the HGB and the BGB apply in addition; where an Incoterms clause does not conclusively govern a question, the agreed law applies.
A special case is Switzerland as a non-EU country: deliveries between the EU and Switzerland are always exports or imports with full customs handling, which is why the choice between, say, DAP (import clearance by the buyer) and DDP (seller clears for import) should be made especially carefully here. Practical advice: DDP means that the seller has to register for tax and customs purposes in the destination country and bear the import VAT – an effort that is often underestimated. Conversely, EXW is risky for the buyer, because it is also responsible for export handling in the seller's country. For most deliveries of goods the ICC therefore recommends FCA instead of EXW and DAP instead of DDP as more balanced standard clauses.
Example
Example: SME exports machine parts under Incoterm FCA
A German supplier sells machine parts to a customer in Poland. In the quotation both agree "FCA Stuttgart, Incoterms 2020". This means: the seller hands over the export-cleared goods to the carrier nominated by the buyer in Stuttgart. From that moment the buyer bears the risk and the further transport costs to Poland; the buyer also takes on the import handling.
In the ERP the FCA clause is stored as a delivery term in the customer master data and is automatically applied to the order. The system does not add freight costs into the sales price, prints "FCA Stuttgart, Incoterms 2020" on the commercial invoice and delivery note, and passes the clause to the ATLAS export declaration and the Intrastat declaration. Because the passing of risk on handover to the carrier is clearly documented, each side knows exactly who is liable for the goods from when – a later transport damage is unambiguously attributable to the buyer.
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