July 18, 2025

What are Incoterms - Understand the rules

Learn what Incoterms are and how they are used in international trade and transportation. Complete guide with rules, differences and practical application from H. Daugaard.

a globe and a clipboard with Incoterms on it

When trading across borders, you inevitably come across the term Incoterms. But what does it really mean and why is it so crucial to your business? As a seasoned logistics partner with over 100 years of experience in international transportation, we help companies navigate these international trade terms every day.

In our work with multimodal transportation solutions across Europe, we constantly see how important the correct use of Incoterms is for smooth trade. That's why we've gathered everything you need to know about these trading terms.

What do Incoterms stand for?

Incoterms stands for "International Commercial Terms" and are standardized trade terms drawn up by the International Chamber of Commerce (ICC). These rules were first published in 1936 and are continuously updated to keep up with developments in international trade.

The basic purpose of Incoterms is to define exactly who - buyer or seller - is responsible for transportation, insurance, customs and risk transfer in commercial transactions. This creates clarity and prevents misunderstandings in international trade agreements.

Without clear Incoterms, even experienced trading partners risk ending up in costly disputes about who should pay unexpected costs or bear responsibility for damage or delays.

What Incoterms are there?

There are 11 official Incoterms in Incoterms 2020, which are divided into two main groups based on mode of transport:

Incoterms for all modes of transportation:

EXW (Ex Works) - Collection from seller

FCA (Free Carrier) - Delivered to carrier

CPT (Carriage Paid To) - Freight paid to

CIP (Carriage and Insurance Paid To) - Carriage and Insurance Paid To

DAP (Delivered at Place) - Delivered at destination

DPU (Delivered at Place Unloaded) - Delivered unloaded at destination

DDP (Delivered Duty Paid) - Delivered duty paid

Incoterms for sea and inland waterway transportation only:

FAS (Free Alongside Ship) - Free alongside ship

FOB (Free On Board) - Free on board

CFR (Cost and Freight) - Cost and Freight

CIF (Cost, Insurance and Freight) - Cost, Insurance and Freight

Choosing between these Incoterms depends on your mode of transportation, experience with international trade and how much control you want over the transportation process.

Do all Incoterms apply to all types of freight transportation?

No, and it's one of the most common mistakes in international trade. Choosing the wrong Incoterm for your mode of transportation can cause significant problems and unexpected costs.

Incoterms for all modes of transport

The first seven Incoterms (EXW to DDP) can be used for any mode of transportation, whether you choose road, rail, sea, air or combined transportation.

These Incoterms are ideal for modern container transportation, where the goods are delivered at a terminal rather than directly on board ship. At H. Daugaard , we often use these terms in our multimodal transportation solutions, where we combine different modes of transport to create the most sustainable and efficient solution.

In practice: We have built up fundamental expertise in handling steel products and offer international rail transportation to Europe from our terminals in Kolding. For such intermodal transportation, CPT or CIP are often suitable Incoterms.

Incoterms for maritime and inland waterway transport

The four maritime Incoterms (FAS, FOB, CFR, CIF) can only be used when the goods are physically loaded on board ship. They are not suitable for container transportation where the delivery point is in a port terminal.

These conditions are perfect for bulk and breakbulk transportation. We offer volume and bulk shipping through quayside facilities in the ports of Kolding and Vejle, where FOB or CIF can be relevant conditions.

Tip: If in doubt about the mode of transport, always choose an Incoterm from the "all modes of transport" group, as they are more flexible and suitable for modern logistics.

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NOTE: When using an Incoterm, it is essential to include a precise place name - such as an address, city or port - after the Incoterms term itself. This applies to all Incoterms and is necessary to establish the exact place of transfer of risk and liability between seller and buyer.

Why are Incoterms important?

Incoterms bring clarity and prevent costly misunderstandings in international trade agreements. They solve four key challenges in global trade:

Accountability - Who does what in the transport chain?

Cost allocation - Who pays for transportation, insurance and customs?

Transfer of risk - When does the risk pass from seller to buyer?

Documentation - What paperwork needs to be provided and by whom?

In international trade, the difference between well-functioning transactions with clear Incoterms and the problems that arise from unclear agreements is clear. Correct Incoterms are the foundation of successful international trade.

Especially in today's globalized economy, where supply chains stretch across continents, precise agreements on liability and costs are crucial to avoid delays and financial losses.

When are Incoterms used?

Incoterms are used every time you trade across borders and should be a standard part of all international purchase contracts. However, they can also be used for domestic transportation to provide clarity on responsibilities and costs.

To avoid misunderstandings and ensure smooth trade, Incoterms must be clearly specified in all relevant documents. You should always specify three things:

The selected Incoterm (e.g. "DAP")

The specific delivery location (e.g. "Hamburg, Germany")

The versions (e.g. "Incoterms® 2020")

Example of correct entry: "DAP Hamburg, Germany (Incoterms® 2020)"

In which documents are Incoterms specified?

To ensure consistent understanding and avoid disagreements, Incoterms must be included in all relevant trade documents throughout the trade process:

Offer phases and price negotiations

Purchase contracts and order confirmations

Invoices and transport documents

Insurance arrangements

This ensures that all parties have the same understanding of responsibilities, costs and risks throughout the trade transaction. With over 100 years of experience, we help our customers choose the most appropriate Incoterm based on their specific needs, mode of transportation and risk appetite.

What is the difference between Incoterms 2020 and Incoterms 2010?

ICC updates Incoterms every ten years to keep up with developments in international trade. Here are the key changes in the 2020 version:

DAT became DPU - More flexibility in where goods can be unloaded

Increased focus on safety - Clearer requirements for safety during transport

Different insurance levels - CIF requires less insurance than CIP

Better cost overview - Easier to see all transportation costs together

Improved document management - Especially for bank financing

The new regulations keep up with modern business practices and technological developments. As an experienced logistics partner, we ensure that our customers always use the most up-to-date regulations to avoid legal complications.

How to choose the right Incoterm

The choice of Incoterm is not random. It requires careful consideration of several factors to avoid costly mistakes and ensure smooth trade.

Rate your experience in international trade:

Are you a beginner? Start with EXW or FCA, where you have less responsibility

Experienced exporter? DDP provides maximum control and full service to the customer

Do you want minimal risk? CIP or CIF includes insurance and protection

Customize to your mode of transport:

Container transportation: Use multimodal Incoterms (EXW to DDP)

Bulk and sea transport: Maritime Incoterms can be used (FAS to CIF)

Combined transport: Choose flexible solutions like CPT or CIP

Consider your customer requirements:

B2B trade: FOB or CIF are well-known and commonly used

B2C deliveries: DDP preferred for best customer experience

Large project deliveries: DAP or DPU suits complex deliveries

Also consider:

Your budget for transportation and insurance

How much control you want over the delivery process

Customer experience with customs and import procedures

Destination country import rules and practices

Choosing the right Incoterm can save you time, money and headaches. If in doubt, it's always best to seek professional advice from experienced logistics partners.

Get expert help choosing the right Incoterms

As an experienced logistics partner with over 100 years of experience, we help companies choose the right Incoterms every day. We advise on the most appropriate trade term based on your mode of transportation, destination and risk appetite.

Whether you need road transport, rail transport or shipping, we can help you optimize both costs and delivery reliability through the right Incoterms choice.