What is Incoterms?

Incoterms have existed since 1936 and are updated every ten years; the current version is Incoterms 2020. They are globally recognised and substantially reduce misunderstandings in cross-border transactions.

The most widely used Incoterms in business procurement are: EXW (Ex Works), where the buyer collects goods from the seller's premises and bears all costs and risks from that point; FOB (Free On Board), where the seller loads the goods onto the vessel and risk transfers to the buyer at that point; DAP (Delivered at Place), where the seller delivers to the agreed destination, uninsured; and DDP (Delivered Duty Paid), where the seller handles everything including customs duties and import taxes.

The choice of Incoterm therefore determines who pays for transport, who bears the risk if goods are damaged in transit, and who handles customs formalities. Under EXW the buyer carries most of the risk; under DDP the seller does.

For businesses purchasing hotel inventory, equipment, or materials from overseas suppliers, the Incoterm choice is critical. An attractive purchase price can rise significantly once unplanned transport and customs costs are added. Without an explicit Incoterm, disputes about responsibility are common and costly.

Suppliers typically propose the Incoterm that favours them. Unless you negotiate, the default often places more cost and risk on you as the buyer than you may realise.

In international procurement, Incoterms are rarely discussed proactively. Suppliers default to the term that suits them; buyers often do not notice until the landed costs arrive.

Knowing Incoterms allows you to compare international offers on a like-for-like basis. A FOB price from a supplier in Asia is not directly comparable to a DDP price from a European supplier without accounting for the additional costs. It also gives you a basis to negotiate terms that match your logistics capabilities and risk tolerance.