If you're importing or exporting goods, you've almost certainly encountered the term "Incoterms" — but understanding exactly what they mean and which one to use in your contracts can be confusing. Getting Incoterms wrong can have significant financial and legal consequences. This guide breaks down the most commonly used terms and helps Australian businesses apply them correctly.
What Are Incoterms?
Incoterms — short for International Commercial Terms — are a globally recognised set of rules published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international trade transactions. They specify who is responsible for the costs, risks, and logistics tasks at each stage of a shipment's journey, from the seller's warehouse to the buyer's door.
The current version is Incoterms 2020, which came into effect on 1 January 2020 and introduced several updates from the previous Incoterms 2010 edition. When specifying an Incoterm in a contract, it is important to reference the version you are using — for example, "FOB Shanghai Incoterms 2020."
Incoterms do not cover all aspects of a sales contract — they do not address payment terms, the transfer of title/ownership, or dispute resolution. They are purely concerned with the physical logistics and the allocation of cost and risk between buyer and seller.
The Most Common Incoterms for Australian Businesses
There are eleven Incoterms in the 2020 edition. Below are the five most relevant for Australian importers and exporters.
EXW — Ex Works
Under EXW, the seller's only obligation is to make the goods available at their premises (their factory, warehouse, or other named place). From that moment, the buyer takes full responsibility for all costs and risks — export customs, loading, international freight, insurance, and import duties in Australia. EXW places the maximum burden on the buyer and is therefore generally unsuitable for buyers who are not experienced in logistics, as it requires them to manage the entire process in a foreign country.
FOB — Free On Board
FOB is one of the most widely used Incoterms for sea freight. Under FOB, the seller is responsible for delivering the goods to the named port of shipment and loading them onto the vessel nominated by the buyer. Once the goods are on board, risk transfers to the buyer. The buyer is then responsible for the main sea freight cost, insurance, and all charges on arrival in Australia. FOB is appropriate for buyers who want control over the shipping process and have established relationships with freight forwarders.
CIF — Cost, Insurance and Freight
Under CIF, the seller pays for the cost of freight and insurance to the destination port. However, critically, risk transfers to the buyer as soon as the goods are loaded on board the vessel at the origin port — even though the seller is paying for the freight. This means that if goods are damaged in transit, the buyer bears the risk despite not having arranged the freight. CIF is commonly used when the buyer does not have established freight arrangements, but it requires careful attention to insurance coverage.
DAP — Delivered at Place
Under DAP, the seller takes responsibility for delivering the goods to a named destination in the buyer's country — this could be a port, warehouse, or the buyer's premises. The seller bears all costs and risks up to that point. The buyer remains responsible for import customs clearance and any import duties. DAP is a popular term for buyers who want the seller to manage international freight but prefer to handle their own Australian customs clearance.
DDP — Delivered Duty Paid
DDP represents the maximum obligation for the seller. Under DDP, the seller takes responsibility for the entire journey — including export formalities, international freight, insurance, and import customs clearance and duties in Australia — delivering the goods to the named destination. This is the simplest term for the buyer but places significant obligations on the seller, who must be familiar with Australian import procedures and duty rates.
Which Incoterm Should You Use?
The right Incoterm depends on your situation, your relationship with your supplier or buyer, and your in-house logistics capability:
- You are an experienced Australian importer with your own freight forwarder: FOB gives you control over freight costs and carrier selection.
- You are a new importer and want simplicity: CIF or DAP means the seller handles more of the logistics, though ensure you understand where risk transfers.
- You want the seller to handle everything: DDP is the simplest for you but may come at a higher price, as the seller will build in a margin for managing Australian customs.
- You are exporting from Australia: EXW or FOB are common starting points, but consider whether your overseas buyer has the capacity to manage Australian export formalities under EXW.
Common Mistakes to Avoid
Even experienced traders make errors with Incoterms. Here are the most common pitfalls:
- Using outdated Incoterm versions: Always specify "Incoterms 2020" in your contracts. Some suppliers still reference Incoterms 2010 or even earlier versions, which can create ambiguity. The rules differ between versions.
- Misunderstanding risk transfer points: Many buyers mistakenly believe that CIF means the seller bears risk to the destination port. It does not — risk transfers when goods are loaded on the vessel. If goods are damaged in transit under CIF, the buyer must claim on the insurance arranged by the seller.
- Ignoring insurance requirements: CIF requires only minimum insurance coverage. If your goods are high-value, ensure additional insurance is taken out. Under most other Incoterms, insurance is not mandatory — but leaving goods uninsured for an international voyage is a significant commercial risk.
- Applying sea freight Incoterms to air freight: FOB and CIF are intended for sea or inland waterway transport only. For air or multimodal shipments, use FCA (Free Carrier) or CPT (Carriage Paid To) instead.
How AusTalk Helps
Selecting and applying the right Incoterm is just one part of a successful import or export transaction. At AusTalk, our licensed customs brokers and freight forwarders work with you to ensure your contracts are structured correctly, your freight is arranged under the most commercially advantageous terms, and your goods clear Australian customs smoothly.
Whether you're new to international trade or an experienced importer looking to optimise your supply chain, our team is here to help. Reach out today for a no-obligation consultation.
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