An SME that exports regularly sells to a new Chinese customer under the EXW term because "it's the simplest — the goods leave the warehouse and from there it's no longer our concern." Three months later, it discovers three things. First: the export declaration was improvised by the Chinese customer, the declared value doesn't match the real value, and the Italian customs agency is asking for clarification because the export turns out to be registered to a company that had no standing to handle it. Second: VAT was not applied correctly because adequate proof of export is missing, and the company risks having to pay the tax as if the sale had been domestic. Third: the Chinese customer had problems with import clearance, received the goods a month late, complains of damage it can't tell whether to attribute to transport or packaging, and somehow it has become the exporter's problem anyway, even though contractually it wasn't.
EXW seemed the simplest term and produced the greatest complication. It's a scenario that is not hypothetical but recurring for SMEs, and it illustrates something important: the choice of Incoterm is not a neutral choice made out of habit. It's a contractual and operational decision that has concrete consequences for costs, for risks, for the quality of the relationship with the customer.
Incoterms are a tool that has existed since 1936, updated periodically by the International Chamber of Commerce to reflect the evolution of global commercial practices. The version currently in force is the 2020 one, with eleven specific terms that cover the different possible configurations of an international transaction. Understanding how they really work — not just their abbreviations but their operational implications — is a competence that exporting Italian SMEs should possess structurally, not delegate entirely to their freight forwarder.
It's worth articulating what Incoterms do, what they don't do (and here there are important misunderstandings), how to choose them strategically, and what the implications of the most common choices are.
What Incoterms actually regulate, and what they don't
The first point to clarify is the actual scope of Incoterms, because many companies attribute meanings to them that they don't have.
Incoterms regulate four specific dimensions of the delivery of goods between seller and buyer in international transactions.
Who organizes transport. Which party handles selecting and contracting the carrier, organizing the shipments, managing the logistical steps.
Who pays for what. The allocation of the costs of transport, insurance, any intermediate handling, export duties, import duties, between seller and buyer.
When risk passes. The exact moment at which the risk of loss of or damage to the goods transfers from seller to buyer. This is probably the most important and least understood dimension.
Who handles customs formalities. Who is responsible for export procedures in the country of origin and import procedures in the country of destination.
What Incoterms do not regulate includes several important dimensions that companies often wrongly assume are covered.
The transfer of ownership of the goods. When the goods legally become the buyer's property is a matter that depends on the sales contract and the applicable law, not on the Incoterm. You can have physical delivery of the goods to the buyer without ownership having passed yet, and vice versa.
The methods and timing of payment. When the buyer must pay, with what instruments, with what guarantees, is a separate contractual matter. The Incoterm does not affect payment terms.
Product warranties. Warranties for defects, flaws, non-conformity of the product are a separate contractual matter.
Liability for delays. If delivery occurs late relative to what was agreed, the consequences (penalties, damages, contract termination) are not governed by the Incoterm.
Applicable law and jurisdiction. Which law governs the contract and which court has jurisdiction over disputes are separate questions that must be specified contractually.
Recognizing the actual scope of Incoterms makes it possible to build complete contracts that don't leave uncovered aspects that Incoterms don't manage. The error of treating the Incoterm as "the contract" produces incomplete contracts that present problems when situations arise that Incoterms don't cover.
The four groups of Incoterms 2020
The eleven terms of Incoterms 2020 can be grouped into four families with progressively different characteristics of seller responsibility.
Group E (Departure) — a single term: EXW. The seller makes the goods available to the buyer at its own premises. Everything else is the buyer's. It's the term that minimizes the seller's obligations in theory, but that frequently produces practical complications.
Group F (Main carriage unpaid) — three terms: FCA, FAS, FOB. The seller delivers the goods to a carrier designated by the buyer, generally in the country of origin. The seller takes on the export formalities. The buyer pays for the main carriage.
Group C (Main carriage paid) — four terms: CPT, CIP, CFR, CIF. The seller organizes and pays for the main carriage up to the agreed place of destination, but risk passes to the buyer already in the country of origin (at the moment of delivery to the carrier). A characteristic that produces frequent misunderstandings.
Group D (Arrival) — three terms: DAP, DPU, DDP. The seller delivers the goods in the country of destination, bearing transport and risk up to that point. The difference between the three D terms concerns unloading (DPU includes unloading, DAP doesn't) and the handling of import formalities (DDP includes import duties, DAP and DPU don't).
To get your bearings in the choices, the general rule is that moving from E toward D, the seller's obligations grow progressively and the buyer's obligations decrease. The choice of group therefore reflects the service relationship you want to structure with the customer.
The terms for sea transport: FAS, FOB, CFR, CIF
Four Incoterms are specifically designed for sea transport or inland waterways, and should not be used for other modes of transport. The distinction is important because many companies use them improperly.
FAS (Free Alongside Ship). The seller delivers the goods alongside the ship at the agreed port of shipment. From that point, risk passes to the buyer. The seller takes on the export formalities. It's used relatively rarely — almost always actual loading on board is the more sensible threshold.
FOB (Free On Board). The seller delivers the goods on board the ship at the agreed port of shipment. Risk passes when the goods are actually loaded on board. It's a historically much-used term, but suitable only for goods that are loaded directly onto a ship (not containers that are consolidated before loading).
CFR (Cost and Freight). The seller pays for transport up to the agreed port of destination, but risk passes already at the moment of loading on board at the port of departure. It's a term that produces frequent misunderstandings because the buyer thinks the risk is the seller's up to destination (transport is, risk isn't).
CIF (Cost, Insurance and Freight). Like CFR, but the seller also adds the obligation to take out minimum insurance up to the port of destination. Important: the minimum insurance required by Incoterms 2020 for CIF is type C (limited coverage), which could be insufficient for many categories of goods — a buyer who wants better coverage must negotiate it explicitly or take it out on their own account.
The maritime terms should not be used for container shipments, for multimodal shipments, for air shipments, for road shipments, for rail shipments. For these configurations there are other, more appropriate terms.
The terms for any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU, DDP
Seven of the eleven Incoterms are designed to be used with any mode of transport, including multimodal. They are the terms of choice for the vast majority of contemporary transactions, and they deserve thorough understanding.
EXW (Ex Works). The seller makes the goods available at its own premises, already packaged and identified for the transaction. The buyer takes on everything else — loading onto the means of transport, transport, export formalities, import formalities. It's a term that seems simple but produces frequent complications because it leaves the seller with the problem of proof of export (for VAT and other purposes) without the seller controlling the process.
For many transactions where one is tempted to use EXW, FCA is a better alternative.
FCA (Free Carrier). The seller delivers the goods, cleared for export, to the carrier designated by the buyer at the agreed place. The place can be the seller's warehouse (in which case the seller must load the goods onto the means transporting them away) or another place in the country of origin (in which case the seller does not have to carry out unloading at the place of delivery). Risk passes at the moment of delivery to the carrier. The seller handles the export formalities.
FCA is a flexible term suited to a great many configurations. In Incoterms 2020 a notable novelty was introduced: for FCA, the buyer can ask the carrier to issue a bill of lading with an "on board" notation and to transmit it to the seller. This change solves a practical problem that companies working with letters of credit knew well.
CPT (Carriage Paid To). The seller organizes and pays for transport up to the agreed place of destination. Risk passes to the first carrier. The seller handles the export formalities, the buyer the import ones.
CIP (Carriage and Insurance Paid To). Like CPT, but with an obligation for the seller to take out insurance. In Incoterms 2020, the insurance required for CIP was increased: type A coverage (extended), no longer minimal as it was in previous versions. For maritime CIF, by contrast, it remains type C.
DAP (Delivered at Place). The seller delivers the goods at the agreed place of destination (in the buyer's country), ready to be unloaded, bearing transport and risk up to that point. The import formalities (customs, duties, VAT) remain the buyer's responsibility.
DPU (Delivered at Place Unloaded). Like DAP, but with the difference that the seller must also unload the goods from the means of transport at the place of destination. It's a new term in 2020 (it replaces the old DAT — Delivered at Terminal — of Incoterms 2010), which recognizes that the place of destination can be anywhere, not necessarily a terminal.
DDP (Delivered Duty Paid). The seller delivers the goods at the agreed place of destination, bearing transport, risk, export formalities, import formalities (including duties and VAT of the destination country). It's the term that maximizes the seller's obligations. It's often chosen by companies that want to offer the customer a "door-to-door" service without the customer having to deal with anything, but it requires the seller to have significant operational capacity to handle formalities in countries other than its own.
Choosing the Incoterm: strategic criteria
Choosing the most appropriate Incoterm for a specific transaction requires considering several factors that SMEs often underestimate.
The mode of transport. For multimodal shipments (which are the vast majority of modern containerized shipments), you need multimodal Incoterms, not maritime ones. Using FOB for a container that leaves by truck from a warehouse in Lombardy, is loaded onto a ship in a port, is unloaded at another port, continues by truck to its destination, is a technically wrong choice.
The capacity of the parties. If the seller has no experience with customs management in the country of destination, choosing DDP is exposing oneself to significant complications. If the buyer has no logistical capacity to organize international transport, choosing EXW puts them in difficulty. The choice of Incoterm should realistically reflect the parties' capacities.
The commercial relationship. For established customers with whom there is trust and repeat business, more balanced terms work well. For new customers or for occasional transactions, terms that are clearer on responsibility and control are preferable.
Risk management. The point at which risk passes determines who bears any damage or loss. For high-value goods or goods particularly sensitive to transport, risk management is a central element of the choice.
Management of costs and margins. Terms in which the seller organizes transport (groups C and D) allow it to negotiate transport conditions and manage the overall margin, but expose it to cost variability. Terms in which the buyer organizes transport (groups E and F) transfer this variability to the buyer.
Tax and customs implications. The handling of VAT and customs formalities differs between Incoterms. For non-EU exports, the proof of export needed for VAT exemption is easier to obtain with terms in which the seller directly handles the export (groups F, C, D) than with EXW, where the seller depends on the documentation the buyer will produce.
The specifics of the destination country. Some countries have regulations or practices that make certain Incoterms more suitable than others. In some markets, certain terms are practically standard for certain commercial categories, and proposing different ones creates needless friction.
The ability to get paid. For transactions that use instruments such as documentary letters of credit, certain operational conditions of the Incoterms integrate better than others with the documentary requirements.
The most frequent mistakes of SMEs
Some recurring mistakes in the choice and use of Incoterms produce specific problems. It's worth naming them.
Using EXW to "simplify." The first mistake by frequency. EXW seems simple but offloads onto the buyer export formalities that can be problematic, and leaves the seller exposed to proof-of-export problems for VAT. For the vast majority of cases, FCA is a better alternative.
Using FOB for container shipments. A recurring technical mistake. FOB is designed for goods that are loaded directly onto the ship (bulk, bulk cargo). For containers, FCA at the port is technically correct.
Using DDP without having operational capacity. Promising the customer a "door-to-door" service with DDP is demanding. It means the seller must be able to handle (directly or through partners) the customs and tax formalities in the destination country, advance duties and VAT, manage any disputes with local authorities. Companies that sell DDP without having this capacity find themselves in difficulty at the first complication.
Confusing the passing of risk and the passing of costs in the C terms. For CPT, CIP, CFR, CIF, the seller pays for transport up to destination BUT risk passes already in the country of origin. It's a situation many parties don't understand — the buyer thinks the risk is the seller's up to destination (because the seller "brought the goods to destination"), but that's not so. For transport-sensitive goods, this is a crucial point that must be communicated explicitly.
Underestimating the importance of insurance. For terms that don't include insurance (and for those that include minimal insurance), a buyer who wants adequate coverage must provide it on their own. Not doing so means exposing oneself to significant financial losses in case of damage.
Not specifying the place precisely. All Incoterms require being accompanied by the indication of the place (port, city, specific address). "FOB Genoa" is clear. "EXW" with nothing else is not. Precision in indicating the place is an essential element.
Not indicating the version of the Incoterms. In contractual agreements, indicating "Incoterms 2020" is important to avoid a different version being applied. Even though the 2020 version is the current one, contracts that refer generically to "Incoterms" can produce ambiguity.
Integration with the sales contract
Incoterms are a partial tool. They must be integrated into a complete sales contract that handles the dimensions Incoterms don't cover.
The elements the contract must handle beyond the Incoterm include several dimensions.
The methods and timing of payment. Payment in advance, on delivery, after delivery with a certain number of days' deferral. Payment instruments (bank transfer, letter of credit, documentary collection). Payment guarantees.
The transfer of ownership. When legal ownership of the goods passes to the buyer, and what happens if the buyer doesn't pay.
Product warranties. Explicit warranties for defects, flaws, non-conformity. Claim periods. How disputes are handled.
Penalties for delays. What happens if delivery doesn't occur within the agreed timeframe.
Termination clauses. In which cases the contract can be terminated, with what consequences.
Force majeure clauses. Unforeseeable events that can suspend or modify the parties' obligations.
Applicable law and jurisdiction. Which law governs the contract, which court (or possibly arbitration) has jurisdiction over disputes.
The handling of VAT and indirect taxes. Explicit indications of how VAT is handled in the transaction, beyond what the Incoterm specifies.
Non-compete, exclusivity, confidentiality clauses. When applicable.
For Italian SMEs that do significant export volumes, having standardized contract templates that integrate Incoterms with the other contractual dimensions is an investment that reduces the risk of misalignments and speeds up operations. Specialized legal advice in international contract law is generally indispensable for the first construction of these templates.
Training the team
Incoterms are a subject that requires widespread competence within the company, not just in the logistics function. The salespeople who negotiate contracts need to know how to use them, the administrative functions that handle invoicing and documentation need to know them, the finance functions that manage cash flow need to understand their implications.
For companies that do significant export volumes, investing in structured team training on Incoterms produces concrete returns. Training can be done through specific courses (the International Chamber of Commerce and its national branches offer qualified courses), periodic internal consulting, reference materials accessible to the team.
The common mistake is to consider Incoterms the freight forwarder's specialist competence. The freight forwarder is an important partner and has technical competence on the subject, but does not replace the seller's contractual responsibility to choose the right Incoterm and to handle its implications correctly.
What digital and AI tools have changed for managing Incoterms
Several aspects of the operational management of Incoterms have been significantly transformed by digital and AI tools.
Checking consistency between documents and the chosen Incoterm. Systems that automatically verify whether the customs documentation, transport conditions, and insurance coverage are consistent with the Incoterm specified in the contract reduce the risk of misalignments that produce problems.
Automated generation of contracts. Tools that produce draft contracts correctly incorporating the chosen Incoterm and its operational implications reduce the risk of contractual errors.
Simulation of total costs. For the same transaction with different Incoterms, calculating the total cost (and the effective margin) for the seller and for the buyer is an exercise that specific tools significantly facilitate. It makes it possible to choose the Incoterm with awareness of the economic implications.
Integrated management of documentation. Systems that integrate the management of customs, transport, contractual, and insurance documentation into coherent flows reduce the risk of errors and speed up operations.
Training the team. Online learning tools, simulators, interactive case studies are accessible at costs that didn't exist ten years ago. They enable continuous team training at sustainable costs.
Decision support. For SMEs that don't have specialized internal consulting, AI tools can provide support in choosing the appropriate Incoterm based on the specific characteristics of the transaction. The support is particularly useful for cases that fall outside standard configurations.
Digital tools do not replace human competence on Incoterms — the strategic choice, the contractual negotiation, the management of ambiguous situations require specialist judgment. But they make it more sustainable to manage significant volumes of international operations with consistent quality.
Incoterms are a valuable tool when they are understood and used correctly, a source of problems when they are used out of inertia or wrong assumptions. The difference between the two situations is not advanced specialist competence — it's structured attention to the fact that the choice of Incoterm is a strategic choice that deserves case-by-case reflection, not a default applied mechanically.
For Italian SMEs that want to improve their management of Incoterms, the practical thing to do is probably to honestly assess their current practices. Which Incoterm do we use by default for the different markets and customer categories, and why? Are the current choices actually the most suitable for the various scenarios, or are they inertia that has never been reviewed? Does our sales, administrative, and logistics team have an actual understanding of the implications of the different choices? Does our contractual documentation correctly integrate the Incoterms with the other dimensions they don't cover?
The answers to these questions, articulated honestly, identify the areas for intervention. Investing in the correct management of Incoterms is not a glamorous investment but it's one of the operational investments with the surest return for companies that do significant volumes of international operations. Operations that run smoothly produce value. Those that get stuck in contractual and customs complications produce problems that no commercial brilliance can offset.