The Incoterms® rules are standard 'trade terms' used in international and domestic sale contracts to allocate certain costs and risks between the seller and the buyer. The best-known and most widely used of the 11 Incoterms® rules are FOB and CIF (sometimes also spelled f.o.b. or c.i.f.), but several other rules are very common as well.
By referring to an Incoterms® rule in the sale contract or export quote, the exporter and importer have a short-hand way of choosing from among a set of 11 different alternatives as to: 1) who must pay for transport, 2) who must bear the risks of loss of or damage to the goods during transport, and 3) who is responsible for customs formalities and duties upon export and import. Two particular Incoterms® rules (CIF and CIP) in addition place a specific requirement on the seller to obtain at least minimum insurance coverage for the goods.
In essence, the Incoterms® rules are a way of letting the buyer know what is 'included' in the sales price. By choosing an Incoterms® rule, the parties allocate transport costs and risks, as well as the responsibility for insurance and customs formalities, between seller and buyer.