Incoterms are the most quietly important three letters in international trade. Published by the International Chamber of Commerce (ICC) and updated roughly every decade, they're a globally recognised shorthand for who does what, who pays for what, and where risk passes from seller to buyer. Get the term right and a deal runs smoothly; get it wrong and you discover — usually after something goes wrong — that nobody arranged the insurance.
What Incoterms actually define (and what they don't)
Each Incoterm allocates three things between buyer and seller: the costs of carriage, insurance and handling; the point at which risk transfers; and the obligations for export/import formalities. What they do not do is transfer ownership of the goods, set the price, or replace your sales contract — they slot into it. They also pair closely with your customs and clearance responsibilities, since some terms make the seller handle import clearance and others the buyer.
Two groups: any mode vs sea only
The 11 terms split into two families — and choosing from the wrong one is the classic mistake:
- Any mode of transport (7 terms): EXW, FCA, CPT, CIP, DAP, DPU, DDP — use these for air, road, rail and, crucially, containerised sea freight.
- Sea & inland waterway only (4 terms): FAS, FOB, CFR, CIF — designed for bulk and breakbulk where goods are physically placed on board a vessel.
All 11 Incoterms 2020 at a glance
| Term | Name | Mode | Risk transfers when… | Seller pays main freight? |
|---|---|---|---|---|
| EXW | Ex Works | Any | Goods available at seller's premises | No |
| FCA | Free Carrier | Any | Handed to buyer's carrier | No |
| CPT | Carriage Paid To | Any | Handed to first carrier | Yes |
| CIP | Carriage & Insurance Paid To | Any | Handed to first carrier | Yes (+ insurance, ICC A) |
| DAP | Delivered at Place | Any | At destination, ready for unloading | Yes |
| DPU | Delivered at Place Unloaded | Any | At destination, after unloading | Yes |
| DDP | Delivered Duty Paid | Any | At destination, import-cleared | Yes (+ duty & taxes) |
| FAS | Free Alongside Ship | Sea | Alongside the vessel | No |
| FOB | Free on Board | Sea | On board the vessel | No |
| CFR | Cost & Freight | Sea | On board the vessel | Yes |
| CIF | Cost, Insurance & Freight | Sea | On board the vessel | Yes (+ insurance, ICC C) |
Notice the pattern: as you move down from EXW to DDP, responsibility shifts steadily from the buyer to the seller. EXW is maximum effort for the buyer; DDP is maximum effort for the seller.
What changed in Incoterms 2020
- DAT became DPU: "Delivered at Terminal" was renamed "Delivered at Place Unloaded" to reflect that the place of delivery need not be a terminal.
- CIP insurance increased: CIP now requires the higher Institute Cargo Clauses (A) cover, while CIF still only requires the minimum Clauses (C).
- FCA on-board bill of lading: a new option lets the parties arrange for an on-board B/L under FCA — useful when a letter of credit requires it.
- Own-transport recognised: the rules acknowledge buyers/sellers using their own vehicles rather than a third-party carrier.
Common, costly mistakes
- Using FOB or CIF for container cargo — they're for goods loaded on board, not handed over at a terminal. Use FCA/CIP instead.
- Assuming CIF means well-insured — it's only minimum cover. For valuable goods, CIP (Clauses A) or your own policy is safer.
- Agreeing DDP into a country you can't clear — the seller becomes responsible for import duty and formalities they may not be set up for.
- Choosing EXW for exports — the buyer technically handles export clearance in the seller's country, which is often impractical.
Insurance and the gap nobody sees
The single most under-appreciated detail is that paying for freight and bearing risk are not the same thing. Under CFR and CIF, the seller pays the ocean freight — but risk has already passed to the buyer once the goods are on board. If the vessel is lost mid-voyage, that's the buyer's exposure, even though the seller booked and paid for the carriage. Always confirm who is actually carrying the risk, and insure accordingly.
How to choose the right term
A quick way to decide:
- Want maximum control of your logistics? Buy EXW/FCA and arrange carriage yourself (often via a forwarder).
- Want a hands-off, delivered-to-your-door deal? Buy DAP or DDP.
- Shipping containers? Stick to the multimodal terms (FCA, CPT, CIP, DAP, DPU, DDP).
- Moving bulk/breakbulk by sea? The sea-only terms (FAS, FOB, CFR, CIF) are appropriate.
Whatever you choose, name the place precisely (e.g. "FCA Jebel Ali Port") and specify the Incoterms version ("Incoterms 2020"). Ambiguity is where disputes start.
Frequently asked questions
What is the difference between FOB and CIF?
Under FOB the seller's risk ends once goods are on board and the buyer arranges main carriage and insurance. Under CIF the seller pays ocean freight and minimum marine insurance to the destination port — but risk still passes to the buyer on loading. Both are sea-freight only.
What changed in Incoterms 2020?
DAT was renamed DPU; CIP now requires higher (Clauses A) insurance while CIF keeps the minimum; FCA gained an on-board bill of lading option; and own-transport arrangements were recognised.
What does DDP mean?
Delivered Duty Paid — the seller delivers to the buyer's destination, import-cleared, bearing all costs and risks including duty and taxes. Most convenient for the buyer; demanding for the seller.
Which Incoterm should I use for containerised cargo?
Use the multimodal terms — FCA, CPT, CIP, DAP, DPU or DDP — not FOB/CFR/CIF. The sea-only terms assume risk passes at the ship's rail, which doesn't fit how containers are handed over.
