What Are Incoterms?
Incoterms (International Commercial Terms) are a set of standardized trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers in international (and sometimes domestic) trade transactions — specifically who arranges and pays for transport, insurance, and customs clearance, and at what point risk transfers from seller to buyer.
The current version, Incoterms® 2020, contains 11 rules divided into two groups: rules for any mode of transport, and rules for sea and inland waterway transport only. Misunderstanding or misapplying Incoterms is a leading cause of trade disputes, unexpected costs, and damaged business relationships.
The Two Groups of Incoterms 2020
Group 1: Rules for Any Mode of Transport
These apply whether goods are shipped by sea, air, road, or rail — or a combination:
| Incoterm | Full Name | Risk Transfer Point | Who Arranges Main Freight |
|---|---|---|---|
| EXW | Ex Works | At seller's premises | Buyer |
| FCA | Free Carrier | Named place / carrier handover | Buyer |
| CPT | Carriage Paid To | On delivery to first carrier | Seller |
| CIP | Carriage and Insurance Paid To | On delivery to first carrier | Seller (inc. insurance) |
| DAP | Delivered At Place | At named destination | Seller |
| DPU | Delivered at Place Unloaded | After unloading at destination | Seller |
| DDP | Delivered Duty Paid | At named destination (all duties paid) | Seller |
Group 2: Rules for Sea and Inland Waterway Only
These are used specifically for containerized or bulk sea/river freight:
| Incoterm | Full Name | Risk Transfer Point |
|---|---|---|
| FAS | Free Alongside Ship | Alongside the vessel at origin port |
| FOB | Free On Board | On board the vessel at origin port |
| CFR | Cost and Freight | On board the vessel at origin port |
| CIF | Cost, Insurance and Freight | On board the vessel at origin port |
The Most Commonly Used Incoterms and When to Use Them
FOB — Free On Board
The workhorse of international trade. The seller delivers goods on board the vessel at the named port of shipment. Risk transfers at that point. The buyer arranges and pays for the main ocean freight. FOB is well understood by both parties and is ideal when the buyer has a strong freight relationship and wants control over shipping costs.
CIF — Cost, Insurance and Freight
The seller pays for ocean freight and minimum insurance to the destination port. Risk transfers when goods are on board at origin. This is convenient for buyers who prefer a simpler process, but it means the seller controls freight selection — which can mask inflated freight costs. Experienced importers often prefer FOB for cost transparency.
DDP — Delivered Duty Paid
The seller takes on maximum responsibility — delivering goods to the buyer's door with all duties, taxes, and import formalities handled. Attractive to buyers who want a "landed" price with no surprises, but it requires the seller to navigate import regulations they may be unfamiliar with. Use with caution if you don't have import compliance expertise in the destination country.
FCA — Free Carrier
An underused but highly flexible term. The seller delivers goods to a named carrier or place. A 2020 update allows the seller to obtain an on-board bill of lading after loading (critical for letters of credit). FCA is recommended over FOB for containerized cargo by many trade experts.
Key Changes in Incoterms 2020
- DAT renamed DPU — now explicitly covers any location, not just a terminal
- FCA enhanced — bill of lading can now be issued after loading for L/C purposes
- CIP insurance standard upgraded — requires Institute Cargo Clauses (A), the highest coverage level
- Carriage by own means allowed — sellers/buyers can now use their own transport under FCA, DAP, DPU, DDP
Common Incoterms Mistakes to Avoid
- Using sea-only Incoterms (FOB, CIF) for containerized cargo moving door-to-door
- Naming a vague delivery point — always specify the exact port, terminal, or address
- Confusing risk transfer with cost transfer (they don't always happen at the same point)
- Using Incoterms without specifying the year: always state "Incoterms® 2020"
Final Tip
The "right" Incoterm depends on your negotiating position, logistics expertise, and risk appetite. New exporters often benefit from starting with EXW or FCA to limit their responsibilities, while growing the capability to offer CIF or DDP as they gain experience and freight relationships.