What are Incoterms? They are a set of 11 standard trade rules published by the International Chamber of Commerce, known as the ICC, that divide delivery duties, costs, and risk between a seller and a buyer in a sale of goods. Each rule uses a three-letter code, such as FOB, CIF, or DAP, plus a named place. Together, the code and the place state who arranges transport, who pays for each stage, who handles export and import clearance, and the exact point where risk of loss or damage passes from seller to buyer. The current version is Incoterms 2020, which took effect on 1 January 2020.
An Incoterm is not a complete contract. It sits inside your contract of sale and answers the delivery part in a form traders, carriers, and banks read the same way.
What Are Incoterms Used For?
Traders use Incoterms to remove doubt before goods move. Without a shared rule, a seller may assume the price ends at the factory gate, while the buyer assumes it includes delivery to a warehouse. That gap leads to unpaid freight bills and uninsured cargo.
With a named rule, both sides can plan in advance. For example, the seller knows whether to book the main carriage or hand goods to the buyer’s carrier. The buyer knows whether to arrange insurance from the port of loading, from the factory, or not at all. Banks and forwarders also rely on the same wording when they check documents.
In practice, the rule also shapes the quoted price. A price under EXW covers far less work than a price under DDP, so two quotes for identical goods can look far apart for a sound reason. Comparing quotes only makes sense after you confirm that both use the same rule, named place, and version.
For a wider view, the logistics guide gathers the related topics in one place.
Incoterms 2020 Explained: Where the Rules Come From
The ICC first published Incoterms in 1936 and has revised them several times since then. Incoterms 2020 is the latest revision and remains the current version. Older editions do not expire automatically, however. Parties can still agree to use Incoterms 2010, but only if the contract states that version clearly.
That detail matters in daily trade. Insurance duties under CIP changed in 2020, and the rule once called DAT became DPU. If a contract says only “CIP” with no year, the two sides may later disagree about which duties apply. So write the rule, the named place, and the version together every time — for example, “CIP Rotterdam, Incoterms 2020.”
The named place matters just as much as the code. Under some rules it is the delivery point. Under others it is the destination up to which the seller pays carriage, while risk passes much earlier. A code with no place leaves that point open.
What Do Incoterms Cover?
Each Incoterms rule allocates three things in a consistent order.
First, the rule sets the delivery point — the point where the seller has completed the delivery duty and risk passes to the buyer. That point may be the seller’s premises, a carrier’s terminal, alongside a ship, on board a ship, or a named place in the buyer’s country.
Second, the rule allocates costs: who pays for loading, export clearance, main carriage, insurance where the rule requires it, unloading, and import clearance. Cost and risk do not always move together, and that split causes much of the confusion around the C rules, covered below.
Third, the rule assigns supporting duties, such as who provides transport documents, who gives notice of shipment or arrival, and who supplies information the other side needs for insurance or security filings.
What Do Incoterms Not Cover?
Incoterms have clear limits, and most costly errors come from treating them as if they covered the whole sale.
- Ownership and title. Incoterms do not state when ownership of the goods passes. Title passes under the contract of sale and its governing law, so the contract needs its own title clause.
- Price and payment terms. The rules do not say how much the buyer pays, when payment falls due, or whether payment runs by letter of credit, open account, or advance transfer.
- Breach and remedies. The rules do not set what happens if goods arrive late or not as described. Remedies, inspection rights, quality standards, and warranties belong in the contract.
- Force majeure and dispute handling. The rules do not decide which law governs the sale, where a dispute is heard, or how an event outside either party’s control affects the deal.
So an Incoterm answers delivery, risk, and cost questions only. A short contract that lists a code and nothing else leaves the rest of the sale unanswered.
The 11 Incoterms 2020 Rules
Incoterms 2020 explained in full means looking at all 11 rules in the ICC’s two groups. The first group works for any mode of transport, including road, rail, air, sea, and a mix of modes. The second group works only for sea and inland waterway transport.
Rules for Any Mode of Transport
EXW — Ex Works. The seller makes the goods available at a named place, usually the factory or warehouse. The buyer bears cost and risk from that point, including loading and export clearance in most cases. EXW gives the seller the smallest duty of any rule.
FCA — Free Carrier. The seller delivers the goods, cleared for export, to the buyer’s carrier at a named place. If that place is the seller’s premises, the seller loads the goods. If it is a terminal, the seller delivers them ready for unloading.
CPT — Carriage Paid To. The seller contracts and pays for carriage to the named destination. Risk passes earlier, however, when the seller hands the goods to the first carrier. The buyer therefore bears risk during a journey the seller paid for.
CIP — Carriage and Insurance Paid To. CIP works like CPT, with one addition: the seller also buys cargo insurance for the buyer’s risk to the named destination. Under Incoterms 2020, CIP requires a higher level of cover than CIF, based on Institute Cargo Clauses (A) or similar cover, unless the parties agree otherwise.
DAP — Delivered at Place. The seller delivers the goods at the named destination, ready for unloading. The seller bears risk and cost to that point. The buyer handles unloading and import clearance, and pays import duties and taxes.
DPU — Delivered at Place Unloaded. DPU is the only rule where the seller must unload at destination. The seller delivers the goods unloaded at the named place and bears risk until unloading is complete. The buyer then handles import clearance and onward movement. DPU replaced DAT in 2020 and widened the delivery point beyond terminals.
DDP — Delivered Duty Paid. The seller delivers the goods at the named destination, cleared for import, ready for unloading, and pays import duties and taxes as well as carriage. DDP gives the seller the largest duty of any rule, and suits a buyer only if the seller can legally clear goods in the buyer’s country.
Rules for Sea and Inland Waterway Transport Only
FAS — Free Alongside Ship. The seller delivers the goods alongside the vessel at the named port of shipment, for example on the quay or a barge next to the ship. Risk passes at that point, and the buyer handles loading and carriage.
FOB — Free On Board. The seller delivers the goods on board the vessel the buyer nominates at the named port of shipment, cleared for export. Risk passes once the goods are on board. The buyer then arranges and pays for sea carriage and any insurance.
CFR — Cost and Freight. The seller delivers the goods on board and pays freight to the named port of destination. Risk still passes on board at the port of shipment, not at destination. The buyer bears risk during the voyage and needs to consider separate insurance, since CFR imposes no insurance duty on the seller.
CIF — Cost, Insurance and Freight. The seller delivers the goods on board, pays freight to the named port of destination, and buys minimum cargo insurance for the buyer’s risk. Under Incoterms 2020 that default cover is Institute Cargo Clauses (C) or similar cover, unless the parties agree on wider cover.
Notice the pattern inside the C rules — CFR, CIF, CPT, and CIP. In each case the seller pays carriage to a named destination, but risk passes at shipment. Paying freight to a place does not mean the seller bears risk to that place.
FOB vs CIF: What Actually Changes?
FOB vs CIF is the comparison buyers ask about most often, and the honest answer is narrower than many expect. Both rules are for sea and inland waterway transport only. Both pass risk at the same point. The difference lies in who arranges and pays for freight and insurance, and who controls the carriage contract.
| Point | FOB | CIF |
|---|---|---|
| Delivery and risk transfer | On board the vessel at the named port of shipment | On board the vessel at the named port of shipment |
| Main freight | Buyer arranges and pays | Seller arranges and pays to the named port of destination |
| Insurance | No duty on either side in the rule itself; buyer arranges cover if wanted | Seller must buy minimum cover, Clauses (C), for the buyer’s benefit |
| Carrier choice | Buyer controls carrier and routing | Seller controls carrier and routing |
| Import clearance and duties | Buyer | Buyer |
| Quoted price | Lower, since freight and insurance sit outside it | Higher, since freight and minimum insurance sit inside it |
Take the voyage itself as a test. If cargo is damaged at sea under CIF, the loss falls on the buyer, because risk passed on board at origin. The buyer’s route to recovery is a claim under the policy the seller bought, not a demand that the seller replace the goods. That split is exactly why the seller must buy that policy under CIF.
Control matters alongside cost. Under FOB, a buyer can use its own carrier contracts, consolidate cargo, and see freight as a separate cost line. Under CIF, the buyer gives up that control and should check whether the seller’s freight charge and minimum cover fit the goods. Clauses (C) cover protects against a limited list of major events, so high-value or fragile cargo may need wider cover agreed in the contract.
How to Choose the Right Incoterm
Start with the mode of transport. If goods move by air, road, rail, or in a container that changes mode, pick from the seven any-mode rules. Reserve FAS, FOB, CFR, and CIF for port-to-port sea moves where goods go directly on board.
Next, decide how much control each side needs. A buyer with strong carrier rates and a forwarder at origin often prefers FCA or FOB, where the buyer controls the main carriage. A buyer with no presence in the seller’s country often prefers a C or D rule, where the seller arranges more of the journey.
Then check customs ability on both ends. Under EXW, the buyer must handle export clearance in the seller’s country, which can be hard without a local presence. Under DDP, the seller faces the mirror problem in the buyer’s country. If either side cannot legally act as exporter or importer of record, that rule is a poor fit no matter how attractive the price looks.
A freight forwarder can test that fit before you sign, by mapping who will book carriage, file each clearance, and hold risk at each handover. That check is cheaper than sorting out a gap after the goods have left.
Finally, agree the named place with care. A city name alone may be too loose for a large port or terminal. Add the terminal, port, or address that matches the delivery point you intend, and state the version beside it.
Common Mistakes With Incoterms
Using FOB, CFR, or CIF for containerised cargo. Containers are normally handed to the carrier at a terminal well before loading on board. Under FOB, risk passes only once goods are on board, so a container sitting at the terminal sits in a grey area neither side planned for. ICC guidance points container traffic toward FCA, CPT, or CIP instead, where delivery happens at handover to the carrier.
Leaving out the named place or the version. “FOB” or “DAP” on its own does not fix a delivery point. Without a place, neither side can prove where risk was meant to pass, and without a year, the parties may be working from different editions.
Reading CIF as risk to destination. As shown above, the seller pays freight to destination under CIF but does not carry risk to destination. Buyers who miss this point may fail to check the insurance the seller bought.
Assuming the code settles ownership or payment. Traders sometimes delay payment or claim ownership based on the Incoterm alone. The code supports neither point. Put title, payment timing, and remedies in the contract itself.
Picking EXW or DDP for convenience alone. EXW looks simple for a seller and DDP looks simple for a buyer, yet both push a customs duty onto the party least able to perform it in many trades. Check who can clear the goods before you accept either extreme.
Frequently Asked Questions
Are Incoterms legally binding on their own?
No. Incoterms become binding only when the contract of sale incorporates them, for example by stating the rule, the named place, and “Incoterms 2020” together. Once incorporated, they form part of that contract, but they do not override mandatory local law.
Can Incoterms be used for domestic shipments?
Yes, in principle. Nothing in the rules limits them to cross-border sales, and traders sometimes use them inside one country to allocate delivery, cost, and risk. In domestic trade, references to export and import clearance simply have no work to do.
Which Incoterm puts import duty on the seller?
Only DDP. Under DDP the seller delivers the goods cleared for import and pays import duties and taxes in the buyer’s country. Under every other rule, import clearance and duty sit with the buyer, even under CIF and DAP.
What changed from DAT to DPU in Incoterms 2020?
The 2010 rule DAT, Delivered at Terminal, required delivery at a terminal. Incoterms 2020 renamed it DPU, Delivered at Place Unloaded, to make clear that the named place can be any place, not only a terminal. The seller’s duty to unload stayed in place.
Do I need a new Incoterm for every shipment with the same partner?
Not if the trading pattern stays the same. Many buyers and sellers agree one rule and named place as a standing term in a supply agreement and repeat it on each order. Review that term if the mode, route, container use, or customs position changes.
Where can I read the official Incoterms 2020 text?
The full official text is an ICC publication that traders buy from the ICC. Summaries can explain the shape of each rule, but the publication itself controls the exact duties. If a high-value shipment turns on a fine point, work from the official text or take advice based on it.
