If you buy or sell goods across borders, the single most important line in your contract may be three letters: FOB, CIF, DDP, or one of their cousins. These are Incoterms, and they decide who pays for what, who carries the risk at each stage, and who handles customs. Misunderstanding them is a classic and expensive mistake for new importers. This guide explains Incoterms 2020 in plain language, with a practical way to choose the right one.
What Are Incoterms?
Incoterms (International Commercial Terms) are standardized trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers for delivery, risk transfer, transport costs, insurance, and export and import clearance. The current edition at the time of writing is Incoterms 2020, though you should always confirm which edition is referenced in your contract.
Incoterms are not a contract by themselves, and they do not cover everything. They do not determine who owns the goods, how and when payment is made, or what happens in a breach. Those belong in your sales contract. They simply clarify delivery, costs, and risk.
The Two Big Ideas: Cost and Risk
Every Incoterm answers two questions:
- Where does risk transfer? At what point does responsibility for loss or damage move from seller to buyer?
- Who pays for what? Who pays for main carriage, insurance, export clearance, import clearance, duties, and unloading?
Note that the point where risk transfers and the point where costs transfer can differ in some terms, which is a common source of confusion.
Incoterms 2020: All 11 Rules
Rules for any mode of transport
- EXW (Ex Works): The seller makes goods available at its premises. The buyer handles nearly everything from there, including loading, export clearance, and transport. It puts the maximum burden on the buyer.
- FCA (Free Carrier): The seller delivers goods to the carrier or another party named by the buyer, and clears the goods for export. It is often a better choice than EXW because the seller handles export clearance.
- CPT (Carriage Paid To): The seller pays for carriage to a named destination, but risk transfers to the buyer once the goods are handed to the first carrier.
- CIP (Carriage and Insurance Paid To): Like CPT, but the seller must also buy insurance. Under Incoterms 2020, CIP requires a higher level of insurance cover than CIF.
- DAP (Delivered at Place): The seller delivers to a named destination, ready for unloading, and carries the risk until then. The buyer handles import clearance and duties.
- DPU (Delivered at Place Unloaded): Like DAP, but the seller also unloads at the destination. DPU replaced the older DAT term in the 2020 edition.
- DDP (Delivered Duty Paid): The seller bears nearly all costs and risks, including import clearance and duties, up to the named destination. It is the maximum obligation for the seller.
Rules for sea and inland waterway transport only
- FAS (Free Alongside Ship): The seller delivers when goods are placed alongside the vessel at the named port.
- FOB (Free on Board): The seller delivers when goods are loaded on board the vessel. Risk passes at that point.
- CFR (Cost and Freight): The seller pays the freight to the destination port, but risk passes when the goods are on board at origin.
- CIF (Cost, Insurance and Freight): Like CFR, with the seller also providing minimum insurance.
A practical warning: FOB, CFR, CIF, and FAS are technically intended for conventional sea cargo, not containerized freight handed over at a terminal or depot. For containers, FCA, CPT, or CIP are often more accurate choices, even though FOB and CIF remain popular in practice.
How to Choose the Right Incoterm
- Your experience level. New importers who lack a forwarder or broker usually should not take on the heavy responsibilities of EXW. A term that leaves the seller handling export clearance (like FCA) is often safer.
- Control of the shipment. If you want control over carrier selection, rates, and routing, you may prefer terms where the buyer arranges main carriage, such as FCA or FOB. If you prefer a single-price delivered experience, choose DAP or DDP.
- Cost visibility. Terms where the seller controls freight can hide markups in the unit price. Terms where you control freight make landed cost easier to compare.
- Customs and duty exposure. DDP means the seller handles import duties, but be sure the seller is capable and licensed in your country. Many problems arise when a seller promises DDP but cannot clear customs correctly.
- Insurance. Do not assume you are covered. Under CPT, FOB, and similar terms, the buyer carries risk during main transit and should insure accordingly.
Common Incoterms Mistakes Importers Make
- Using the term without the named place. “FOB” alone is incomplete. Always specify the named port or place, for example “FOB Shenzhen.”
- Assuming EXW is cheapest. The unit price may look lower, but you inherit origin charges, export clearance, and a lot of risk.
- Confusing DAP and DDP. Under DAP, you still pay import duties and clear customs. Under DDP, the seller does.
- Ignoring destination costs. Terminal charges, drayage, chassis, and detention can still land on you depending on your terms. Read our guides to demurrage vs. detention and auditing a drayage invoice.
- Forgetting the tariff environment. Duty rules change. See what importers should do now that de minimis is gone.
Incoterms and Your Landed Cost
Whatever term you choose, calculate your landed cost: product price, freight, insurance, duties and taxes, brokerage fees, terminal and port charges, drayage, warehousing, and final delivery. Two quotes under different Incoterms are not comparable until you convert both to landed cost. If you are an importer weighing FCL vs. LCL, the Incoterm you choose affects who books and pays for each leg.
Frequently Asked Questions
Are Incoterms legally binding?
They become binding when you incorporate them into your sales contract. Specify “Incoterms 2020” and the named place so there is no ambiguity.
Which Incoterm is best for importers?
There is no universal answer. Many experienced importers prefer FCA or FOB so they can control freight, while newer importers may start with DAP to simplify logistics. The right choice depends on your capabilities and your supplier’s.
Do Incoterms cover customs duties?
Only partly. They assign responsibility for clearance and duties between buyer and seller, but they do not set the duty rates or replace local laws.
Final Thoughts
Incoterms are short, but they carry real money. Pick one deliberately, write it into the contract with the named place, and make sure everyone in your chain, from supplier to forwarder to broker, understands what it means.
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