Incoterms 2020 Explained: A Shipper's Guide

Incoterms are the three-letter codes — EXW, FOB, CIF, DDP and the rest — that appear on almost every international sales contract. Get them right and everyone knows exactly who pays for what and who carries the risk at each stage. Get them wrong and you end up arguing over a damaged shipment or an unexpected bill. Here is how they work.

What Incoterms do (and don’t) cover

Incoterms, published by the International Chamber of Commerce, define three things between a buyer and seller:

• Who arranges and pays for transport at each stage.
• Who handles export and import formalities.
• Where risk transfers from seller to buyer.

They do not cover when payment is due, transfer of ownership, or what happens in a dispute — those belong in your sales contract. Incoterms are about logistics responsibility, nothing more.

The eleven terms, grouped

The 2020 edition has eleven terms. Seven work for any mode of transport; four are only for sea and inland waterway.

Any transport mode:

• EXW (Ex Works) — buyer collects from the seller’s premises and does everything from there. Maximum responsibility on the buyer.
• FCA (Free Carrier) — seller delivers to a named carrier or place; risk passes there.
• CPT / CIP (Carriage Paid To / Carriage and Insurance Paid To) — seller pays carriage (and, for CIP, insurance) to the destination, but risk passes when goods are handed to the first carrier.
• DAP (Delivered at Place) — seller delivers, ready for unloading, at the destination. Buyer handles import clearance.
• DPU (Delivered at Place Unloaded) — like DAP, but the seller also unloads.
• DDP (Delivered Duty Paid) — seller delivers cleared for import, duties paid. Maximum responsibility on the seller.

Sea and inland waterway only:

• FAS (Free Alongside Ship) — seller delivers alongside the vessel.
• FOB (Free On Board) — seller delivers on board the vessel; risk passes at the ship’s rail.
• CFR (Cost and Freight) — seller pays freight to destination port; risk passes on board at origin.
• CIF (Cost, Insurance and Freight) — CFR plus marine insurance.

The trap most people fall into

The single biggest mistake is using a sea-only term like FOB or CIF for containerised or air cargo. With containers, you hand goods to the carrier at a terminal days before they are loaded — so “on board” is the wrong risk point. For containers, FCA, CPT or CIP are the correct equivalents. Using FOB for a container leaves a gap where neither party clearly carries the risk.

How to choose

• New importer who wants simplicity? DDP or DAP — the seller handles most of the journey.
• Want control over your own freight and rates? FOB (sea) or FCA (any mode).
• Buying ex-factory at the lowest unit price? EXW — but be ready to manage everything.

The bottom line

Pick the Incoterm deliberately, match it to your transport mode, and write it clearly on the contract with a named place — “FCA Shenzhen” not just “FCA.” If you are unsure which term protects you, ask your forwarder before you sign; it is far cheaper than sorting it out after something goes wrong.