Two letters in a contract — EXW, FOB, CIF, DDP — decide who pays for shipping, who carries the risk, and exactly where responsibility passes from seller to buyer. Misunderstand them and you can end up liable for costs or losses you never expected. Incoterms are the shared language that prevents that. Here is a complete, plain-English breakdown of all 11 current Incoterms 2020 rules.
What Incoterms Are
Incoterms are a standardized set of trade terms published by the International Chamber of Commerce (ICC), currently in their 2020 revision, that define the responsibilities of buyers and sellers in international transactions. Each three-letter term answers three questions for every shipment: who arranges and pays for transport, who bears the risk at each stage, and at what precise point responsibility transfers from one party to the other.
Why They Matter So Much
The Incoterm you agree to determines real money and real risk. Agree to deliver goods further down the chain and you carry cost and liability longer; agree to hand them over early and the buyer takes on more. Disputes in international trade frequently trace back to a misunderstanding of which party was responsible at the moment something went wrong — a cargo damaged mid-transit, a customs delay, an insurance gap between where one party’s coverage ended and the other’s began.
The Two Categories of Incoterms
The 11 Incoterms 2020 rules split into two groups based on transport mode. Getting this grouping right is the first filter for choosing the correct term — using a sea-freight-only term for an air or road shipment is a common and costly mistake.
Rules for Any Mode of Transport (7 terms)
These apply regardless of how goods move — sea, air, road, rail, or multimodal combinations.
- EXW — Ex Works. The seller makes goods available at their premises (factory, warehouse) and the buyer takes on everything from there: loading, transport, insurance, export clearance, and risk. Minimum seller obligation, maximum buyer responsibility.
- FCA — Free Carrier. The seller delivers goods, cleared for export, to a carrier or location named by the buyer. Risk transfers once goods are handed to that carrier — increasingly the preferred alternative to FOB even for sea freight, since it works cleanly with containerized cargo delivered to a terminal rather than loaded directly onto a vessel.
- CPT — Carriage Paid To. The seller pays for carriage to the named destination, but risk transfers to the buyer once goods are handed to the first carrier — cost and risk transfer points do not align, which frequently causes confusion.
- CIP — Carriage and Insurance Paid To. Identical to CPT, but the seller must also arrange insurance covering the goods to the named destination, and under the 2020 revision, at a higher minimum coverage level than CIF requires.
- DAP — Delivered at Place. The seller delivers goods, ready for unloading, at the named destination — risk transfers only once goods arrive, but the buyer handles import clearance and duties.
- DPU — Delivered at Place Unloaded. Similar to DAP, but the seller is also responsible for unloading the goods at the destination — the only Incoterm that places unloading responsibility on the seller.
- DDP — Delivered Duty Paid. The seller takes on the maximum: delivery all the way to the buyer’s named location with import duties and taxes paid. Maximum seller responsibility, minimum buyer involvement.
Rules for Sea and Inland Waterway Transport Only (4 terms)
These four apply specifically to bulk cargo and break-bulk shipments moved by sea or inland waterway, where the point of loading onto a vessel is a meaningful and traditional transfer point.
- FAS — Free Alongside Ship. The seller delivers goods alongside the vessel at the named port — common for bulk commodities like grain or ore, less so for containerized cargo.
- FOB — Free On Board. The seller is responsible up to the point the goods are loaded on the vessel, after which risk and cost pass to the buyer. Still the most commonly referenced term in sea freight contracts, though the ICC recommends FCA for containerized cargo.
- CFR — Cost and Freight. The seller pays for carriage to the destination port, but risk transfers once goods are loaded on the vessel at origin — the sea-freight equivalent of CPT.
- CIF — Cost, Insurance and Freight. The seller arranges and pays for carriage and insurance to the destination port, though the risk transfer point (on loading) and the cost responsibility (to destination) do not align — a subtlety that catches people out constantly.
Why FCA Is Increasingly Preferred Over FOB
For containerized sea freight, containers are typically handed to the carrier at a container terminal well before actual loading onto the vessel — meaning the traditional FOB transfer point (on board the ship) doesn’t reflect where the goods physically change hands. FCA transfers risk at the terminal, matching real-world container logistics far more accurately, which is why the ICC and most trade finance practitioners recommend FCA over FOB for container shipments, reserving FOB for genuine bulk and break-bulk cargo.
Choosing the Right Term
The right Incoterm depends on how much of the logistics chain each party is willing and able to manage, the experience of both sides, and the route and cargo type involved. A buyer new to importing may prefer the seller to carry more (DAP, DDP); an experienced importer may want control over freight and insurance and choose EXW or FCA. On complex multi-border routes, the choice interacts directly with export documentation and customs clearance responsibilities at each border crossed.
A Common Costly Mistake
One of the most frequent errors we see is a buyer or seller agreeing to DDP without fully understanding that this means taking on import duties, taxes, and customs clearance responsibility in a foreign country — including navigating a regulatory system the seller has no direct experience with. DDP can be the right choice, but only when the seller genuinely has the local capability (through their own entity or a reliable partner) to execute import clearance, not simply because it looks like the most buyer-friendly option on paper.
Frequently Asked Questions About Incoterms
How many Incoterms are there?
There are 11 Incoterms under the current 2020 revision published by the International Chamber of Commerce: 7 that apply to any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and 4 that apply specifically to sea and inland waterway transport (FAS, FOB, CFR, CIF).
What is the difference between FOB and FCA?
FOB transfers risk once goods are loaded onto the vessel and applies only to sea freight. FCA transfers risk when goods are handed to a carrier at a named location, which better matches how containerized cargo is actually handled at a terminal, and applies to any transport mode.
Which Incoterm is best for a first-time importer?
There is no single best term, but first-time importers often prefer terms where the seller handles more of the logistics chain, such as DAP or DDP, accepting a higher price in exchange for less operational complexity on their end.
What is the risk of agreeing to DDP terms?
Under DDP, the seller takes on import duty payment and customs clearance in the buyer’s country — a regulatory environment the seller may have no direct experience with. DDP only works well when the seller has genuine local capability to execute import clearance, either directly or through a reliable partner.
Do Incoterms cover payment terms or only shipping responsibility?
Incoterms cover only the delivery of goods — transport, risk, and cost responsibility. They do not address payment terms, which are a separate part of the sales contract, often structured using tools like letters of credit or documentary collections.
Getting the Terms Right
Incoterms are a small part of a contract with an outsized effect on cost and risk. We help clients structure trade transactions — terms, documentation, and logistics — so responsibilities are clear and nothing falls through the gaps, across markets including Central Asia and the GCC. Explore our trade facilitation services or book a discovery call.
This article is general information. Always confirm the current ICC Incoterms 2020 rules and your specific contract terms with qualified professionals.