Incoterms 2020 Explained: All 11 Rules, Risk Transfer & Selection Guide

What Are Incoterms?

Incoterms (International Commercial Terms) are a standardized set of three-letter trade terms published by the International Chamber of Commerce (ICC) that define the rights and obligations of buyers and sellers in commercial transactions. They are used in contracts of sale, letters of credit, shipping documents, and customs declarations worldwide.

Incoterms define, for each named rule:

• Delivery point: Where the seller's obligation to deliver ends and where the buyer's responsibility begins
• Risk transfer point: Where the risk of loss or damage to the goods passes from seller to buyer
• Cost allocation: Who pays for transport, insurance, loading, unloading, export clearance, and import clearance at each stage

What Incoterms do NOT cover

Incoterms are commonly misunderstood as covering more than they actually do. They do not cover:

• Title transfer: When legal ownership of the goods passes from seller to buyer — this is governed by the contract of sale
• Payment terms: When and how the buyer pays (open account, letter of credit, documentary collection) — these are separate commercial terms
• Remedies for breach: What happens if the goods do not conform to specification, or if delivery fails — this is governed by contract law (CISG, domestic law)
• Force majeure: Incoterms do not address what happens when performance is prevented by extraordinary events

Legal status of Incoterms

Incoterms are not law — they are contractually incorporated trade terms. They apply only when explicitly included in the contract of sale (e.g., "FOB Shanghai, Incoterms 2020"). If a contract specifies "FOB" without specifying "Incoterms 2020," a court may apply local custom or an earlier version. Always specify the Incoterms version in commercial contracts to avoid ambiguity.

The Structure of Incoterms 2020

Incoterms 2020 contains 11 rules, organized into two groups based on the transport mode to which they apply:

A common mistake is using sea-only terms (FOB, CIF) for containerized shipments. When goods are handed to a freight forwarder or carrier at an inland container depot or terminal before being loaded on a vessel, the correct term is FCA (for most FOB situations) or CIP (for most CIF situations), because risk transfers before the goods are on board the vessel.

The "E", "F", "C", and "D" groups

Incoterms are also organized informally by the first letter of the rule's abbreviation, which broadly signals the responsibility allocation:

• E-term (EXW): Minimum obligation for seller — goods available at seller's premises; buyer does everything
• F-terms (FCA, FAS, FOB): Seller delivers to carrier nominated by buyer; main carriage unpaid by seller
• C-terms (CPT, CIP, CFR, CIF): Seller pays for main carriage but risk transfers before main carriage begins
• D-terms (DAP, DPU, DDP): Maximum obligation for seller — seller responsible until goods arrive at named destination; buyer is responsible for import clearance except under DDP

Rules for Any Mode of Transport (7 Rules)

EXW — Ex Works (named place of delivery)

Under EXW, the seller makes the goods available at their own premises (factory, warehouse) or another named place. The seller has no obligation to load the goods, obtain export clearance, or arrange transport. Risk transfers to the buyer at the moment goods are available for collection at the named place.

• Seller does: Make goods available; provide commercial invoice and packing list
• Buyer does: Everything else — loading at origin, inland transport to port/airport, export customs clearance, export loading, main carriage, insurance, import clearance, import duties, inland delivery to final destination
• Risk transfer: When goods are available at seller's premises / named place
• Best for: Experienced importers with strong logistics infrastructure who want maximum control over the entire shipment; domestic transactions
• Caution: EXW requires the buyer to handle export clearance from the seller's country — legally and practically difficult for foreign buyers. FCA at seller's premises is often a better alternative

FCA — Free Carrier (named place of delivery)

Under FCA, the seller delivers goods to the carrier (or another person nominated by the buyer) at a named place. If the named place is the seller's premises, the seller is responsible for loading. If delivery is at any other place, the seller delivers to the carrier's arriving transport ready for unloading.

• Seller does: Export clearance; delivery to named carrier at named place
• Buyer does: Main carriage arrangement and payment; insurance; import clearance; import duties; delivery to final destination
• Risk transfer: When goods are handed to the carrier at the named delivery point
• Key 2020 update: The buyer can now instruct its carrier to issue an on-board bill of lading to the seller — enabling FCA to be used under letters of credit that require an ocean bill of lading. This resolves a long-standing practical conflict
• Best for: Container shipments (replaces FOB for containerized cargo); air freight; any situation where the buyer wants to control main carriage but seller handles export clearance

CPT — Carriage Paid To (named place of destination)

Under CPT, the seller pays for carriage to the named destination. However, risk transfers to the buyer when goods are handed to the first carrier — not when they reach the destination. This is the defining characteristic of all C-terms: cost goes to destination, risk transfers at origin.

• Seller does: Export clearance; arranges and pays for transport to named destination
• Buyer does: Insurance (not the seller's obligation under CPT); import clearance; import duties; unloading at destination
• Risk transfer: When goods are handed to the first carrier at origin
• Best for: Any transport mode, especially multimodal; when seller handles freight logistics but buyer wants to arrange insurance

CIP — Carriage and Insurance Paid To (named place of destination)

CIP is identical to CPT, with the addition that the seller must also provide cargo insurance to the destination. Under Incoterms 2020, the required insurance cover was upgraded from Institute Cargo Clauses (C) — the most limited cover — to Institute Cargo Clauses (A) — the broadest available. This is a significant change from Incoterms 2010.

• Seller does: Export clearance; arranges and pays for transport to named destination; provides cargo insurance (minimum ICC-A under Incoterms 2020)
• Buyer does: Import clearance; import duties; unloading at destination
• Risk transfer: When goods are handed to the first carrier at origin (same as CPT)
• Best for: Any transport mode; especially relevant when seller has better insurance relationships or rates than the buyer; recommended for high-value goods given the upgraded insurance requirement

DAP — Delivered at Place (named place of destination)

Under DAP, the seller is responsible for delivering goods to the named destination, ready for unloading. The seller bears all risks and costs until the goods arrive at the destination — but is not responsible for unloading or import clearance.

• Seller does: Export clearance; all transport and insurance to named destination; bears all risk to destination
• Buyer does: Unloading at destination; import clearance; import duties and taxes
• Risk transfer: When goods are available for unloading at named destination
• Best for: Sellers capable of managing the full supply chain to destination; buyers in countries with complex import procedures who want control over customs clearance; door-to-door delivery arrangements

DPU — Delivered at Place Unloaded (named place of destination)

DPU is the only Incoterm under which the seller is responsible for unloading at the destination. It replaced DAT (Delivered at Terminal) in Incoterms 2020, with the scope expanded to allow any named place (not just a terminal) as the delivery location. DPU requires the seller to have the capability to unload at the agreed destination.

• Seller does: Export clearance; all transport to named place; unloading at destination
• Buyer does: Import clearance; import duties and taxes; onward delivery from unloaded point
• Risk transfer: When goods have been unloaded at the named place
• Best for: Port-to-port handoffs; situations where seller's carrier handles unloading and the buyer takes over from a quay or loading bay; bulk cargo with specific unloading requirements

DDP — Delivered Duty Paid (named place of destination)

DDP represents the maximum obligation for the seller and the minimum obligation for the buyer. The seller is responsible for everything: export clearance, all transport, insurance, import clearance, import duties and taxes, and delivery to the named destination. The buyer simply accepts delivery.

• Seller does: Everything — export clearance; all transport and insurance; import clearance; import duties and all local taxes (including VAT); delivery to named destination
• Buyer does: Accept delivery; unload (unless otherwise agreed)
• Risk transfer: When goods are available for unloading at named destination
• Best for: Buyers with limited logistics capability or local presence; B2C e-commerce cross-border (seller handles all duties); situations where the seller is the stronger logistics party
• Caution: DDP requires the seller to clear import customs in the buyer's country — legally and operationally complex. The seller bears VAT and import duty risk, which can be significant and unpredictable. Many sellers refuse DDP for this reason

Rules for Sea and Inland Waterway Only (4 Rules)

These four rules apply exclusively to goods transported by sea or inland waterway — and only when the goods are not containerized (or when the seller can physically deliver goods on board a vessel at the port of origin). For containerized shipments, FCA, CPT, or CIP are generally the appropriate alternatives.

FAS — Free Alongside Ship (named port of shipment)

Under FAS, the seller delivers by placing goods alongside the named vessel at the port of shipment. Risk transfers to the buyer once goods are alongside the ship. The buyer then arranges loading, freight, insurance, and all onward logistics.

• Seller does: Export clearance; delivery alongside vessel at named port
• Buyer does: Loading onto vessel; main carriage; insurance; import clearance; import duties
• Risk transfer: When goods are placed alongside the named vessel at the port of shipment
• Best for: Bulk cargo, commodities, and heavy machinery where the buyer's vessel agent handles loading; when the seller cannot load goods on board

FOB — Free On Board (named port of shipment)

Under FOB, the seller delivers goods on board the vessel nominated by the buyer at the named port of shipment. Risk transfers once the goods are on board the vessel. The buyer pays for freight and insurance from that point.

• Seller does: Export clearance; delivery on board vessel at named port; loading costs
• Buyer does: Main ocean freight; marine insurance; import clearance; import duties; inland delivery to final destination
• Risk transfer: When goods are on board the vessel at the named port of shipment
• Key note: FOB is widely used — and widely misused. For containerized shipments, the container is handed to a carrier at an inland terminal or CFS (Container Freight Station) before loading on the vessel. Risk at that point should transfer at the CFS/terminal (use FCA), not on board the vessel (FOB). Using FOB for container shipments creates a gap period where neither party's insurance clearly covers the goods
• Best for: Break-bulk cargo, bulk commodities, tanker shipments; any situation where the seller physically loads goods on board the vessel at the export port

CFR — Cost and Freight (named port of destination)

Under CFR, the seller pays the cost of freight to the named destination port. Risk transfers to the buyer when goods are on board the vessel at the origin port — the same point as FOB. The buyer is responsible for marine insurance from that origin point, despite the seller paying for freight.

• Seller does: Export clearance; loading on board vessel; pays ocean freight to named destination port
• Buyer does: Marine insurance (not seller's obligation); import clearance; import duties; unloading; inland delivery
• Risk transfer: When goods are on board the vessel at the port of shipment (same as FOB)
• Key note: The split between freight payment (seller) and insurance responsibility (buyer) is counterintuitive and a common source of disputes. The seller pays for something (freight) while the buyer bears the risk of that voyage. This misalignment makes CIF (which adds insurance) the more commonly recommended alternative

CIF — Cost, Insurance and Freight (named port of destination)

Under CIF, the seller pays freight and provides marine insurance to the named destination port. Risk transfers to the buyer at the port of shipment when the goods are on board — the same risk transfer point as FOB and CFR. The seller's insurance covers the goods for the voyage despite risk having passed to the buyer.

• Seller does: Export clearance; loading on board vessel; pays ocean freight; provides marine insurance (minimum Institute Cargo Clauses (C) under Incoterms 2020 — ICC-C, not ICC-A)
• Buyer does: Import clearance; import duties; unloading; inland delivery to final destination
• Risk transfer: When goods are on board the vessel at the port of shipment
• Key note: CIF is the most common term in international letter of credit trade — banks processing LCs often require CIF or CIP. However, note that the minimum insurance under CIF remains ICC-C (unlike CIP, where Incoterms 2020 upgraded the minimum to ICC-A). Buyers relying on CIF insurance coverage should verify whether ICC-C is sufficient for their goods and request ICC-A if needed
• Best for: Commodity trades; LC-based transactions; bulk shipping where standard ICC-C cover is adequate

Full Comparison Table: All 11 Incoterms 2020 Rules

What Changed from Incoterms 2010 to Incoterms 2020

Incoterms 2020 introduced four substantive changes from the 2010 edition. Every practitioner using the 2010 rules for new contracts since January 2020 should be aware of these updates.

1. DAT Renamed to DPU (Delivered at Place Unloaded)

The Incoterms 2010 term DAT (Delivered at Terminal) was replaced by DPU (Delivered at Place Unloaded) in Incoterms 2020. The change broadens the scope: under DAT, delivery could only occur at a "terminal" — which the ICC defined as a quay, warehouse, container yard or road, rail, or air cargo terminal. Under DPU, delivery can occur at any agreed place — including the buyer's premises — provided the seller has the capability to unload there. The substance of the rule (seller unloads at destination) is unchanged; only the geographic scope of "where" is broader.

2. FCA and the On-Board Bill of Lading

A longstanding practical conflict existed between FCA and letters of credit (LC). LCs for containerized shipments typically require an on-board bill of lading — a document confirming goods are on board the vessel. However, under FCA, the seller's delivery obligation ends when goods are handed to the carrier at an inland point (container terminal, freight forwarder's CFS) — before the vessel is loaded. The carrier would not issue an on-board bill of lading until after loading, at which point risk had already passed to the buyer. This left sellers unable to comply with the LC's document requirement.

Incoterms 2020 solves this: the parties can now contractually agree that the buyer will instruct its carrier to issue an on-board bill of lading to the seller after loading, which the seller can then present to the bank under the LC. The underlying risk transfer (at FCA delivery point) is unchanged — but the documentary mechanics now work for LC transactions.

3. CIP Insurance Upgraded to ICC-A

Under Incoterms 2010, the minimum insurance required from the seller under both CIF and CIP was Institute Cargo Clauses (C) — the narrowest cover, protecting only against major perils (vessel sinking, overturning, stranding, fire/explosion, collision). Incoterms 2020 differentiates the two rules:

• CIF (sea only): Minimum cover remains ICC-C (consistent with commodity trade practice)
• CIP (any mode): Minimum cover upgraded to ICC-A — the broadest cover, protecting against all risks of loss or damage except enumerated exclusions. This reflects the fact that CIP is primarily used for high-value manufactured goods where comprehensive cover is appropriate

4. Explicit Accommodation of Own Transport

Incoterms 2010 framed all transport obligations in terms of "contracting with a carrier." Incoterms 2020 explicitly acknowledges that either the buyer or the seller may use their own transport (in-house fleet) rather than a third-party carrier. The relevant rules (FCA, DAP, DPU, DDP) now include language covering own-transport arrangements, reflecting the commercial reality that many large logistics operations run captive fleets rather than relying entirely on external carriers.

The Risk and Cost Spectrum: EXW to DDP

Incoterms can be thought of as a continuous spectrum of seller vs buyer responsibility. At one extreme is EXW (maximum buyer responsibility, minimum seller responsibility); at the other is DDP (maximum seller responsibility, minimum buyer responsibility).

Moving along the spectrum from left (EXW) to right (DDP):

• The seller takes on more responsibility for transport, insurance, and clearance
• The risk transfer point moves later in the physical journey (closer to the buyer)
• The seller's landed cost calculation becomes more complex and harder for the buyer to verify
• The buyer retains less control over carrier selection, freight costs, and customs handling

Neither extreme is universally "better." The right point on the spectrum depends on each party's capabilities, bargaining power, and operational preferences.

How to Choose the Right Incoterm

Selecting the appropriate Incoterm requires aligning on five key questions:

Decision Framework

Most Common Incoterms by Trade Context

Common Mistakes and Misconceptions

Mistake 1: Using FOB for containerized shipments

FOB requires delivery "on board the named vessel." For containerized cargo, the seller typically hands goods to a freight forwarder or carrier at an inland container depot or CFS — not directly onto a vessel. Risk under FOB only transfers when goods are on board, creating an uncovered gap between the CFS hand-off and vessel loading. The correct term for containerized shipments is FCA (with the named place being the seller's warehouse, the freight forwarder's facility, or the port CFS). This is the single most common Incoterms error in international trade.

Mistake 2: Assuming Incoterms determine title transfer

Incoterms govern risk and cost — not title (ownership). It is entirely possible to use FOB (risk transfers at loading) while the contract of sale specifies that title only passes upon full payment (a "retention of title" clause). Incoterms and title transfer are independent dimensions of the commercial transaction, governed by separate clauses in the contract of sale.

Mistake 3: Not naming a specific place

Every Incoterm must be followed by a named place or named port to be effective: "FOB Shanghai," "DAP Buyer's warehouse, Lyon, France." Without the named place, the contract is ambiguous and cannot determine where risk transfers. The named place should be specific enough to avoid dispute — a port name is not always sufficient; a specific terminal within the port may be required.

Mistake 4: Assuming CIF provides comprehensive insurance

The minimum insurance under CIF (Incoterms 2020) is Institute Cargo Clauses (C) — not ICC-A. ICC-C covers only named perils (sinking, fire, collision) and specifically excludes theft, water damage, rough handling, and many other common causes of cargo loss. If buyers are relying on CIF insurance for high-value or fragile goods, they should either negotiate ICC-A coverage explicitly in the contract or use CIP (which mandates ICC-A under Incoterms 2020).

Mistake 5: Using DDP without import agent capability

DDP requires the seller to clear goods through customs in the buyer's country — acting as the importer of record in a foreign jurisdiction. This requires the seller to be registered or represented for customs purposes in the buyer's country, to hold applicable import licenses, and to manage the complexity of foreign customs regulations. Many sellers are not set up for this. Sellers who agree to DDP without proper import capability expose themselves to delays, fines, and compliance risk in a foreign legal system.

Frequently Asked Questions

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