Incoterms are a set of eleven three-letter codes published by the International Chamber of Commerce. They are shorthand for a long list of responsibilities in an international sale.
Writing "FOB Shanghai" into a contract saves both parties from writing several paragraphs about who does what. Both sides are supposed to know what it means.
In practice, a lot of buyers do not, and accept whatever the supplier proposes. That is how a company ends up responsible for customs clearance in a country it has never traded with.
What they actually decide
Each rule settles four things:
- Who arranges transport, and how far they pay for it.
- Where risk passes from seller to buyer — the point after which a loss is your loss.
- Who handles export clearance in the seller's country, and import clearance in yours.
- Who arranges insurance, where the rules require it at all.
The second one matters most and is understood least. Cost and risk do not always transfer at the same place. Under some rules the seller pays for carriage to a destination but stops carrying the risk long before the goods arrive there.
The eleven rules
The current edition is Incoterms 2020, which the ICC recommends using from 1 January 2020. Older editions remain valid if both parties agree and say which one they mean — which is why the version number belongs in the contract.
The rules split into two groups. Seven work for any mode of transport. Four are for sea and inland waterway only.
| Code | Name | Transport mode |
|---|---|---|
| EXW | Ex Works (named place of delivery) | Any mode |
| FCA | Free Carrier (named place of delivery) | Any mode |
| CPT | Carriage Paid To (named place of destination) | Any mode |
| CIP | Carriage and Insurance Paid To (named place of destination) | Any mode |
| DAP | Delivered at Place (named place of destination) | Any mode |
| DPU | Delivered at Place Unloaded (named place of destination) | Any mode |
| DDP | Delivered Duty Paid (named place of destination) | Any mode |
| FAS | Free Alongside Ship (named port of loading) | Sea and inland waterway |
| FOB | Free on Board (named port of loading) | Sea and inland waterway |
| CFR | Cost and Freight (named port of destination) | Sea and inland waterway |
| CIF | Cost, Insurance and Freight (named port of destination) | Sea and inland waterway |
One change in the 2020 edition is worth knowing if you are reading older contracts. DAT, Delivered at Terminal, was renamed DPU, Delivered at Place Unloaded.
The ones you will actually meet
Most buyers deal with five or six. Here is what each commits you to, drawn from the UK government's export guidance.
EXW — Ex Works
The seller makes the goods available at its own premises or another named place. That is the whole of its obligation.
You take on all the transport costs and the risks that go with them, from the seller's door onward. You also need to understand customs procedures at both ends.
This looks cheap on a quote because the price excludes everything. It is the term that most often surprises inexperienced buyers.
FOB — Free on Board
Sea freight only. The seller pays all costs until the goods are loaded onto the vessel at the named port of loading, and handles transport and customs clearance in its own country.
Once the goods are loaded, you are responsible for the costs and the risks of the onward shipment.
FOB is the most widely used term in container shipping and often a sensible default, because the responsibility changes hands at a clear, observable moment.
CFR — Cost and Freight
Sea freight only. The seller pays the cost and the freight to the destination port. You take the costs and the risk from that port onward, and you cover unloading and import clearance.
Note what is missing. The seller pays for carriage but does not insure the goods during it.
CIF — Cost, Insurance and Freight
CFR plus insurance. The seller pays cost, freight and insurance to the destination port. You take risk from there, and cover unloading and import clearance.
The insurance detail matters more than most buyers realise. The default level of cover under CIF is Institute Cargo Clauses (C), which is the narrowest of the standard cargo policies. It covers named major events rather than all risks.
If you want broader cover you have to ask for it and pay for it. Assuming CIF means fully insured is a common and expensive mistake.
DPU — Delivered at Place Unloaded
Any mode. The seller arranges carriage to the named place and is responsible for unloading the goods there.
Import customs clearance is still yours, at your own cost and risk, along with duties and taxes.
DPU is the only rule where the seller must unload. If unloading needs equipment you do not have, this is the term to ask for.
DDP — Delivered Duty Paid
Any mode, and the opposite end of the scale from EXW. The seller delivers to the named place in your country and pays all the costs of getting it there, bearing the risks along the way, cleared for import.
This is the simplest term for a buyer. One price, goods arrive, nothing else to arrange.
It places a real burden on the seller, who must understand import clearance procedures in your country or appoint a competent local customs broker. Sellers who agree to DDP without understanding that tend to discover the problem at your border.
How to choose
The honest rule is that the party better placed to manage a leg of the journey should own it.
| Your situation | Lean toward | Why |
|---|---|---|
| You import rarely and have no freight expertise | DDP or DAP | One price, one accountable party. You pay for the convenience, and it is usually worth it. |
| You import regularly and have freight rates of your own | FCA or FOB | You control carriage and often beat the supplier's freight margin. |
| High-value or fragile goods | Any term, but arrange your own insurance | CIF's default cover is the narrowest standard policy. Do not rely on it. |
| You need goods unloaded at a site without equipment | DPU | The only rule that puts unloading on the seller. |
| Tariffs or duty rates are volatile for your goods | Avoid DDP | Under DDP the seller carries duty risk and will price it in heavily, or dispute it later. |
Five mistakes that cost money
1. Leaving out the named place
"DAP" on its own means very little. "DAP, our Birmingham warehouse, Incoterms 2020" means something specific. The place is part of the term, and vagueness here is argued about later at your expense.
2. Not stating the version
Incoterms 2010 is still used, and DAT still exists in it. If the contract does not say which edition applies, you have built in a disagreement.
3. Using a sea term for a container shipped door to door
FOB and CIF were designed around goods crossing a ship's rail. Containers are usually handed over at an inland terminal days before. FCA and CIP are the intended rules for that, and using the sea terms leaves a gap over who carries the risk in between.
4. Assuming CIF means properly insured
Covered above, and worth repeating because it only becomes visible after a loss. Institute Cargo Clauses (C) is the minimum, not comprehensive cover.
5. Accepting EXW to make a quote look competitive
An EXW price and a DDP price are not comparable numbers. Comparing them side by side in a sourcing exercise, without adding freight, insurance, duty and clearance to the EXW line, is how the wrong supplier wins.
Where Incoterms end and your contract begins
A recurring problem is treating the three letters as though they settle everything about delivery. They do not. Several things still need writing down separately.
- When ownership passes
- Incoterms govern cost and risk, not title. If you need ownership to transfer at a particular moment — for financing, insurance or insolvency protection — that is a separate clause.
- What happens if delivery is late
- No Incoterm contains a remedy for lateness. If a delivery date matters, the consequence of missing it has to be in the contract.
- Who pays when duty rates change mid-contract
- Particularly relevant now that duty rates move more than they used to. Under DDP the seller carries it; under most other terms you do. Either way, say so explicitly rather than relying on the term.
- Demurrage and detention
- Port storage and container charges accrue fast when clearance is delayed. The Incoterm implies who is likely to face them but does not allocate them cleanly. Name them.
A short checklist
- Does every purchase order with an international supplier carry an Incoterm, a named place and the edition year?
- Do you know, for your top ten imported items, who is actually insuring the goods in transit and at what level of cover?
- Are you comparing quotes on landed cost rather than on terms that include different things?
- For container shipments, are you using FCA or CIP rather than FOB or CIF?
- Does your contract say who absorbs a change in duty rates?
Most companies cannot answer the second question. It is usually the one that turns out to matter.
Common questions
What are Incoterms?
Eleven three-letter codes published by the International Chamber of Commerce that set out who does what in an international sale. Each rule settles who arranges and pays for transport, where risk passes from seller to buyer, who handles export and import clearance, and who insures the goods where insurance is required. The current edition is Incoterms 2020, recommended for use from 1 January 2020.
What are the eleven Incoterms 2020 rules?
Seven apply to any mode of transport: EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP (Delivered at Place), DPU (Delivered at Place Unloaded) and DDP (Delivered Duty Paid). Four apply to sea and inland waterway transport only: FAS (Free Alongside Ship), FOB (Free on Board), CFR (Cost and Freight) and CIF (Cost, Insurance and Freight).
What is the difference between EXW and DDP?
They are opposite ends of the scale. Under EXW the seller simply makes the goods available at its premises and you take on all transport costs and risks from there, plus customs at both ends. Under DDP the seller delivers to a named place in your country, pays all costs of getting it there, bears the risks along the way and clears the goods for import. EXW gives the lowest headline price and the most work; DDP the opposite.
Does CIF mean my goods are fully insured?
No, and this is a common and expensive assumption. Under CIF the seller does pay for insurance to the destination port, but the default level of cover is Institute Cargo Clauses (C) — the narrowest of the standard cargo policies, covering named major events rather than all risks. If you want broader cover you have to specify it and pay for it.
What is the difference between FOB and CIF?
Both are sea-freight-only rules. Under FOB the seller pays costs until the goods are loaded onto the vessel at the named port of loading, and you take costs and risk from that point onward. Under CIF the seller pays cost, freight and insurance all the way to the destination port, though you still take the risk from that port onward and cover unloading and import clearance.
Should I use FOB for a container shipment?
Usually not. FOB and CIF were designed around goods crossing a ship's rail, but containers are typically handed to the carrier at an inland terminal days earlier. FCA and CIP are the rules intended for container movements. Using a sea term for a door-to-door container leaves a gap over who carries the risk between handover and loading.
What do Incoterms not cover?
They do not transfer ownership of the goods, set the price or payment terms, or provide any remedy if the seller delivers late or delivers defective goods. They are one clause within a contract, not the contract. Title transfer, late-delivery consequences, who absorbs a change in duty rates, and demurrage and detention charges all need writing down separately.
What changed in Incoterms 2020?
The change most likely to affect you when reading older contracts is that DAT, Delivered at Terminal, was renamed DPU, Delivered at Place Unloaded. Earlier editions such as Incoterms 2010 remain valid if both parties agree and state which version applies, which is why the edition year belongs in the contract alongside the code and the named place.
Which Incoterm should a company new to importing use?
DDP or DAP, in most cases. They give you one price and one accountable party, which is worth paying for if you have no freight expertise and no negotiated carrier rates. Companies that import regularly and hold their own freight rates usually do better with FCA or FOB, because they control the carriage and often beat the supplier's freight margin.
Why do EXW and DDP quotes look so different?
Because they include different things. An EXW price excludes freight, insurance, duty and clearance; a DDP price includes all of them. Comparing the two side by side without adding those costs to the EXW line makes the wrong supplier look cheapest. Compare on landed cost, not on the headline number.
Who pays if duty rates change after we sign?
It depends on the term, and you should not rely on the term alone. Under DDP the seller carries duty and will usually price that risk in heavily or dispute it later; under most other rules the cost falls to you. Given how much duty rates have moved recently, write the answer into the contract explicitly rather than leaving it implied by three letters.
Sources
- International Trade Administration (US Department of Commerce), Know Your Incoterms, Full list of the eleven Incoterms 2020 rules, the split between seven any-mode rules and four sea and inland waterway rules, and the ICC's recommendation to use the 2020 edition from 1 January 2020.
- UK Government, International trade contracts and Incoterms, Per-rule detail for EXW, FOB, CFR, CIF, DPU and DDP, including the point of risk transfer, customs responsibilities, and that the default level of insurance cover under CIF is Institute Cargo Clauses (C).
- International Chamber of Commerce, Incoterms 2020, The publisher of the rules. Confirms eleven three-letter terms, the renaming of DAT to DPU, and that the rules allocate cost, risk and obligations. The full rule text is a paid ICC publication; per-rule detail in this article therefore comes from the two government sources above.
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