If you’ve ever stared at a trade contract and wondered exactly who is responsible for the cargo once it leaves the factory and who picks up the bill if something goes wrong at sea, you’re not alone. This is precisely why Incoterms explained clearly and simply can save businesses thousands of dollars, and prevent the kind of disputes that derail otherwise solid trade relationships.
Incoterms, short for International Commercial Terms, are a set of 11 globally recognised rules published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers in international trade covering cost allocation, risk transfer, and logistics responsibilities. They don’t cover payment terms or ownership of goods, but they do tell you, in precise terms, who arranges transport, who pays for insurance, and crucially, at what point in the journey the risk passes from seller to buyer.
Last updated in 2020, the current Incoterms 2020 rules apply to contracts the world over. Whether you’re an importer in Hamburg, an exporter in Shanghai, or a freight forwarder managing both ends of a supply chain, understanding this list of Incoterms is non-negotiable.
Incoterms Explained: The Basics You Need to Know
Before diving into each term, a quick structural note. The 11 Incoterms are divided into two groups:
Rules for any mode of transport (including multimodal and air): EXW, FCA, CPT, CIP, DAP, DPU, DDP.
Rules for sea and inland waterway transport only: FAS, FOB, CFR, CIF.
This distinction matters a great deal. One of the most common and costly errors in international trade is applying a sea-only term like FOB to containerised cargo but more on that shortly.
The Full List of Incoterms 2020, With Real Freight Scenarios
1. EXW — Ex Works
The seller’s obligation ends the moment the goods are made available at their premises — factory, warehouse, or otherwise. The buyer takes on everything from that point: export clearance, loading, transport, insurance, and import duties.
Scenario: A garment manufacturer in Vietnam offers EXW terms to a buyer in the Netherlands. The Dutch importer must arrange a local agent in Ho Chi Minh City to pick up the goods, handle export customs, and manage the entire shipment. This works if the buyer has strong local logistics capability. For most importers, it’s a heavy lift.
2. FCA — Free Carrier
The seller delivers the goods to a named carrier at a specified location. For containerised cargo, FCA is widely preferred over FOB because risk transfers once the goods are handed to the carrier, not when they’re loaded onto the vessel. Incoterms 2020 added a specific provision allowing the buyer’s bank to receive an on-board Bill of Lading under FCA, addressing a long-standing friction point in letters of credit.
Scenario: A Spanish wine exporter delivers pallets to the freight forwarder’s CFS (container freight station) in Barcelona under FCA terms. Once the forwarder acknowledges receipt, risk has transferred. The seller can focus on production, not port logistics.
3. FAS — Free Alongside Ship
The seller places the goods alongside the vessel at the named port of shipment. Risk transfers at that point. FAS is typically used for bulk commodities, think grain, coal, or timber where conventional vessel loading (not container) is the norm.
4. FOB — Free on Board
Arguably the most recognised and most misused of the group. Under FOB, the seller is responsible until the goods are loaded onto the vessel at the named port of shipment. Risk then transfers to the buyer. The problem? FOB is a sea-only term, technically intended for non-containerised, break-bulk cargo. Using it for containerised shipments creates a grey area: who is liable between the seller’s warehouse and the port terminal?
Scenario: A Chinese electronics manufacturer ships containers to a buyer in the US under FOB Shanghai. The containers are damaged while waiting at the terminal before being loaded. Under a strict reading of FOB, the seller may still bear the risk at that point. FCA would have been cleaner.
5. CFR — Cost and Freight
The seller pays for transport to the destination port, but risk transfers to the buyer as soon as the goods are loaded onto the vessel at the origin. This creates an important split: the seller controls the freight arrangement, but the buyer bears the risk during transit. Insurance is therefore the buyer’s responsibility.
6. CIF — Cost, Insurance and Freight
Similar to CFR, but the seller must also procure minimum insurance (Institute Cargo Clauses C) for the buyer’s benefit. Note: “minimum” is the operative word. Clause C covers only major catastrophic losses — not theft, contamination, or many other common cargo risks. Buyers who assume CIF means comprehensive coverage often find out otherwise when they file a claim.
Scenario: A Brazilian coffee exporter ships under CIF Rotterdam. The cargo sustains moisture damage mid-voyage. The buyer, expecting a generous insurance payout, discovers that Clause C doesn’t cover this type of loss. The lesson: always verify what the policy actually covers, and consider arranging your own.
7. CPT — Carriage Paid To
The multimodal equivalent of CFR. The seller pays freight to the named destination, but risk transfers when goods are handed to the first carrier at origin. Like CFR, the cost/risk split can surprise buyers who aren’t reading carefully.
8. CIP — Carriage and Insurance Paid To
The multimodal equivalent of CIF with a notable upgrade in Incoterms 2020. Under CIP, the seller must now provide insurance under the Institute Cargo Clauses A (the broadest standard), not Clause C. This is one of the most consequential changes from Incoterms 2010 and makes CIP significantly more buyer-friendly than CIF.
9. DAP — Delivered at Place
The seller delivers to the named destination, ready for unloading, but does not handle import customs or duties. The buyer takes over from there. DAP works well for sellers with strong international logistics capabilities who want control of the shipment but prefer not to deal with the complexities of import clearance in the destination country.
10. DPU — Delivered at Place Unloaded
New in Incoterms 2020, replacing DAT (Delivered at Terminal). DPU is the only Incoterm under which the seller is responsible for unloading the goods at the destination. The named place can be any location, giving this term more flexibility than its predecessor.
11. DDP — Delivered Duty Paid
The maximum obligation for the seller. DDP means the seller handles everything, export, freight, insurance, import customs, and duties, and delivers the goods to the buyer’s door, cleared and ready. For buyers, this is the most convenient arrangement. For sellers, it demands deep familiarity with the destination country’s import regulations.
Scenario: A German machinery manufacturer offers DDP terms to a buyer in India. The seller must navigate Indian customs, pay applicable import duties, and manage local last-mile delivery. One regulatory misstep can mean detained cargo, unexpected costs, and reputational damage. DDP is attractive to buyers but demands significant seller expertise.
Why Getting Incoterms Right Actually Matters
Choosing the wrong Incoterm isn’t just a paperwork issue. It determines who bears the loss when a container falls overboard, who is liable when goods arrive damaged, and who gets stuck with unexpected customs fees. In practice, many incoterms risk transfer disputes arise not because companies didn’t know the rules, but because they didn’t read the specific clauses carefully — or defaulted to a term they’d “always used” without checking whether it was appropriate.
A few principles worth keeping front of mind:
For containerised freight, prefer FCA over FOB, and CIP over CIF. The multimodal terms were designed for exactly this type of cargo. Incoterms and letters of credit interact closely. Banks have specific requirements about which terms they will accept on documentary credit transactions. Mismatches between the contract Incoterm and the LC terms can result in refused documents. Cargo insurance is not automatically comprehensive under seller-arranged terms. Whether you’re on CIF or CIP, always read the policy, not just the Incoterm.
Your Incoterms Guide: A Quick Decision Framework
Incoterms explained in the abstract only go so far. In practice, selecting the right term comes down to a few key questions:
How much control do you want over the shipment? If you’re a seller who knows your freight forwarders and wants to manage the journey, lean toward C-group or D-group terms. If you prefer the buyer to handle logistics, E or F-group terms put that responsibility on them.
What mode of transport is involved? For containerised cargo, always use any-mode terms (FCA, CPT, CIP, DAP, DPU, DDP). Reserve the sea-only terms (FOB, CFR, CIF, FAS) for bulk, break-bulk, or non-containerised shipments.
What is your risk appetite? Sellers comfortable with higher responsibility and margin potential may prefer DDP to offer buyers a simple, landed-cost proposition. Those who want to limit exposure early in the journey may choose EXW or FCA.
The Bottom Line
Incoterms explained well are a powerful tool, a shared language between buyers, sellers, and freight professionals that eliminates ambiguity and reduces risk. But they only work when all parties understand what they’ve agreed to and have chosen a term that genuinely reflects their logistics capabilities and risk appetite.
If there’s one thing to take away from this guide: never default to a term out of habit. Every shipment has different characteristics: mode, route, commodity, counterparty, and your Incoterm should reflect that. When in doubt, talk to your freight forwarder before you sign the contract, not after the container has sailed.