What are Incoterms, and why do they matter?
Incoterms are 11 three-letter trade terms published by the International Chamber of Commerce (ICC) for use in both international and domestic contracts of sale. Each rule sets out how the tasks, costs and risks of delivering the goods are split between seller and buyer: where and when the seller delivers the goods, which is also the point where risk of loss or damage transfers to the buyer, who contracts for carriage, who insures (where the rule calls for it), and who handles export and import customs clearance. What the rules leave out matters just as much. As the US International Trade Administration points out, Incoterms don't set the price or the payment terms, don't say when title passes, and don't deal with defective goods, late delivery or disputes. Those belong in the sales contract and the law that governs it.
A misread term tends to surface on the freight invoice. A buyer who agrees to EXW may find it has to clear the goods for export itself, because the seller has no duty to do so. A buyer on CIF may assume the cargo is fully insured, when the seller only has to buy minimum cover under Institute Cargo Clauses (C). Carrier surcharges such as the bunker adjustment factor (BAF), currency adjustment factor (CAF), peak season surcharge (PSS) and terminal handling charges add another layer to the bill. Our freight surcharges guide explains what each one is for.
The current edition, Incoterms 2020, took effect on January 1, 2020; the first set of rules dates back to 1936. The rules are grouped by transport mode. Seven work for any mode: EXW, FCA, CPT, CIP, DAP, DPU and DDP. Four are for sea and inland waterway only: FAS, FOB, CFR and CIF. The Incoterms chart above splits a shipment into 10 stages. That split is our own simplified model, not an ICC one, and for each rule it shows who pays, who carries the risk and, under CIP and CIF, where the seller's insurance comes in.
What Incoterms cover, and what they leave out
Each rule settles the practical side of getting the goods from seller to buyer: the point and place of delivery, where risk of loss or damage passes, who contracts for carriage, who insures (only CIP and CIF require it), who handles export and import customs clearance, and who pays for each of those tasks.
A rule only works with a named place or port and an edition, for example "CIF Shanghai Incoterms 2020". What gets named depends on the rule. EXW and FCA name the place of delivery. CPT, CIP, DAP, DPU and DDP name the destination. FAS and FOB name the port of shipment, and CFR and CIF name the port of destination.
The rules say nothing about price, payment method or timing, transfer of title, or liability for defective or late goods. The sales contract has to cover those.
Any mode vs. sea and inland waterway
Seven rules work for any mode of transport, including multimodal moves: EXW, FCA, CPT, CIP, DAP, DPU and DDP. The other four, FAS, FOB, CFR and CIF, are for sea and inland waterway transport only.
The sea-only rules tie delivery to the ship: alongside it under FAS, on board it under FOB, CFR and CIF. That doesn't match how most container freight moves, since the seller hands the container to a carrier at a terminal before it is loaded on board. For that case the ICC points to FCA in place of FAS or FOB, CPT in place of CFR, and CIP in place of CIF.
Risk transfer vs. cost transfer
Risk transfers from seller to buyer at delivery, and in most rules the costs pass at the same point. Seven rules work this way: EXW, FCA, DAP, DPU, DDP, FAS and FOB.
The four C rules, CPT, CIP, CFR and CIF, split the two. The seller pays main carriage, the international leg, to the named destination or port of destination, yet risk passes to the buyer back at origin: when the goods reach the first carrier under CPT and CIP, or go on board at the port of shipment under CFR and CIF. Once delivered, the seller doesn't guarantee that the goods arrive, or in what condition or quantity.
So under a C rule, the buyer carries the risk of loss or damage during a leg the seller has paid for. The chart shows this as a gap between the risk marker and the cost marker.
Cargo insurance: only CIP and CIF require it
Just two of the 11 rules oblige the seller to insure, and they set different levels of cover. CIP requires Institute Cargo Clauses (A) or similar, the broadest all-risks cover; the parties can agree on less. CIF requires only Clauses (C) or similar, minimum cover; the parties can agree on more.
In both cases the seller insures for the buyer's benefit. The insured amount is at least the contract price plus 10%, in the contract currency, and cover runs at least from delivery to the named destination (CIP) or port of destination (CIF). If the goods are lost or damaged in transit, the buyer can claim directly from the insurer under the insurance the seller was obliged to take out.
Under the other nine rules, nobody has to insure. The party carrying the risk, often the buyer, should arrange its own cargo insurance. If the destination country requires insurance to be bought locally, consider CPT instead of CIP, or CFR instead of CIF.
Common Incoterms mistakes
Using FOB, CFR or CIF for containers handed over at a terminal. The seller keeps the risk until the container is on board, even though it has already handed it over at the terminal. Use FCA, CPT or CIP instead.
Using EXW for export sales. Under EXW, the buyer has to clear the goods for export, which a foreign buyer may not be able to do. The ICC treats EXW as a fit for domestic sales and recommends FCA when the goods are going abroad.
Agreeing to DDP without checking the tax side. The seller pays import duties and taxes and may not be able to recover them from the buyer. Before choosing DDP, check whether the seller can reclaim import VAT (the value-added tax charged when goods enter the country). If the seller can't handle import clearance, DAP or DPU is the safer choice.
Naming only a city. "FCA Chicago" leaves open exactly where risk and costs change hands. Name the precise point, such as a specific terminal or warehouse.
What is the difference between EXW and DDP?
They sit at opposite ends of the 11 Incoterms rules. Under EXW (Ex Works), the seller has the least to do: it places the goods at the buyer's disposal at the named place, without loading them or clearing them for export. Under DDP (Delivered Duty Paid), the seller takes on the most: it delivers the goods to the named destination, cleared for import with import duties and taxes paid, ready for unloading. Everything in between, from export clearance to import duties, shifts from the buyer under EXW to the seller under DDP.
When does risk transfer under each Incoterm?
Risk transfers from seller to buyer at the point of delivery, and each rule defines that point differently. EXW: when the goods are placed at the buyer's disposal at the named place. FCA: when they are handed to the buyer's nominated carrier, or loaded onto the buyer's vehicle if delivery is at the seller's premises. CPT and CIP: when they are handed to the first carrier. FAS: when they are alongside the vessel at the port of shipment. FOB, CFR and CIF: when they are on board the vessel at the port of shipment. DAP and DDP: when they arrive at the named destination, ready for unloading. DPU: once they have been unloaded there.
What is the difference between CIF and CFR?
Insurance. Under both CFR (Cost and Freight) and CIF (Cost, Insurance and Freight), the seller pays freight to the named port of destination, and risk passes to the buyer once the goods are on board the vessel at the port of shipment. Under CIF, the seller must also insure the goods for the buyer, at minimum cover under Institute Cargo Clauses (C) or similar, unless the parties agree on more. Under CFR, the seller has no obligation to insure, so the buyer is well advised to buy its own cover for the sea leg.
Which Incoterms should I use for container shipments?
If the container is handed to a carrier at a terminal, use a rule for any mode of transport rather than a sea-only one. The ICC recommends FCA instead of FAS or FOB, CPT instead of CFR, and CIP instead of CIF. FCA leaves main carriage (the international leg) to the buyer; CPT and CIP have the seller pay it, and CIP adds all-risks insurance. FOB, CFR and CIF remain a fit for bulk and break bulk cargo loaded on board, or for containers the seller loads on board itself.
Who insures the goods under FOB?
Nobody is obliged to. FOB (Free on Board) puts no insurance obligation on either the seller or the buyer. Risk passes to the buyer once the goods are on board the nominated vessel at the named port of shipment, so the buyer will normally want its own cargo insurance from that point. Only two Incoterms rules, CIP and CIF, require the seller to insure.
Do Incoterms decide when ownership of the goods passes?
No. Incoterms deal with delivery, risk, costs, carriage, insurance and customs clearance, not with transfer of title. As the US International Trade Administration explains, they don't say when ownership passes, and they don't cover price, payment or breach of contract either. Set out when title passes in the sales contract; the law that governs that contract fills any gaps.
How much insurance does the seller have to buy under CIP?
Under CIP, the seller must insure the goods under Institute Cargo Clauses (A) or similar clauses, the broadest all-risks level of cover, unless the parties agree on less. The minimum insured amount is the contract price plus 10% (110%), in the currency of the contract. Cover must run at least from the point of delivery to the named place of destination, the buyer can claim directly from the insurer, and the seller must give the buyer the policy or insurance certificate.
Can I still use Incoterms 2010?
Yes, if both parties agree. The 2020 edition doesn't cancel earlier ones, so a contract can still be written on Incoterms 2010. State the edition in the contract, for example "CIF Shanghai Incoterms 2020", so there is no doubt which version of the rule applies.
Sources
All calculations run in your browser. Figures are based on published standards, carrier-published values and nominal dimensions, so check them against your carrier's own numbers before you book.
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