What Are Incoterms? (Incoterms 2020 Guide)
What Incoterms are and what they actually govern: the eleven Incoterms 2020 rules, transfer of cost and risk, common mistakes and how to choose the right term.
A price on its own means very little in international trade. "USD 640 per tonne" cannot be compared until you know whether that is at the factory gate or delivered to the buyer's warehouse. Incoterms exist to remove exactly that ambiguity. This guide explains what Incoterms are, what they do and do not govern, and how the eleven Incoterms 2020 rules work in practice.
What Incoterms Actually Govern
Incoterms are three-letter delivery rules published by the International Chamber of Commerce that standardise the obligations of buyer and seller. The current edition is Incoterms 2020. Each rule answers three questions:
- Cost: who pays for carriage, loading, unloading, customs formalities and insurance?
- Risk: at what precise point does the risk of loss or damage pass from seller to buyer?
- Obligation: who arranges export and import clearance, the carriage contract and the required documents?
What Incoterms do not cover is equally important. They say nothing about transfer of title, payment terms, price, governing law or product quality. Those belong in the sales contract. Incoterms define only how delivery happens.
The Eleven Rules of Incoterms 2020
The rules split into two families: those suitable for any mode of transport, and those reserved for sea and inland waterway shipments.
Any mode of transport
- EXW (Ex Works) – delivery at the seller's premises; the seller's minimum obligation.
- FCA (Free Carrier) – delivery to the carrier at a named place; the recommended rule for containerised cargo.
- CPT (Carriage Paid To) – seller pays carriage, risk passes on handover to the first carrier.
- CIP (Carriage and Insurance Paid To) – CPT plus insurance, with wide coverage required under the 2020 edition.
- DAP (Delivered at Place) – delivered at the named destination, ready for unloading.
- DPU (Delivered at Place Unloaded) – delivered and unloaded at destination.
- DDP (Delivered Duty Paid) – delivered with import duties and taxes paid; the seller's maximum obligation.
Sea and inland waterway only
- FAS (Free Alongside Ship) – delivered alongside the vessel at the port of shipment.
- FOB (Free On Board) – delivered on board at the port of shipment.
- CFR (Cost and Freight) – seller pays freight, risk passes at the port of shipment.
- CIF (Cost, Insurance and Freight) – CFR plus minimum insurance cover.
We cover the two most frequently used rules in detail in our articles on FOB and CIF.
Cost Transfer Is Not Risk Transfer
The single most common misunderstanding is assuming that cost and risk change hands at the same point. Under the C rules (CPT, CIP, CFR, CIF) they deliberately do not: the seller pays carriage to the destination, but risk passes at the port or place of shipment. If a CIF cargo is damaged mid-voyage, the buyer bears the risk even though the seller paid the freight, and the claim goes to the insurer.
Under the D rules (DAP, DPU, DDP) both cost and risk stay with the seller until arrival. Under the E and F rules (EXW, FCA, FAS, FOB) both pass early.
| Group | Rules | Risk passes |
| E | EXW | At the seller's premises |
| F | FCA, FAS, FOB | On handover to carrier or vessel at origin |
| C | CPT, CIP, CFR, CIF | At origin, while cost runs to destination |
| D | DAP, DPU, DDP | At the named destination |
What Changed in Incoterms 2020
- DAT was replaced by DPU, removing the requirement that unloading take place at a terminal.
- CIP now requires wider insurance cover, while CIF retains the minimum level.
- FCA gained an option enabling an on-board bill of lading, which matters greatly for letter of credit presentations.
- The rules now expressly address carriage using the buyer's or seller's own means of transport.
- Security-related requirements and their cost allocation were clarified.
Choosing the Right Term
The choice should follow each party's logistics capability and the payment structure:
- If the buyer has strong freight arrangements, FCA or FOB usually works best.
- If the seller has better freight rates and wants to quote landed prices, CFR, CIF or CPT is appropriate.
- If the buyer expects delivery at its own premises and the seller can manage the destination leg, consider DAP.
- For containerised cargo, FCA is technically more accurate than FOB because risk should pass at the terminal, not at the ship's rail.
- DDP places import duties and tax obligations on the seller and should only be used with genuine knowledge of the destination country's regulations.
Under a letter of credit the delivery term and the document set are linked: CIF and CIP require an insurance policy in the presentation, FOB does not. The delivery term therefore has to be agreed at the same moment as the payment structure.
Delivery Terms as Part of the Whole Operation
A delivery term is not an abbreviation on a proforma invoice; it is the allocation of cost and risk across an entire operation. Yurt Bereket Global plans the delivery term, transport model, payment structure and document flow together when it brings manufacturers and international buyers into one transaction. Yurt Bereket Global is not a bank, a law firm or an independent financial adviser: contract review and payment instruments remain with legal professionals and banks, while we coordinate the commercial operation.
You can read more about how we plan transport and delivery on our logistics and supply chain page.