Incoterms 2020: a simple guide
In short
Incoterms 2020 are a set of eleven standard three-letter trade terms, published by the ICC, that define who arranges and pays for transport and insurance and exactly where risk passes from seller to buyer. Seven apply to any transport mode and four only to sea or inland waterway. This is general guidance, not legal advice — the official Incoterms rules and your contract govern.
Few things cause more confusion in cross-border trade than who pays for freight and who carries the risk if something goes wrong. Incoterms exist to settle that in three letters. This is general guidance, not legal advice; the official Incoterms rules and your contract govern.
What Incoterms are
Incoterms — short for International Commercial Terms — are a set of standard trade terms published by the International Chamber of Commerce (ICC). The current version, Incoterms 2020, contains eleven rules. Each is a three-letter code (such as FOB or DDP) that defines, for a sale of goods, who arranges carriage and insurance, who bears which costs, and the precise point where risk passes from seller to buyer. They do not cover payment, title transfer or every logistics detail — those live in your contract.
Two families of rules
The eleven rules fall into two groups:
- Any mode of transport (road, rail, air, sea or a mix): EXW, FCA, CPT, CIP, DAP, DPU, DDP.
- Sea and inland waterway only: FAS, FOB, CFR, CIF. These are written around a ship and a port, so they suit bulk or non-containerised cargo; for containers, the ICC generally points to FCA, CPT or CIP instead.
The eleven rules at a glance
Read the table as a ramp: at the top (EXW) the buyer does almost everything; at the bottom (DDP) the seller does almost everything.
| Code | Term | Mode | Who carries the main cost/risk |
|---|---|---|---|
| EXW | Ex Works | Any | Buyer — collects at the seller's premises |
| FCA | Free Carrier | Any | Risk passes when goods are handed to the buyer's carrier |
| CPT | Carriage Paid To | Any | Seller pays carriage; risk passes at the first carrier |
| CIP | Carriage & Insurance Paid To | Any | As CPT, plus the seller buys (higher) insurance |
| DAP | Delivered at Place | Any | Seller delivers ready for unloading at destination |
| DPU | Delivered at Place Unloaded | Any | Seller delivers and unloads at destination |
| DDP | Delivered Duty Paid | Any | Seller bears everything, including import duties |
| FAS | Free Alongside Ship | Sea | Seller delivers alongside the vessel |
| FOB | Free on Board | Sea | Risk passes once goods are on board |
| CFR | Cost and Freight | Sea | Seller pays freight; risk passes on board at origin |
| CIF | Cost, Insurance & Freight | Sea | As CFR, plus the seller buys (minimum) insurance |
Cost vs risk — the key subtlety
A common trap is assuming that whoever pays the freight also carries the risk. Under CPT, CIP, CFR and CIF the seller pays to get the goods to the destination, but risk passes to the buyer much earlier — at origin, when the goods are handed to the carrier or loaded. So damage in transit can be the buyer's problem even though the seller booked and paid for the shipping. Always check the named place and the insurance cover, not just the three letters.
How to choose and use a term
- Name the place precisely. FOB followed by the load port, or DAP followed by the full delivery address — a bare code is incomplete.
- Match the term to the cargo. Use the sea-only terms for vessel and port shipments, and the any-mode terms for containers and air.
- Agree insurance explicitly. Only CIP and CIF oblige the seller to insure, and the minimum cover differs; arrange your own if you need more.
- State the version. Write Incoterms 2020 so there is no ambiguity with earlier editions.
- Put it in the quote. A clear quote request should ask the supplier to state the Incoterm so offers are comparable.
Key takeaways
- Incoterms 2020 are eleven ICC rules that split cost and risk in a sale of goods.
- Seven work for any transport mode; four are sea and inland-waterway only.
- Paying the freight is not the same as carrying the risk — check where risk passes.
- Always name the place, agree insurance, and state the 2020 version in writing.
This is general guidance, not legal advice; the official Incoterms rules and your contract govern, and a qualified professional should review your terms. Comparing suppliers? Ask each to quote the same Incoterm when you request a quote.
Frequently asked questions
- What does Incoterms stand for?
- International Commercial Terms. They are standard trade terms published by the International Chamber of Commerce that define who arranges and pays for carriage and insurance and where risk passes between seller and buyer.
- How many Incoterms are there in the 2020 edition?
- Eleven. Seven apply to any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and four apply only to sea and inland waterway transport (FAS, FOB, CFR, CIF).
- Does the Incoterm decide who pays import duties?
- Only in some terms. Under DDP the seller pays import duties, while under most others the buyer handles import clearance and charges. Duty and tax rules vary by country, so confirm what applies in your market.
- Is the party that pays the freight the same as the party that carries the risk?
- Not always. Under CPT, CIP, CFR and CIF the seller pays the freight but risk passes to the buyer earlier, at origin. Always check the exact point where risk transfers, not just who pays.
- Which Incoterm should I use for containers?
- The ICC generally recommends FCA, CPT or CIP for containerised goods rather than FOB, CFR or CIF, because the sea terms are written around loading onto a vessel. Choose the term that matches how your cargo actually moves, and seek professional advice for high-value shipments.