Incoterms Explained: The 11 Rules Every Freight Forwarder Must Know

Incoterms — International Commercial Terms — are a set of standardised trade rules published by the International Chamber of Commerce (ICC). They define the point at which risk transfers from seller to buyer, who pays for freight and insurance, and who handles customs clearance at origin and destination.

That sounds dry, but the practical stakes are high. When a shipment is damaged at sea, the applicable Incoterm determines whether the claim falls on the seller’s insurance, the buyer’s insurance, or sits in a contractual grey area. When goods are held at customs, the Incoterm dictates who is responsible for clearing them. Getting Incoterms wrong — or leaving them out of the sales contract — creates disputes that are expensive to resolve.

This guide covers all 11 Incoterms 2020 rules, when to use them, and the most common mistakes.

Why Incoterms Matter

Three things are at stake in any Incoterm selection:

Liability. The Incoterm defines the precise point where risk of loss or damage passes from seller to buyer. Before that point, it’s the seller’s problem. After it, it’s the buyer’s.

Insurance. Some Incoterms (CIF, CIP) require the seller to arrange and pay for insurance. Others leave it optional. Parties often assume insurance is covered when it isn’t — Incoterms make this explicit.

Customs. Export customs clearance is always the seller’s responsibility. Import customs clearance is usually the buyer’s — except under DDP (Delivered Duty Paid), where the seller handles everything.

The current version is Incoterms 2020, published in January 2020. Always specify the version in your contracts: “FOB Shanghai, Incoterms 2020.” Older versions (Incoterms 2010) are still valid if specified.

The 4 Groups

Incoterms are grouped by the first letter, reflecting where the seller’s responsibility ends:

• E terms (EXW) — Seller’s premises. Minimum obligation for the seller.
• F terms (FCA, FAS, FOB) — Seller delivers to a carrier nominated by the buyer. Freight is on the buyer.
• C terms (CFR, CIF, CPT, CIP) — Seller arranges and pays for main carriage, but risk passes before the destination.
• D terms (DAP, DPU, DDP) — Seller delivers to destination. Maximum obligation for the seller.

All 11 Incoterms Explained

EXW — Ex Works

The seller makes goods available at their premises (factory, warehouse). The buyer arranges and pays for everything from that point: loading, export customs, freight, insurance, import customs, and delivery.

Use when: The buyer has strong logistics capabilities and wants full control of the supply chain. Not recommended for inexperienced buyers — they assume all risk from the seller’s loading dock.

FCA — Free Carrier

The seller delivers the goods to a named carrier or another nominated party at a named place. Risk transfers at that handover point. If the place is the seller’s premises, the seller is responsible for loading. If elsewhere, not.

Use when: Container shipments or multimodal transport. The ICC recommends FCA over FOB for containerised cargo because the risk transfer point better reflects how container logistics actually work (risk passes at the terminal, not the ship’s rail).

FAS — Free Alongside Ship

The seller delivers the goods alongside the named vessel at the port of shipment. The buyer bears all costs and risk from that point forward, including loading onto the vessel.

Use when: Bulk or break-bulk cargo where the buyer has direct control of the loading operation.

FOB — Free On Board

Probably the most widely used Incoterm. Risk transfers when the goods are loaded on board the vessel at the named port of shipment. The seller handles export customs; the buyer handles everything from loading onwards.

Common misuse: FOB is frequently used for container shipments where it doesn’t technically fit — the risk transfer at the ship’s rail is meaningless when the seller hands over a sealed container to the terminal. FCA is usually more appropriate for containerised cargo.

CFR — Cost and Freight

Seller pays for freight to the named destination port. Risk transfers when goods are loaded on the vessel at origin — the same as FOB. So the seller pays for freight but the buyer bears risk during transit.

Use when: The seller has better freight rates or relationships with carriers. The disconnect between risk transfer and cost responsibility can create disputes if goods are damaged in transit.

CIF — Cost, Insurance and Freight

Same as CFR but the seller must also arrange and pay for marine insurance. The insurance must meet minimum coverage (Institute Cargo Clauses C). Risk still transfers at loading.

Note: CIF minimum insurance (Clauses C) is basic. Buyers who want comprehensive coverage should either specify a higher standard in the contract or arrange their own additional insurance.

CPT — Carriage Paid To

Seller pays for carriage to the named destination. Risk transfers when goods are handed to the first carrier — earlier than CFR/CIF. Used for multimodal shipments.

CIP — Carriage and Insurance Paid To

Same as CPT with insurance. Importantly, CIP requires a higher level of insurance than CIF — Institute Cargo Clauses A (all-risk) rather than Clauses C. This was changed in Incoterms 2020.

DAP — Delivered At Place

Seller is responsible for delivering goods to the named destination, ready for unloading. Buyer handles import customs and duties. Risk transfers at destination.

Use when: The seller has logistics capability at destination and the buyer is handling their own import process.

DPU — Delivered At Place Unloaded

Same as DAP but the seller is also responsible for unloading at the destination. This is the only Incoterm that requires the seller to unload. Renamed from DAT (Delivered At Terminal) in Incoterms 2020.

DDP — Delivered Duty Paid

Maximum obligation for the seller. The seller delivers goods to the named destination, cleared through import customs, with all duties and taxes paid. The buyer only needs to unload.

Use when: The buyer wants the simplest possible arrangement and is willing to pay a premium for it. Increasingly common in B2C cross-border e-commerce.

Caution: DDP requires the seller to act as importer of record in the destination country — which may require registration, a local agent, and compliance with local tax requirements. Many sellers cannot or should not offer DDP without understanding these obligations.

EXW vs DDP: The Two Extremes

The clearest way to understand the Incoterm spectrum is to compare the extremes:

Everything in between is a variation on how these responsibilities are split.

Most Common Incoterm Mistakes

Specifying an Incoterm without a named place. “FOB” is incomplete. “FOB Shanghai, Incoterms 2020” is a contract term. The named place is legally necessary.

Using FOB for container shipments. As noted above, the risk transfer at the ship’s rail doesn’t reflect how container logistics work. Cargo delivered to a terminal can sit there for days before loading. FCA is more appropriate.

Assuming CIF provides adequate insurance. Minimum Institute Cargo Clauses C coverage excludes many common causes of loss. If goods are damaged by handling, theft, or contamination, minimum CIF insurance may not respond.

Seller offering DDP without understanding importer of record obligations. Especially in EU and US markets, being the importer of record has significant compliance implications. Sellers who offer DDP without understanding this are taking on obligations they may not be equipped to meet.

Not specifying the Incoterms version. Incoterms 2020 and Incoterms 2010 have meaningful differences (particularly CIP insurance requirements and DAT→DPU). Always specify the year.

Codifying Incoterms in Your FMS

Incoterms should be captured at the shipment level in your freight management system — not just on the invoice. When your FMS knows the applicable Incoterm, it can:

• Auto-assign the correct party as responsible for each milestone (customs clearance, insurance, delivery)
• Flag mismatches — for example, a seller who is trying to book import customs clearance on a DAP shipment where the buyer should be handling it
• Generate accurate shipping instructions and documents that reflect the agreed terms
• Provide an audit trail if a liability dispute arises

Treating Incoterms as a document field rather than an operational parameter is a common oversight. The right FMS makes the Incoterm structurally meaningful, not just a text string on a PDF.