What an Incoterm actually settles
An Incoterm is a three-letter code, agreed in the sales contract, that splits the costs and risks of moving goods between the seller and the buyer. It answers four questions at once: who arranges and pays for each leg of transport, who insures the cargo, who clears it through export and import customs, and the crucial one, where the risk of loss or damage passes from seller to buyer. It does not set the price of the goods, decide the payment method, or transfer legal ownership. Those live elsewhere in the contract.
The reason it matters so much is that risk and cost do not always transfer at the same point, and that point can be a factory door, a ship's deck, a port terminal, or the buyer's warehouse. Two companies can agree a price and still be miles apart on who carries the loss if a container is dropped in transit. The Incoterm is what closes that gap.
Cost, risk, and customs in one code
Every Incoterm answers the same four questions: who pays for each transport leg, who insures the cargo, who clears export and import customs, and where risk passes from seller to buyer. It does not cover the price, the payment method, or the transfer of ownership. Choosing the wrong term is how a buyer ends up paying twice, or a seller ends up liable for damage far from home.
The 11 rules, split into two families
Incoterms 2020 has 11 rules, and the first thing to know is that they come in two groups. Seven work for any mode of transport, including air, road, rail, and multimodal container moves. Four are for sea and inland waterway only, and using them for containers is one of the most common mistakes in the book.
- Any mode (7): EXW, FCA, CPT, CIP, DAP, DPU, DDP. Use these for containerised, air, road, rail, and multimodal shipments, which is most modern freight.
- Sea and inland waterway only (4): FAS, FOB, CFR, CIF. These assume the goods cross a ship's rail at a named port, so they fit bulk and breakbulk cargo, not a container handed over at an inland depot.
Why the split matters: FOB and CIF are written around the moment goods are loaded on board a vessel. For a container that you hand to the carrier at an inland yard days before it ever sees a ship, that moment is the wrong place to transfer risk. For those moves the correct terms are FCA, CPT, or CIP. Using FOB for a container is workable in practice but technically wrong, and it can leave a gap in insurance cover for the days between handover and loading.
The terms importers and exporters meet most
You do not need all 11 by heart. A handful cover the vast majority of real trade:
- EXW (Ex Works). The seller just makes the goods available at their premises. The buyer does everything else: collection, export clearance, freight, insurance, and import. Maximum work and risk for the buyer. It looks cheap on the invoice, but the buyer is on the hook from the seller's loading dock, often in a country where they have no agent.
- FCA (Free Carrier). The seller clears the goods for export and hands them to the carrier the buyer nominates, at an agreed place. Risk passes at handover. This is the modern, container-friendly replacement for FOB, and the 2020 rules even let the buyer instruct the carrier to issue an on-board bill of lading.
- FOB (Free On Board). The seller loads the goods onto the vessel the buyer books, and risk passes once they are on board. Widely used and widely misused for containers. It is correct only for true port-to-port cargo loaded at the quay.
- CIF (Cost, Insurance and Freight). The seller pays the freight to the destination port and buys insurance, but risk passes to the buyer as early as loading at origin. So the buyer owns the risk for the whole sea voyage while the seller holds the freight contract, and the required insurance is only minimum cover.
- CFR (Cost and Freight). The same as CIF but with no insurance obligation on the seller. The buyer bears sea risk from loading and must arrange their own cover.
- DAP (Delivered At Place). The seller delivers to a named place in the buyer's country, ready for unloading, bearing cost and risk to that point. The buyer handles import clearance and duties.
- DPU (Delivered At Place Unloaded). Like DAP, but the seller also unloads. This is the only Incoterm that requires the seller to unload, and it replaced the old DAT term in 2020.
- DDP (Delivered Duty Paid). The seller does everything, including paying import duty and taxes, and delivers to the buyer's door. Maximum responsibility for the seller. Easy for the buyer, but the seller takes on foreign customs liability it may not fully control.
The CIF trap: paid freight, borrowed risk
Under CIF the seller pays the ocean freight and buys insurance, so buyers often assume the seller carries the risk all the way to destination. They do not. Risk passes to the buyer the moment the goods are loaded at the origin port, and the insurance the seller must buy is only the minimum level of cover. If cargo is damaged mid-ocean, it is the buyer's loss to claim, on a policy the buyer did not choose. Many importers upgrade their own cover for exactly this reason.
What changed in Incoterms 2020
If you learned Incoterms years ago, a few things moved in the 2020 edition:
- DAT became DPU. The old Delivered At Terminal was renamed Delivered At Place Unloaded, widening it beyond terminals to any named place and making clear the seller unloads.
- CIP now needs better insurance. Under CIP the seller must buy a high level of cover (all-risks, Institute Cargo Clauses A), while CIF still only requires the minimum (Clauses C). If you want all-risks cover on a container move, CIP is the term.
- FCA and the on-board bill of lading. FCA 2020 lets buyer and seller agree that the carrier issues an on-board bill of lading after loading, which helps sellers who need that document for a Letter of Credit while still using a container-appropriate term.
- Security and cost transparency. The 2020 text spells out security-related obligations and lays out costs more clearly, so each side can see what it is actually agreeing to pay.
How to choose the right term
The right Incoterm depends on who is best placed to manage each leg, and how much control you want:
- Match the term to the transport. Container, air, or multimodal cargo should use FCA, CPT, CIP, DAP, DPU, or DDP, not FOB or CIF. Save the sea-only terms for bulk and breakbulk loaded at the quay.
- Control follows the freight. Whoever books the main carriage controls routing, carrier choice, and often the tracking. If visibility and reliability matter to you, favour a term where you hold the freight contract.
- Mind the customs you can actually clear. DDP looks generous, but it makes the seller liable for import clearance and duties in the buyer's country, which is hard to manage from abroad. EXW puts the mirror-image burden on the buyer at origin. FCA and DAP split the difference sensibly.
- Insure to the reality, not the label. CIF and CIP both mean the seller buys cover, but at very different levels, and under CIF the buyer still owns the sea risk. Read the cover, and top it up if it does not match the value at stake.
The bottom line
An Incoterm is three letters that quietly allocate every cost and every risk in a shipment, and the most expensive mistakes come from assuming the label means more protection than it does. FOB and CIF belong to true port-to-port sea cargo, not containers handed over inland; for those, FCA, CPT, and CIP are the right tools. CIF pays the freight but leaves the sea risk with the buyer. DDP is easy for the buyer but hands the seller foreign customs liability. Pick the term that matches how the goods actually move and who can really manage each leg, read what the insurance clause actually covers, and remember that whoever controls the main carriage usually controls the visibility. Whichever side of the deal you are on, once the term is set, the one thing you always want is to know where your cargo is, no matter whose risk it is at that moment.