Incoterms made simple, a guide and checklist
Incoterms are international rules that define who bears what responsibilities in a shipment – covering costs, risk transfer, and documentation. But if you’re new to international shipping, the array of terms and acronyms can be confusing (at best). We’ve put together this guide to help you understand the industry language and avoid common pitfalls when planning a shipment and selecting terms.
What Incoterms do (and don’t do)
Incoterms are the globally recognised rules published by the International Chamber of Commerce (ICC) that define responsibilities for delivery, risk transfer, and cost allocation between the seller and the buyer. The latest and current version is Incoterms 2020. Their aim is to prevent misunderstandings and disputes, which can lead to unnecessary costs for both parties.
Incoterms do not govern the following items - these should be covered in the sales contract:
- Ownership
- Title transfer
- Payment terms
- Sale price
Incoterms 2020 in plain English
The tables below explain the different terms in use under Incoterms 2020, and where the handover of risk and responsibility from seller to buyer occurs — the delivery point. It’s vital that you understand this to properly align your insurance coverage and ensure there are no gaps.
Incoterms that apply to any mode of transport: road, rail, air, or sea.
EXW (Ex Works)
Seller: Makes goods available at their premises.
Buyer: Responsible from pickup, including transport, export/import, customs, etc.
FCA (Free Carrier)
Seller: Delivers the goods to the carrier.
Buyer: Responsible for transportation and associated costs from that point.
CPT (Carriage Paid To)
Seller: Arranges and pays for the carriage of goods to a named destination.
Buyer: Responsible once the goods have been handed over to the carrier.
CIP (Carriage and Insurance Paid To)
Seller: As CPT, but the seller arranges insurance (all risks) for the buyer's risk of loss or damage during transit.
Buyer: Responsible once the goods have been handed over to the carrier.
DAP (Delivered at Place)
Seller: Delivers the goods to a named destination, ready for unloading, and bears all risks and costs until that point.
Buyer: Responsible for import duties, taxes and associated costs.
DPU (Delivered at Place Unloaded)
Seller: Delivers the goods to a named destination and unloads them. Bears all risks and costs until that point.
Buyer: Responsible for import duties, taxes and associated costs.
DDP (Delivered Duty Paid)
Seller: Delivers the goods to a named destination, cleared for import, and bears all costs and risks, including duties and taxes.
Buyer: None
Incoterms that apply only to sea and inland waterway transport.
FAS (Free Alongside Ship)
Seller: Delivers the goods alongside the ship at a named port of shipment.
Buyer: Responsible for all transportation, export and import formalities, and associated costs from that point.
FOB (Free on Board)
Seller: Delivers the goods on board the ship at a named port of shipment and clears the goods for export.
Buyer: Responsible for all transportation, import formalities, and associated costs from that point.
CFR (Cost and Freight)
Seller: Arranges and pays for the carriage of goods to a named port of destination and clears the goods for export.
Buyer: Responsible for import formalities, insurance, and associated costs from that point.
CIF (Cost, Insurance, and Freight)
Seller: As CFR, but the seller arranges insurance (minimum coverage) for the buyer's risk of loss or damage during transit.
Buyer: Responsible for import formalities and associated costs from that point.
Avoiding common pitfalls
- Clearly specify the Incoterms version (Incoterms 2020 is recommended) and the chosen terms
- Clearly specify named places and responsibilities for documents, security filings, and returns.
- Don’t use FOB with vague locations, e.g. “FOB China” – always specify the exact port or place.
- Avoid using EXW for exports if the seller needs export evidence. FCA is a better option here.
- Don’t agree on DDP into an unfamiliar market where you don’t know the local taxes and licenses.
- Consider upgrading insurance coverage for fragile/high‑value goods under CIF.
- Under other terms, clearly agree in advance who insures the goods and to what level.
- Make sure you know which costs are included in customs value (e.g., freight to the border).
Need help navigating Incoterms?
If you’re new to international shipping, talk to CECL. We’ll review your intended terms, flag any risks, suggest better‑fit options by mode if appropriate, and align logistics, customs, and insurance so your deal works in practice – not just on paper.
FAQs – Incoterms
Here are answers to common questions about Incoterms – if there’s anything else you need to know, give CECL a call.
Are Incoterms only for international shipping?
No. Incoterms 2020 also apply to transactions within the same country or within a customs union, such as shipping goods from a seller in one EU country to a buyer in another. Any provisions of the rules that are not applicable to the transaction, such as those relating to import duty or taxes, can simply be discounted.
Are Incoterms legally binding?
No, Incoterms themselves are not laws – they are contractual terms. They become legally binding only when inserted into a sales contract signed by both parties. They exist to provide a simple, universal template for terms that can be consistently applied by buyers and sellers in different countries, avoiding ambiguity or misunderstanding.
Under CIP/CIF, what insurance is required?
The level of insurance that the seller is required to arrange is defined in the Institute Cargo Clauses (Clause (A) for CIP and Clause (C) for CIF. Under CIP, the seller must provide insurance with maximum coverage covering all risks, for at least 110% of the invoice value. Under CIF, the seller is only required to provide insurance with minimum coverage (fire, explosion, overturning, etc) for at least 110% of the invoice value. Under CIF, buyers therefore often take out supplementary insurance cover, especially for high-value goods.
What is the current version of Incoterms?
The current version is Incoterms 2020, which came into effect on the 1st of January 2020. Older versions, such as Incoterms 2010 or 2000, may be used (if they are specified in contracts, they remain legally binding); however, it’s recommended that all organisations use Incoterms 2020, as these best reflect current shipping practices.
When is the risk transferred from the seller to the buyer?
The “delivery point” is the point at which risk is transferred from the seller to the buyer, and it varies depending on the Incoterm specified in the contract. The 11 terms can be grouped in terms of delivery point according to the first letter of their acronym:
- Starting E (EXW): The delivery point is when the goods are made available at the seller's premises.
- Starting F (FCA, FAS, FOB): The delivery point is when the goods are delivered to the carrier or vessel.
- Starting C (CFR, CIF, CPT, CIP): The delivery point is when the goods are delivered to the first carrier.
- Starting D (DAP, DPU, DDP): The delivery point is when the goods arrive at the designated destination.
