Incoterms 2020 Explained: Who Is Responsible for What?
Note: This article is general information. The official Incoterms rules are published by the International Chamber of Commerce (ICC); make contract decisions with your advisors.
Phrases such as "our price is FOB Istanbul" or "DAP Dubai" appear in international trade every day. These three-letter terms decide where goods are delivered, who pays for transport and insurance, and at what point the risk of loss or damage passes from seller to buyer. The Incoterms rules published by the International Chamber of Commerce standardize the answers. Incoterms 2020, in force since 1 January 2020, is the current version. A rule that is chosen or understood incorrectly can lead to unexpected freight and customs costs, gaps in insurance, and document discrepancies under letters of credit.
What Incoterms Cover, and What They Do Not
Incoterms define the delivery point, how costs such as transport and insurance are shared, who handles customs formalities, and when risk transfers. They do not determine when ownership passes, the payment terms, or what happens if the contract is breached; those must be covered in the sales contract. Always state the named place and the version, for example "FCA Gebze Incoterms 2020", to avoid ambiguity.
Seven Rules for Any Mode of Transport
- EXW (Ex Works): the seller makes the goods available at its own premises. Loading, export clearance, and all transport are the buyer's responsibility. This is the minimum obligation for the seller.
- FCA (Free Carrier): the seller clears the goods for export and delivers them to the buyer's carrier at a named place. Very practical for container and multimodal transport.
- CPT (Carriage Paid To): the seller pays freight to the destination, but risk passes to the buyer when the goods are handed to the first carrier.
- CIP (Carriage and Insurance Paid To): as CPT, plus the seller arranges insurance. Under Incoterms 2020, CIP requires the higher level of cover in Institute Cargo Clauses (A).
- DAP (Delivered at Place): the seller delivers the goods at the named destination, ready for unloading. Import clearance and duties are the buyer's responsibility.
- DPU (Delivered at Place Unloaded): the seller delivers the goods unloaded at the named destination. DPU replaced DAT from Incoterms 2010.
- DDP (Delivered Duty Paid): the seller delivers to the destination with import clearance and duties paid. This is the maximum obligation for the seller.
Four Rules for Sea and Inland Waterway Transport
- FAS (Free Alongside Ship): the seller delivers the goods alongside the vessel at the port of shipment.
- FOB (Free on Board): the seller delivers the goods on board the vessel at the port of shipment, where risk passes.
- CFR (Cost and Freight): the seller pays freight to the destination port, but risk passes when the goods are on board.
- CIF (Cost, Insurance and Freight): as CFR, plus the seller arranges insurance. Under CIF, the minimum cover is Institute Cargo Clauses (C), although the parties can agree on more.
In container shipping, goods are usually handed over at a terminal before they are loaded on board, so FCA and CIP are generally more appropriate than FOB and CIF.
Common Mistakes
- Using FOB or CIF for containerized cargo: risk may pass at a point outside the seller's control.
- Assuming risk passes at destination under CPT and CIP: the seller pays the freight, but risk passes at handover to the first carrier.
- Leaving the named place vague: terms such as "FCA Turkey" invite disputes over the delivery point.
- Underestimating DDP: the seller takes on customs and tax obligations in the buyer's country.
- Using EXW when the buyer cannot clear exports: a foreign buyer may struggle to handle export formalities, so FCA is often a better fit.
- Mismatching the rule and the letter of credit: the rule in the contract must match the documents and insurance required by the credit.
How to Choose the Right Rule
The choice should consider the mode of transport, the seller's strength in logistics and insurance, customs procedures in the buyer's country, the payment method, and price competitiveness. The rule must also be reflected correctly in the price: whoever carries freight, insurance, and customs costs needs to include them. Recording the Incoterms rule, the named place, and the related costs for every quote, order, and shipment prevents both pricing errors and document discrepancies.
Frequently Asked Questions
How many Incoterms 2020 rules are there?
There are 11: EXW, FCA, CPT, CIP, DAP, DPU, and DDP for any mode of transport, and FAS, FOB, CFR, and CIF for sea and inland waterway transport only.
What is the difference between FOB and CIF?
Under FOB, the seller delivers the goods on board at the port of shipment, and freight and insurance are the buyer's responsibility. Under CIF, the seller also pays freight and insurance to the destination port. In both, risk passes when the goods are on board.
Did DPU replace DAT?
Yes. DPU (Delivered at Place Unloaded) replaced DAT from Incoterms 2010. The seller delivers the goods unloaded at the named place, which is no longer limited to a terminal.
Is insurance cover the same under CIP and CIF?
No. Under Incoterms 2020, CIP requires the higher level of cover in Institute Cargo Clauses (A), while CIF requires minimum cover under Institute Cargo Clauses (C). The parties can agree otherwise.
Which Incoterm is best for container shipments?
Because containers are usually handed over at a terminal, FCA, CPT, or CIP are generally more appropriate than FOB and CIF.
Do Incoterms determine when ownership passes?
No. Incoterms cover delivery, costs, and risk. Transfer of ownership, payment terms, and remedies for breach must be set out in the sales contract.
Conclusion
The 11 Incoterms 2020 rules clarify where costs, risk, and responsibilities change hands in an international sale. Choosing the rule that fits the transport mode and both parties' capabilities, naming the place precisely, and keeping the rule consistent with pricing, insurance, and letter of credit terms prevents many export problems before they start. We build software for exporting manufacturers and wholesalers that manages quotes, orders, shipments, and documents according to the agreed delivery terms.