Incoterms 2020 Explained: All 11 Terms

Incoterms (International Commercial Terms) are standardized trade definitions published by the International Chamber of Commerce (ICC). The current version, Incoterms 2020, governs how risk and cost are allocated between a seller and buyer during the transport of goods. They are not law, but they are incorporated by reference into contracts and letters of credit and are widely treated as binding once agreed.

There are 11 Incoterms 2020 rules, split into two groups: seven that apply to any mode of transport, and four that apply to sea and inland waterway transport only.

The Core Distinction: Risk vs. Cost Transfer

Risk and cost do not always transfer at the same point. Under some terms the seller bears cost beyond the point where risk transfers. Understanding this distinction is critical:

Risk transfer point: Where liability for loss or damage shifts from seller to buyer
Cost transfer point: Where responsibility for paying freight, insurance, duty shifts

Never assume they are the same. Under CIF, for example, the seller pays freight and insurance but risk transfers to the buyer when the goods are loaded onto the vessel — so the buyer bears transit risk while the seller bears transit cost.

Full Comparison Table: All 11 Incoterms 2020

| Term | Mode | Risk Transfers | Seller Pays Costs To | Insurance Obligation | Import Duty | Best Used For | |------|------|---------------|---------------------|---------------------|-------------|---------------| | EXW | Any | Seller's premises | Named place (factory) | None | Buyer | Buyer controls all logistics | | FCA | Any | Named place / carrier handover | Named carrier/place | None | Buyer | Containerized sea, air, multimodal | | CPT | Any | First carrier handover | Named destination | None | Buyer | Non-sea multimodal, air cargo | | CIP | Any | First carrier handover | Named destination | Seller (Clauses A) | Buyer | High-value goods, multimodal | | DAP | Any | Named destination (not unloaded) | Named destination | None | Buyer | Door delivery with buyer handling customs | | DPU | Any | Named destination (after unloading) | Named destination + unloading | None | Buyer | Terminal or warehouse deliveries | | DDP | Any | Named destination | Named destination + import duty | None | Seller | E-commerce, landed price required | | FAS | Sea only | Alongside vessel at origin port | Alongside vessel | None | Buyer | Bulk / break-bulk cargo | | FOB | Sea only | On board vessel at origin port | On board at origin | None | Buyer | Conventional cargo, commodity trade | | CFR | Sea only | On board vessel at origin port | Destination port | None | Buyer | Commodity trade without insurance | | CIF | Sea only | On board vessel at origin port | Destination port + insurance | Seller (Clauses C minimum) | Buyer | Commodity trade with insurance included |

Incoterms 2020 vs. Incoterms 2010: What Changed

The 2020 revision introduced several practical changes:

1. DAT Renamed to DPU

Delivered at Terminal (DAT) was renamed to Delivered at Place Unloaded (DPU) to clarify that delivery can occur at any named place, not just a terminal. The substance is the same — the seller delivers, unloads, and bears risk through unloading — but the naming now makes the delivery scope explicit.

2. FCA: New Bill of Lading Option

A significant practical change for containerized shipments. FCA now allows the buyer to instruct their carrier to issue an on-board bill of lading to the seller after the container is loaded onto the vessel. This addresses a longstanding problem with letters of credit: banks require an on-board bill of lading as a payment document, but under FCA, the seller's obligations end when they hand goods to the carrier (at the terminal), before loading on the vessel. The 2020 revision provides a mechanism to bridge this gap.

3. CIP Insurance Upgraded

Under Incoterms 2010, both CIF and CIP required minimum insurance under Institute Cargo Clauses (C) — the most limited cover. Under Incoterms 2020:

CIP now requires insurance under Institute Cargo Clauses (A) — the most comprehensive cover, including theft, contamination, and concealed damage
CIF retains the lower Clauses (C) minimum

This is a material difference for high-value goods. CIP is now appropriate for manufactured goods and electronics; CIF remains common for bulk commodities where all-risk cover is less commercially relevant.

4. FCA, DAP, DPU, DDP: Security Provisions Clarified

Each of the rules now contains explicit provisions allocating security-related costs (export and import security measures) to the party in whose territory the goods sit at that stage. This reflects post-2010 growth in trade security programs (US CBP 24-hour rule, EU Import Control System, etc.).

5. Own Means of Transport Under FCA and DDP

Incoterms 2020 explicitly allows use of the seller's own transport (not just a contracted third-party carrier) under FCA and DDP. This reflects the reality of direct delivery by sellers who operate their own logistics.

The 7 Any-Mode Incoterms

EXW — Ex Works

The seller's minimum obligation: make goods available at their premises. The buyer arranges all transport including export clearance, loading, and bears all risk from the factory door. Maximum obligation on the buyer.

Used when the buyer has strong logistics capabilities at the origin country. Rarely appropriate for inexperienced importers because the buyer must handle export customs in a foreign country — complex and often impractical without a local agent.

FCA — Free Carrier

Seller delivers goods to a named carrier or nominated party at a named place. Risk transfers at the handover point. Increasingly preferred over FOB for containerized sea freight because risk transfers when the carrier takes custody — at the container terminal, before vessel loading — which accurately reflects reality.

The 2020 on-board bill of lading option (see above) makes FCA more viable for letter of credit transactions.

CPT — Carriage Paid To

Seller contracts for and pays carriage to the named destination. Risk transfers when goods are handed to the first carrier, but cost extends to destination. The seller bears the freight cost but not the transit risk. No insurance obligation on either party.

CIP — Carriage and Insurance Paid To

Same as CPT, but with the 2020-upgraded insurance requirement (Clauses A). Best for high-value manufactured goods shipped multimodal or by air. The seller organizes comprehensive insurance and the buyer knows goods are fully covered.

DAP — Delivered at Place

Seller delivers goods ready for unloading at the named destination. The buyer unloads, handles import clearance, and pays import duty. The seller bears the main carriage risk and cost to that point. Suitable when the buyer has import clearance capability but wants the seller to handle international transport.

DPU — Delivered at Place Unloaded

The seller delivers and unloads goods at the named destination. This is the only term where the seller bears the cost and risk of unloading at destination. The buyer handles import clearance and duty. Used for deliveries to warehouses, ports, or terminals where unloading is part of the seller's service.

DDP — Delivered Duty Paid

The seller's maximum obligation. The seller delivers goods to the buyer's premises, import-cleared, with all duties and taxes paid. The seller bears all risk and cost including import customs, duty, and any VAT or GST.

Practical limitations of DDP:

The seller must be able to act as importer of record in the destination country — this requires either establishing a local legal entity or using a fiscal representative. Not all sellers can do this.
If the seller cannot recover VAT paid at destination (because they are not VAT-registered there), DDP becomes significantly more expensive
DDP is widely used in e-commerce where customers expect a landed, no-surprise price (Amazon FBA imports, Shopify international stores)

The 4 Sea and Inland Waterway Incoterms

These apply only when both delivery and receipt points are ports. They should not be used for containerized cargo — FCA or CPT are appropriate for containers (which change hands at a container terminal, not over a ship's rail).

FAS — Free Alongside Ship

Seller places goods alongside the named vessel at the port of shipment. The buyer handles loading, freight, insurance, and everything onward. Used for bulk cargo, commodities, and break-bulk shipping where the buyer controls the loading process.

FOB — Free On Board

Seller loads goods onto the named vessel and handles export clearance. Risk transfers when goods are on board. The buyer pays ocean freight and insurance from that point.

FOB is the most widely used and most frequently misused Incoterm. It is technically incorrect for containerized cargo because the container is handed to the carrier (at the terminal) before vessel loading — under FOB, the seller retains risk during terminal handling. FCA is the technically correct term for containers.

In practice, FOB continues to be used for container shipments by widespread commercial convention. Most commercial contracts, freight forwarder quotes, and supplier terms for Chinese exports use FOB. Understanding the technical limitation does not prevent you using FOB; it alerts you to the risk profile during terminal handling.

CFR — Cost and Freight

Seller pays freight to the destination port. Risk transfers when goods are on board at origin. The seller bears freight cost; the buyer bears transit risk. No insurance obligation under CFR. Common in commodity trades (grains, ores, raw materials) where the buyer manages insurance themselves.

CIF — Cost, Insurance, and Freight

Seller pays freight and obtains minimum marine insurance (Institute Cargo Clauses C) to the destination port. Risk still transfers at origin. The seller bears freight and insurance cost; the buyer bears transit risk.

Under CIF, buyers cannot easily verify the actual freight cost. The seller selects the carrier and insurer and adds both to the product price, potentially at a margin. For importers who want cost transparency, FOB with their own freight forwarder is generally preferred over CIF.

Choosing the Right Incoterm: Decision Framework

Use this decision tree to narrow down the appropriate term for your situation:

Do you want to control the shipping arrangements?

Yes → Do you have logistics capability at the origin country?
- Yes → EXW (maximum control, maximum buyer responsibility)
- No → FOB (seller handles export, you control from port onward) or FCA (better for containers)
No → Do you want a delivered price with no customs work on your side?
- Yes → DDP (seller delivers duty-paid to your door) or DAP (you handle customs, seller delivers)
- No, you just want freight prepaid → CPT or CIF

What type of cargo is it?

Containerized → Use FCA, CPT, or CIP (not FOB, CFR, CIF technically)
Bulk commodity → FOB, CFR, or CIF
Air freight → FCA or CIP
High value, comprehensive insurance needed → CIP

Who are you?

Small importer buying from Alibaba → FOB or FCA
E-commerce seller shipping to international customers → DDP
Commodity trader → FOB, CFR, or CIF
Experienced buyer with China freight forwarder → EXW for maximum control

Real-World Scenarios

Scenario 1: Amazon FBA Importer (China to UK)

An importer buys goods from a Shenzhen factory and ships to Amazon's UK fulfillment center. The importer needs the goods delivered to the FBA warehouse with import duties paid — Amazon requires goods to be import-cleared before delivery.

Appropriate term: DDP or more practically, the importer uses FOB with their freight forwarder handling UK customs clearance and delivery to Amazon. DDP requires the seller to act as importer of record in the UK, which most Chinese factories cannot do. Most importers therefore use FOB (seller to named port) + their own forwarder for UK clearance and delivery.

Scenario 2: Alibaba Consumer Goods Order

A UK retailer orders 500 units of LED lighting from a Shenzhen manufacturer. The retailer has appointed a freight forwarder.

Appropriate term: FOB Shenzhen, Incoterms 2020. The supplier handles export clearance and loads goods onto the vessel at Shenzhen. The freight forwarder quotes for sea freight from Shenzhen to Felixstowe and handles UK customs clearance. This gives the retailer full visibility over freight costs.

Scenario 3: Grain Commodity Purchase

A food importer in Egypt purchases wheat from a Canadian exporter. The importer has an established relationship with a marine insurer and wants to manage their own cover.

Appropriate term: CFR Port Said, Incoterms 2020. The Canadian exporter pays freight to Port Said; the Egyptian importer bears transit risk and manages their own insurance policy. This is the standard for commodity grain trades.

Scenario 4: Incoterms and Letters of Credit (L/C + CIF)

A buyer in Malaysia purchases machinery from a German manufacturer using a Documentary Letter of Credit. The L/C requires an on-board bill of lading.

Appropriate term: CIF Port Klang, Incoterms 2020. The seller arranges freight and insurance, and the on-board bill of lading is issued when goods are loaded at Hamburg. The seller presents the bill of lading and other documents to the bank to trigger payment under the L/C. Under FCA, the on-board bill of lading requirement would use the new 2020 mechanism — but CIF remains simpler for traditional L/C transactions involving sea freight.

Common Contract Pitfalls

Incoterm without a named place: "FOB" without "FOB Shanghai" is incomplete and legally ambiguous. Always specify the named port or place.
Using the wrong group for the mode of transport: CIF used for an air shipment is technically incorrect (CIF applies to sea only); CIP should be used instead.
Assuming Incoterms cover everything: Incoterms allocate risk and cost but do not govern payment terms, title transfer, force majeure, or dispute resolution. These require separate contract clauses.
Using Incoterms 2010 when 2020 is current: State "Incoterms 2020" explicitly in your contract to ensure the correct version applies. Old contracts may reference 2010.
DDP without import capability: A seller agreeing to DDP who cannot legally act as importer of record in the destination country cannot fulfil their obligation. The contract should confirm the seller has this capability.
Confusing FOB with freight prepaid: A shipper's bill of lading marked "freight prepaid" is a carrier payment term, not an Incoterm. The Incoterm governs seller/buyer obligations; freight prepaid/collect is between the cargo owner and the carrier.

Always specify: [Term] [Named Place], Incoterms 2020 — for example, "FOB Shanghai, Incoterms 2020."