What Are Incoterms?

Two businesses agreeing to buy and sell goods across a border need a shared vocabulary for questions that come up in almost every international sale: who books and pays for the freight, who's responsible if the goods are damaged in transit, and at what exact point does that responsibility change hands. Incoterms exist to answer those questions consistently, using short, standardized abbreviations that mean the same thing to a buyer in one country and a seller in another, rather than each contract having to spell out shipping responsibilities from scratch. This guide works through what the 11 current terms are, how they group together, the one distinction — cost versus risk — that trips up more shippers than any other, and what a term does and doesn't decide once it's written into a contract.

The 11 Incoterms 2020 Terms

• EXW (Ex Works) — the seller makes goods available at their own premises; the buyer handles everything from that point, including export clearance.
• FCA (Free Carrier) — the seller delivers goods, cleared for export, to a carrier named by the buyer.
• FAS (Free Alongside Ship) — the seller delivers goods alongside the vessel at the named port of shipment.
• FOB (Free on Board) — the seller delivers goods onboard the vessel at the named port of shipment.
• CFR (Cost and Freight) — the seller pays the cost and freight to the named destination port, though risk transfers once goods are loaded onboard.
• CIF (Cost, Insurance and Freight) — like CFR, with the seller also arranging insurance.
• CPT (Carriage Paid To) — the seller pays for carriage to the named destination; risk transfers once goods are handed to the first carrier.
• CIP (Carriage and Insurance Paid To) — like CPT, with the seller also arranging insurance.
• DAP (Delivered at Place) — the seller delivers goods ready for unloading at the named destination.
• DPU (Delivered at Place Unloaded) — the seller delivers and unloads goods at the named destination.
• DDP (Delivered Duty Paid) — the seller delivers goods to the named destination with import duties and taxes already paid, taking on the most responsibility of any term.

The Four Groups: E, F, C, D

The 11 terms aren't a random list — the ICC organizes them into four families, and the initial letter is a memory aid for how far the seller's obligation reaches.

E — Departure. EXW is alone in this group. The seller's job ends the moment the goods are made available; everything else, including loading onto the first truck, belongs to the buyer.

F — Main carriage unpaid by the seller. FCA, FAS, and FOB sit here. The seller delivers the goods to a carrier or vessel the buyer has named, but the buyer arranges and pays for the main international transport.

C — Main carriage paid by the seller, but risk transfers early. CPT, CIP, CFR, and CIF fall into this group, and it's the one that causes the most confusion, because the seller pays to move the goods to the destination named in the contract, yet risk has already passed to the buyer well before arrival — at the first carrier for CPT/CIP, or on loading at the origin port for CFR/CIF.

D — Arrival. DAP, DPU, and DDP put the seller on the hook for both cost and risk all the way to the named destination. DPU is the only term of the eleven that requires the seller to unload the goods; it replaced a term called DAT (Delivered at Terminal) when Incoterms 2020 came into force, broadening "terminal" to any named place. DDP goes one step further than DAP and DPU by adding import customs clearance and duty payment to the seller's side.

Two Ways Incoterms Split by Transport Mode

On top of the four groups, the 11 terms split another way: seven of them work with any mode of transport, and four are reserved for sea and inland waterway transport only.

EXW, FCA, CPT, CIP, DAP, DPU, and DDP can be used regardless of how the goods actually move — by sea, air, road, rail, or any combination. That's because their reference point is a generic "carrier" or a named place, which fits a container yard, an airport ramp, or a rail terminal equally well.

FAS, FOB, CFR, and CIF are different: they're written around a vessel at a port, so the reference point is physically "alongside the ship" or "on board." That works cleanly for bulk or break-bulk cargo loaded directly onto a vessel, but it breaks down for containerized cargo, which is typically handed to a carrier at an inland container freight station days before it's anywhere near a ship's rail. That mismatch is the single biggest reason FCA, CPT, or CIP are generally recommended over FOB or CIF for container shipments — a point this guide comes back to below.

Cost and Risk Are Two Separate Questions

This is the single most misunderstood point in all of Incoterms, and it's worth stating plainly: paying for freight and bearing risk are not the same thing, and several terms deliberately split them.

Under CIF and CFR, the seller pays the ocean freight all the way to the named destination port. That fact makes many buyers assume the seller is also "on the hook" for the cargo until it arrives. It isn't — risk transfers to the buyer the moment the goods are loaded on board the vessel at the origin port, exactly as under FOB. If the vessel is delayed, damaged in a storm, or the cargo is lost overboard during that voyage, that loss falls on the buyer, not the seller, even though the seller is still the one paying the freight bill. The seller's obligation under CIF and CFR is to arrange and pay for carriage to destination — it is not a promise that the goods will arrive in good condition.

The same split shows up under CPT and CIP: the seller pays carriage to the named place, but risk transfers as soon as the goods are handed to the first carrier, which can be well before the international leg even begins.

Insurance requirements add a further wrinkle that changed with the 2020 revision. CIF only obliges the seller to buy the lower Institute Cargo Clauses (C) cover — a minimum, named-perils level of protection. CIP, by contrast, now requires the higher Institute Cargo Clauses (A) cover — broader, all-risks protection — unless the parties agree otherwise. So the two "C" terms that include insurance in their name don't actually carry the same minimum insurance standard, which matters if a buyer is comparing a CIF sea-freight quote against a CIP multimodal one.

FCA carries its own version of this same lesson: risk transfers not on physical loading but on delivery of the goods to the carrier nominated by the buyer at the named place — which might be the seller's own loading dock if that's where the buyer's nominated carrier picks up. Buyers relying on FCA should be precise about naming that place, since it is the risk-transfer point, not just a formality.

What Incoterms Do Not Cover

Incoterms are narrow by design — they only govern the transport-side split of cost, risk, and delivery obligations. Several things buyers and sellers often expect an Incoterm to settle are actually left to the rest of the sale contract:

• Payment terms. When and how payment is made — advance, open account, letter of credit — is negotiated separately.
• Transfer of legal title. Ownership of the goods can pass at a completely different moment than risk, depending on what the contract says.
• Remedies for defective or non-conforming goods. Incoterms say nothing about warranty, inspection rights, or what happens if the goods don't match the order.
• Governing law and dispute resolution. Which country's law applies and how disputes are resolved is a separate clause.
• Currency and price. Incoterms don't set the price or the currency it's quoted in — CIF or DDP pricing is simply structured to include more cost components, not stated in any particular currency.

Treating an Incoterm as if it were a complete contract on its own is one of the more expensive assumptions a first-time importer or exporter can make.

Why the Named Place or Port Matters

An Incoterm on its own — just the three-letter code — is incomplete. Every term needs a named place, port, or point attached to it: "FOB Laem Chabang," "DAP Bangkok warehouse," "EXW Shenzhen factory." That place is what fixes exactly where the transfer of cost and risk happens; without it, the parties have agreed on a category of arrangement but not on the specific point that matters most if something goes wrong.

It's also worth naming which edition applies — "Incoterms 2020" — directly in the contract or on the commercial invoice. Definitions have shifted between editions (DAT becoming DPU being a recent example), and parties are free in principle to reference an older edition, so silence on the version invites disagreement about which definition governs.

How the Term Touches Customs, Insurance, and Documents

The Incoterm chosen doesn't just decide who pays what — it ripples into who is legally positioned to do certain things at each end.

Export side. Under EXW, the buyer is technically the exporter of record for customs purposes, even though the buyer often has no legal presence in the seller's country to file that declaration directly — which is why EXW shipments almost always still involve the seller's staff or a local agent handling the paperwork in practice, despite the legal responsibility sitting with the buyer.

Import side. Under DDP, the seller needs a way to actually clear goods through the destination country's customs and pay duty — normally through a licensed customs broker acting on the seller's behalf, since import declarations generally require a party positioned in that country. A seller offering DDP into an unfamiliar market without that arrangement in place is offering a term it may not be able to fulfil.

Insurance. Only CIF and CIP obligate the seller to buy cargo insurance at all, and as covered above, the minimum level differs between them. Every other term leaves insurance to whichever party bears the risk at that stage of the journey to arrange separately, if they want it.

Documents. The stated Incoterm should line up with the paperwork: the commercial invoice, packing list, and the bill of lading or air waybill's named consignee and notify party should be consistent with who is actually clearing customs and taking delivery under that term. A shipment quoted DDP but documented as if the buyer were the importer of record, for instance, creates a mismatch that customs authorities or banks financing the trade may flag.

A Structural Walk-Through Across Four Terms

Seeing the same hypothetical shipment quoted under four different terms makes the pattern concrete. Suppose a factory in one country is shipping a container of goods to a buyer in another, and picture how responsibility for each stage moves as the term changes, from EXW toward DDP:

• Packing and export haulage (moving goods from factory to port/airport): buyer's job under EXW; seller's job under FOB, CIF, and DDP.
• Export customs clearance: buyer's job under EXW (in practice via an agent); seller's job under FOB, CIF, and DDP.
• Main international freight: buyer arranges and pays under EXW and FOB; seller arranges and pays under CIF and DDP.
• Cargo insurance: left to whichever party bears the risk to arrange, under EXW and FOB; seller must provide a minimum level under CIF; left to the buyer to arrange again once goods land, under DDP.
• Import customs clearance and duty: buyer's job under EXW, FOB, and CIF; seller's job under DDP.
• Final delivery/unloading: buyer's job under EXW, FOB, and CIF; seller delivers ready-to-unload under DDP.

Nothing in this walk-through is a live quote — it's illustrative only, meant to show how the same physical shipment gets sliced differently depending on which term the parties choose, not to suggest what any specific shipment would actually cost.

Common Misreadings of Incoterms

Beyond the cost-versus-risk confusion already covered, a few other misreadings show up repeatedly in commercial disputes:

• Treating Incoterms as a shipping method rather than a responsibility framework. "We're shipping FOB" doesn't describe the mode of transport or the carrier — it describes who does what and when risk transfers, nothing more.
• Assuming "FOB" always means the ICC's Incoterms FOB. Some domestic trade contexts use "FOB" informally with different meaning than the international standard. Contracts referencing Incoterms should say so explicitly — "FOB [port], Incoterms 2020" — to avoid the term being read under a different, informal convention.
• Assuming a CIF buyer has no real risk exposure because the seller "insured" the cargo. The seller's obligation under CIF is only a minimum level of cover; a high-value or fragile shipment may need materially more.
• Assuming DDP leaves the buyer with nothing to do. The buyer still has to be ready to receive and unload the goods, and should agree in advance how a customs dispute over declared value or classification would be handled, since that dispute happens in the buyer's own country.

Questions to Ask a Forwarder Before Settling on a Term

A freight forwarder can't choose the Incoterm for a shipment — that's a negotiation between buyer and seller — but a good one will flag the practical consequences before the contract is signed. Worth asking:

• Does the physical routing of this cargo (container vs. bulk, single mode vs. multimodal) rule out the sea-only terms?
• Which party already has a working customs broker relationship at each end of the move?
• If the seller offers DDP, can they demonstrate an actual mechanism for clearing import customs and paying duty in the destination country?
• What insurance does the term require at minimum, and does that match the actual value and fragility of the cargo?
• Is the named place or port specific enough that there's no ambiguity about where cost or risk transfers?

Choosing the right Incoterm isn't about finding the one that produces the lowest number on a quote — it's about matching the split of cost, risk, and administrative burden to what each party is actually equipped to handle. A buyer with no customs presence in the seller's country will struggle with EXW no matter how attractive the ex-works price looks; a seller with no import mechanism in the destination country can't credibly offer DDP. The 11 terms exist precisely so that trade-off can be discussed in a shared vocabulary before goods ever move, rather than argued over after something has already gone wrong.