Incoterms, or International Commercial Terms, are the universal language of global trade. Developed by The International Chamber of Commerce (ICC), these eleven rules define the responsibilities of sellers and buyers regarding the delivery of goods, the transfer of risk, and the allocation of costs.
Understanding these terms is not just a legal necessity but a strategic advantage. Choosing the wrong term can lead to unexpected shipping costs, customs delays, or uninsured losses.
Rules for Any Mode of Transport
These seven terms apply regardless of whether the goods are traveling by road, rail, air, or sea.
EXW: Ex Works
The seller makes the goods available at their own premises. The buyer bears all costs and risks from that point forward, including loading the goods and handling export clearance.
Business Example: A boutique watchmaker in Switzerland, like Patek Philippe, might sell to a specialized distributor under EXW terms, leaving the complex logistics of high-value transport and customs to the buyer.
FCA: Free Carrier
The seller delivers the goods to a carrier or another person nominated by the buyer at the seller’s premises or another named place. The seller is responsible for export clearance.+1
Business Example: Apple often uses FCA when shipping components from suppliers in Vietnam. The supplier clears the goods for export and hands them over to Apple’s designated logistics partner at a local hub.
CPT: Carriage Paid To
The seller pays for the carriage of the goods to the named destination. However, the risk transfers to the buyer as soon as the goods are handed over to the first carrier.
CIP: Carriage and Insurance Paid To
Similar to CPT, but the seller must also procure high-level insurance (Institute Cargo Clauses A) covering the buyer’s risk during transit.
Business Example: Siemens might use CIP when shipping medical imaging equipment to a hospital in Brazil. Because the cargo is fragile and expensive, the buyer requires the seller to handle the insurance logistics to ensure full coverage.
DAP: Delivered at Place
The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport, ready for unloading at the named place of destination. The buyer handles import clearance and duties.
DPU: Delivered at Place Unloaded
This is the only Incoterm that requires the seller to unload the goods at the destination. It replaced the old DAT (Delivered at Terminal) to allow for delivery locations beyond just terminals.
DDP: Delivered Duty Paid
The seller bears all costs and risks, including export and import clearance, duties, and taxes. This represents the maximum obligation for the seller.
Business Example: Amazon often operates on a model similar to DDP for international customers, where the price paid at checkout includes all "Import Fees Deposit," ensuring the customer doesn't have to interact with customs.
Rules for Sea and Inland Waterway Transport
These four terms are reserved for transactions where the goods are transported from port to port.
FAS: Free Alongside Ship
The seller delivers when the goods are placed alongside the vessel (e.g., on a quay) at the named port of shipment. The buyer bears all risks from that moment.
Business Example: Large commodity traders like Cargill use FAS for bulk shipments of grain. The grain is delivered to the dockside, and the buyer assumes responsibility for loading it onto their chartered vessel.
FOB: Free on Board
The seller delivers the goods on board the vessel nominated by the buyer. The risk transfers once the goods are physically on the ship.
CFR: Cost and Freight
The seller pays the costs and freight necessary to bring the goods to the named port of destination, but the risk transfers to the buyer once the goods are on board the vessel at the origin.
CIF: Cost, Insurance, and Freight
The seller pays for the freight and a minimum level of insurance (Institute Cargo Clauses C) to the destination port.
Business Example: PetroChina frequently uses CIF or CFR for oil exports. While they pay the tanker costs to reach a destination like Rotterdam, the risk of the oil being lost at sea transfers to the buyer the moment the oil passes the ship's manifold at the loading port.
Critical Factors for Decision Making
When selecting an Incoterm, businesses must weigh several operational factors:
- Control vs. Convenience: EXW offers the seller the least risk but gives them no control over how the goods leave the country. Conversely, DDP gives the buyer a seamless experience but puts a heavy administrative burden on the seller.
- Cost Transparency: Terms like CIF and CIP include insurance and freight in the invoice price, which can simplify accounting for the buyer but may include a markup by the seller.
- Transfer of Risk: It is a common misconception that risk transfers at the same time as cost. In C-series terms (CIF, CFR, CPT, CIP), the seller pays for the freight to the destination, but the buyer assumes the risk of loss or damage much earlier (at the point of shipment).
Incoterms 2020: Risk and Responsibility Comparison
The following table outlines the exact moment risk transfers from the seller to the buyer, as well as who is responsible for the main carriage and insurance. This serves as a quick-reference guide for logistics managers and procurement officers.
| Incoterm | Mode of Transport | Risk Transfers to Buyer… | Main Carriage Paid By | Insurance Paid By |
| EXW | Any | At the seller’s premises (not loaded). | Buyer | Buyer |
| FCA | Any | When handed over to the carrier at the named place. | Buyer | Buyer |
| CPT | Any | When handed over to the first carrier. | Seller | Buyer |
| CIP | Any | When handed over to the first carrier. | Seller | Seller |
| DAP | Any | When ready for unloading at the destination. | Seller | Seller/Buyer* |
| DPU | Any | Once unloaded at the destination. | Seller | Seller/Buyer* |
| DDP | Any | When ready for unloading at the destination. | Seller | Seller |
| FAS | Sea/Inland | When placed alongside the ship at the port. | Buyer | Buyer |
| FOB | Sea/Inland | Once the goods are safely on board the ship. | Buyer | Buyer |
| CFR | Sea/Inland | Once the goods are safely on board the ship. | Seller | Buyer |
| CIF | Sea/Inland | Once the goods are safely on board the ship. | Seller | Seller |
Note on Insurance: Under DAP, DPU, and DDP, the seller bears all risks until delivery. While the rules do not strictly mandate an insurance policy (unlike CIF/CIP), the seller typically insures the goods to protect their own financial interest during transit.
Strategic Application in Industry
The choice of term often depends on the bargaining power and logistical infrastructure of the companies involved.
Manufacturing Efficiency: Global automotive giants like Volkswagen often prefer FCA or EXW for their inbound supply chain. By taking control of the transport early, they can consolidate shipments from multiple suppliers into a single “milk run,” reducing overall freight costs and managing their own production timelines.
Customer Experience: High-end consumer goods companies, such as LVMH (Moët Hennessy Louis Vuitton), frequently use DDP for online international sales. By handling all duties and taxes upfront, they ensure that the luxury customer receives their package at their doorstep without being contacted by customs for additional payments, maintaining a premium brand experience.
Bulk Commodities: In the mining sector, Rio Tinto often sells iron ore under CFR or FOB terms. This allows the buyer—often a massive steel mill in China—to manage the unloading and local logistics, which is more efficient since the buyer typically has established relationships with their local ports and terminals.