Incoterms 2020 Guide
Three letters on a purchase order decide who pays for what, and who carries the loss if something goes wrong. All eleven Incoterms 2020 rules, set out plainly — with the two questions worth asking before you agree to any of them.
What Incoterms do — and do not — cover
Incoterms are standard trade terms published by the International Chamber of Commerce and revised roughly every decade. The 2020 edition is the current one. They answer four questions:
- Who arranges carriage and to what point.
- Who bears the cost of each stage of the journey.
- Where risk transfers from seller to buyer — which is not necessarily where cost transfers.
- Who handles export and import formalities, including customs clearance and any licences.
They do not deal with the price, payment terms, transfer of title, governing law, product warranties or what happens in a dispute. Those belong in the contract of sale. An Incoterm on its own is not a contract.
Always name the place.
The eleven rules at a glance
| erm | Mode | Export clearance |
Main carriage |
Insurance | Import clearance |
Duty & tax |
Risk passes at |
|---|---|---|---|---|---|---|---|
| EXW | Any | Buyer | Buyer | Neither | Buyer | Buyer | Seller's premises |
| FCA | Any | Seller | Buyer | Neither | Buyer | Buyer | Handover to buyer's carrier |
| CPT | Any | Seller | Seller | Neither | Buyer | Buyer | Handover to first carrier |
| CIP | Any | Seller | Seller | Seller (ICC A) | Buyer | Buyer | Handover to first carrier |
| DAP | Any | Seller | Seller | Neither | Buyer | Buyer | Named destination, on vehicle |
| DPU | Any | Seller | Seller | Neither | Buyer | Buyer | Named destination, unloaded |
| DDP | Any | Seller | Seller | Neither | Seller | Seller | Named destination, on vehicle |
| FAS | Sea | Seller | Buyer | Neither | Buyer | Buyer | Alongside the vessel |
| FOB | Sea | Seller | Buyer | Neither | Buyer | Buyer | On board the vessel |
| CFR | Sea | Seller | Seller | Neither | Buyer | Buyer | On board the vessel |
| CIF | Sea | Seller | Seller | Seller (ICC C) | Buyer | Buyer | On board the vessel |
"Sea" means sea and inland waterway transport only. "Neither" under insurance means no party is obliged to insure — which does not mean nobody should. Whoever bears the risk at a given moment should be the one insured, and under seven of the eleven terms that obligation is left entirely to commercial judgement.
Each term in detail
EXW — Ex Works
Any mode
Minimum obligation for the seller. Maximum burden for the buyer.
The seller makes the goods available at their own premises. They are not obliged to load them onto the collecting vehicle, and not obliged to clear them for export. Everything from that point is the buyer's problem.
Delivery point
Seller's factory, works or warehouse
Risk passes
When goods are placed at the buyer's disposal, before loading
Watch out for
The buyer must complete export formalities in a country where it may have no legal standing to do so
FCA — Free Carrier
Any mode
Cost and risk split at different points. This catches people out.
The seller delivers to a carrier nominated by the buyer, at a named place. If that place is the seller's premises, the seller loads. If it is anywhere else, the seller delivers the goods ready for unloading. Export clearance is the seller's responsibility.
Incoterms 2020 added an option allowing the parties to agree that the buyer instructs the carrier to issue an on-board bill of lading to the seller — which resolves the long-standing problem of FCA being incompatible with letters of credit requiring an on-board document.
Delivery point
Named place — seller's premises or a terminal
Risk passes
On handover to the buyer's carrier
Best for
Container shipments where the buyer controls the main carriage
CPT — Carriage Paid To
Any mode
Minimum obligation for the seller. Maximum burden for the buyer.
The seller contracts and pays for carriage to the named destination, but risk transfers much earlier — as soon as the goods are handed to the first carrier. If the cargo is damaged mid-voyage, the buyer bears the loss even though the seller paid the freight.
Cost transfers at
Named destination
Risk transfers at
Handover to the first carrier at origin
Watch out for
The buyer is uninsured over a journey it did not arrange unless it takes out its own cover
CIP — Carriage and Insurance Paid To
Any mode
CPT plus a mandatory insurance obligation, upgraded in 2020.
Identical to CPT, with the addition that the seller must insure the cargo for the buyer's benefit. Since Incoterms 2020 the default level of cover is Institute Cargo Clauses (A) — all risks — at 110 percent of the contract value, a significant strengthening of the previous minimum.
Insurance level
ICC (A), 110% of contract value, in the contract currency
Risk transfers at
Handover to the first carrier at origin
Best for
Buyers who want cover arranged for them on a multimodal movement
DAP — Delivered at Place
Any mode
Seller delivers to the door, ready for unloading.
The seller bears all cost and risk to the named destination. The goods are placed at the buyer's disposal on the arriving vehicle, ready to be unloaded — unloading itself is the buyer's job. Import clearance, duty and taxes remain with the buyer.
Delivery point
Named destination, goods still on the vehicle
Import clearance
Buyer
Watch out for
DPU — Delivered at Place Unloaded
Any mode
Renamed from DAT in Incoterms 2020, and broadened.
The only rule that requires the seller to unload the goods at destination. Previously DAT and restricted to terminals, DPU can now name any place. The seller must be confident it can actually arrange unloading at the named point — which is not always the case at a private warehouse.
Delivery point
Named destination, goods unloaded
Unique feature
The only Incoterm obliging the seller to unload
Import clearance
Buyer
DDP — Delivered Duty Paid
Any mode
Maximum obligation for the seller.
The seller delivers to the buyer's door with everything paid: carriage, import clearance, duty and taxes. Attractive to buyers, and frequently a trap for sellers, who must register for tax and act as importer of record in a jurisdiction where they may have no presence.
Delivery point
Named destination, goods on the vehicle
Duty and tax
Seller
Watch out for
Recovering import sales tax is often impossible for a non-resident seller
FAS — Free Alongside Ship
Sea & inland waterwa
For bulk and break-bulk cargo loaded from the quay.
The seller delivers when the goods are placed alongside the vessel — on the quay or on a barge — at the named port. Risk passes at that moment, before loading. Export clearance is the seller's responsibility.
Delivery point
Typical use
Grain, ore, timber, project cargo
Not suitable for
Containers, which are handed over at a terminal, not alongside a ship
FOB — Free On Board
Sea & inland waterwa
The most used and most misused term in international trade.
Risk passes when the goods are on board the vessel at the named port of shipment. The buyer arranges and pays the main carriage from there.
The problem is that FOB is written for cargo the seller loads directly onto a ship. A container is handed to the terminal days before loading, and under a strict reading the seller remains at risk throughout that period despite having no access to or control over the goods. The ICC recommends FCA instead for containerised cargo — advice which is widely ignored, largely because banks and buyers are used to seeing FOB.
Risk passes at
Goods on board the vessel
Main carriage
Buyer
Better alternative
FCA for anything in a container
CFR — Cost and Freight
Sea & inland waterwa
Seller pays the ocean freight; buyer carries the sea risk.
The seller contracts and pays for carriage to the named destination port, but risk passes once the goods are on board at origin. As with CPT, cost and risk part company — the buyer owns the risk of a voyage arranged by someone else.
Cost transfers at
Destination port
Risk transfers at
On board at origin port
Watch out for
Destination terminal handling is often not included and is billed to the buyer on arrival
CIF — Cost, Insurance and Freight
Sea & inland waterwa
CFR plus minimum insurance. Still the default on many trade lanes.
The seller pays freight to the destination port and must insure the cargo for the buyer's benefit. Unlike CIP, the default cover under CIF remains Institute Cargo Clauses (C) — a restricted named-perils policy that does not respond to many common causes of loss.
Cost transfers at
Destination port
Risk transfers at
On board at origin port
Watch out for
Destination terminal handling is often not included and is billed to the buyer on arrival
What changed in Incoterms 2020
- DAT became DPU. Delivered at Terminal was renamed Delivered at Place Unloaded, and is no longer restricted to terminals.
- CIP insurance was upgraded. The default moved from Institute Cargo Clauses (C) to (A). CIF was deliberately left at (C) to suit commodity trading practice.
- FCA gained the on-board bill of lading option. Parties may agree that the buyer instructs its carrier to issue an on-board B/L to the seller, making FCA workable under letters of credit.
- Own-transport is recognised. FCA, DAP, DPU and DDP now acknowledge that a party may carry the goods in its own vehicles rather than contracting a third-party carrier.
- Security obligations were made explicit. Security-related clearance requirements and their costs are now allocated within each rule.
- Cost allocation was consolidated. Each rule now lists all costs in one article, so both parties can see the full allocation without cross-referencing.
Incoterms 2010 remains valid if the contract specifies it. Always state the edition: "CIF Karachi, Incoterms 2020".
Choosing a term
Two questions settle most cases:
- Who is better placed to control the main carriage? Whoever has the volume, the relationships and the local knowledge on that lane should arrange it. For Pakistani importers buying from Asia, controlling the freight yourself under FCA or FOB usually beats accepting the supplier's CIF rate, because the supplier's margin on freight is invisible to you.
- Who can actually complete the customs formalities? Never accept a term that requires you to clear customs in a country where you have no legal presence. That single rule eliminates EXW for most buyers and DDP for most sellers.
A note on CIF into Pakistan.
This guide is general information about a widely used commercial standard, not legal advice. The authoritative text is the ICC's own publication, and contract wording should be reviewed by your own legal advisers before signing.
Frequently Asked Questions
What are Incoterms?
ICC-published standard trade terms defining who arranges and pays for transport, insurance and customs formalities, and where risk transfers. They do not transfer title or set the price.
What is the difference between FOB and FCA?
FOB passes risk when goods are on board; FCA passes risk on handover to the buyer's carrier. For containers, FCA reflects reality — FOB leaves the seller at risk for cargo it has already surrendered.
Which terms should not be used for containers?
FAS, FOB, CFR and CIF. The ICC recommends FCA, CPT and CIP instead.
Which term is riskiest for the buyer?
EXW, which requires the buyer to handle export clearance abroad. FCA at the seller's premises gives almost the same commercial result without that problem.
Do Incoterms cover payment or ownership?
No. Payment terms, transfer of title, governing law and dispute resolution all sit outside Incoterms and must be addressed in the contract of sale.
Is insurance compulsory?
Only under CIF and CIP. Under the other nine rules nobody is obliged to insure — so establish who is bearing the risk at each stage and make sure that party has cover.