Incoterms 2020 Explained: All 11 Rules, Risk and Cost Transfer

What Incoterms actually decide

Incoterms are a set of eleven three-letter rules published by the International Chamber of Commerce that allocate obligations between a seller and a buyer in a sale of goods. Each rule answers three questions: who arranges and pays for carriage, who bears the risk of loss or damage at each stage, and who handles export and import formalities.

They are contractual shorthand, incorporated into a sale contract by reference. They are not law, they do not transfer ownership, they do not decide when payment is due, and they do not override the terms of your contract if the two conflict. What they do is remove ambiguity from a set of questions that would otherwise take a page of drafting each time.

The 2020 edition is the current one. Referencing an edition matters: 'FOB Shanghai' without an edition is technically incomplete, and prior editions remain in use in some contracts, so 'Incoterms 2020' should always follow the rule and named place.

• Incoterms allocate cost, risk and formalities — nothing else
• They do not transfer title or ownership of the goods
• They do not set payment terms or currency
• They do not decide which court or law governs the contract
• They must be stated with a named place and an edition to be complete

The two families: any mode and sea only

The eleven rules split into seven that work for any mode of transport and four that are designed exclusively for sea and inland waterway. This split is the single most practically important thing to understand, because misapplying it is the most common Incoterms error in international trade.

The four maritime rules — FAS, FOB, CFR and CIF — were written for goods handed over alongside or loaded across a ship's rail. That is how break bulk works. It is not how containers work: containerised cargo is handed to a carrier at a terminal or a container yard, often days before the vessel loads, and the seller has no practical control over it in the interval.

The result of using FOB for a container shipment is a gap. Risk formally stays with the seller until the goods are on board, but the seller lost physical control at the terminal gate. If the container is damaged in the yard, the seller bears a risk it could not manage and cannot easily evidence. FCA, CPT and CIP exist to close exactly that gap.

The C rules: where risk and cost part company

Under CPT, CIP, CFR and CIF the seller pays for carriage to the named destination. It does not follow that the seller bears risk to that destination — and this divergence is the most misunderstood feature of the entire system.

Under CIF Rotterdam, the seller pays freight and insurance to Rotterdam. But risk transfers when the goods are loaded on board at the origin port. If the vessel sinks mid-ocean, the loss is the buyer's, even though the seller paid the freight to a port the goods never reached. The buyer's protection is the insurance the seller was required to arrange — which is precisely why the insurance obligation exists in CIF and CIP but not in CFR and CPT.

Under CFR and CPT there is no insurance obligation at all. A buyer agreeing CFR terms and not arranging its own cover is uninsured for a voyage whose risk it bears. This is a genuinely common and expensive mistake.

• Cost transfer point: the named destination the seller pays carriage to
• Risk transfer point: on board at origin (CFR, CIF) or handover to the first carrier (CPT, CIP)
• CIF requires only minimum insurance cover — typically inadequate for manufactured goods
• CIP requires the higher institute-clauses level of cover under the 2020 edition
• CFR and CPT require no insurance from either party — the buyer must arrange its own

EXW and DDP: the two extremes, and why both are risky

EXW places the maximum obligation on the buyer. The seller makes the goods available at its own premises and does nothing else — it does not load, does not clear for export, and bears no transport risk. In practice this creates a problem: in many countries the exporter of record must be established locally, and a foreign buyer cannot legally file the export declaration. The workaround is usually that the seller does it anyway, informally, without the contractual obligation or the protection.

FCA at the seller's premises achieves nearly everything EXW is chosen for while placing loading and export clearance with the party actually able to perform them. For most sales where EXW is being considered, FCA is the better rule.

DDP is the mirror image: the seller does everything including import clearance and paying duties and taxes at destination. It requires the seller to be able to act as importer of record in the buyer's country, which is frequently impossible or requires a local registration the seller does not have. Unrecoverable import VAT is the usual sting — a seller who cannot reclaim destination VAT has quietly absorbed it into the sale price.

• EXW: the buyer may not be legally able to file the export declaration
• EXW: the seller loading a truck under EXW is doing so at the buyer's risk, which surprises both parties
• FCA seller's premises is usually the correct alternative to EXW
• DDP: the seller must be able to act as importer of record at destination
• DDP: import VAT is often unrecoverable by a foreign seller
• DAP or DPU achieves delivered-terms convenience without the import clearance burden

What changed from Incoterms 2010

The 2020 revision made a small number of substantive changes. Knowing them matters because contracts referencing the 2010 edition remain in force, and a party assuming the current rules against a 2010 contract will get the insurance level and the delivery point wrong.

• DAT (Delivered at Terminal) was renamed DPU (Delivered at Place Unloaded), widening it beyond terminals to any place
• CIP now requires the higher institute-clauses level of insurance cover; CIF continues to require only minimum cover
• FCA gained an option for the parties to agree that the buyer instructs the carrier to issue an on-board bill of lading to the seller — solving a long-standing problem for FCA sales under documentary credits
• The rules now expressly allow for carriage using the seller's or buyer's own means of transport, rather than assuming a third-party carrier
• Security-related obligations and their costs are set out more explicitly throughout
• The presentation was reordered to make the delivery point and risk transfer more prominent in each rule

Choosing a rule

The practical question is not which rule is best but which party is genuinely able to perform each obligation in each country. A rule that allocates a task to a party that cannot do it does not save anyone money; it produces an informal workaround with no contractual backing.

• Containerised cargo: use FCA, CPT, CIP, DAP, DPU or DDP — not FOB, CFR or CIF
• Break bulk and bulk loaded across a ship's rail: the maritime rules are appropriate
• Buyer has strong freight rates and wants control: FCA
• Seller wants to control the routing and sell a landed price: CIP or DAP
• Buyer cannot clear imports and expects a door price: DDP, but only if the seller can act as importer of record
• Payment by documentary credit: check which rule the credit assumes, since the required documents follow from it
• Always state the named place precisely — 'FCA Shenzhen' is ambiguous, 'FCA Seller's warehouse, Bao'an District, Shenzhen, Incoterms 2020' is not

Where Incoterms go wrong in practice

Nearly every Incoterms dispute traces back to one of a small number of recurring errors, and all of them are avoidable at the contract stage.

• Using FOB, CFR or CIF for containerised cargo, creating a risk gap between terminal handover and vessel loading
• Stating a rule without a named place, so the delivery point is undefined
• Omitting the edition, so it is unclear whether CIP requires minimum or higher insurance cover
• Assuming that the party paying freight also bears the risk under the C rules
• Agreeing CFR or CPT and arranging no insurance at all
• Agreeing EXW where the buyer cannot legally file the export declaration
• Agreeing DDP where the seller cannot recover destination VAT
• Naming a destination under DAP without agreeing who unloads — that is what DPU is for
• Using an Incoterm to describe when title passes, which it does not do
• Inconsistent Incoterms across the purchase order, the invoice and the transport document