Every international trade contract involves a fundamental question: who is responsible for what, and at what point does that responsibility transfer from the seller to the buyer? Incoterms exist to answer that question clearly, before a single shipment moves.
Incoterms, short for International Commercial Terms, are a set of standardized three-letter codes published by the International Chamber of Commerce that define the obligations, costs, and risks between buyer and seller in international trade. The current version is Incoterms 2020, which has been in force since January 1, 2020 and remains the global standard for all contracts and shipments today. The next revision is not expected until 2030.
Choosing the wrong Incoterm, or not understanding the one your supplier is quoting, can leave your business responsible for costs and risks you did not expect. It also affects how your customs clearance works, who arranges transportation, and who carries cargo insurance if something goes wrong in transit.
What Incoterms Do and Do Not Cover
Incoterms define three things: who arranges and pays for each leg of transportation, at what point the risk of loss or damage transfers from seller to buyer, and who handles export and import clearance. They do not govern payment terms, ownership transfer, or the consequences of a contract breach. Those elements need to be addressed separately in the sales contract.
The 11 Incoterms Currently in Force
The 11 terms are divided into two groups based on transport mode.
Seven terms apply to any mode of transport including ocean, air, road, and rail: EXW, FCA, CPT, CIP, DAP, DPU, and DDP. Four terms apply exclusively to sea and inland waterway transport: FAS, FOB, CFR, and CIF.
One of the most common mistakes in international trade is using a sea-only term like FOB for a containerized or air freight shipment. For containerized cargo, the ICC recommends using FCA, CPT, or CIP instead of FOB, CFR, or CIF.
Here is a plain-language summary of the terms most commonly used in commercial trade:
EXW (Ex Works) — The seller makes goods available at their own premises. The buyer arranges and pays for everything from that point: export clearance, inland transport to the port, ocean or air freight, import clearance, and delivery to destination. EXW places maximum obligation on the buyer.
FCA (Free Carrier) — The seller delivers goods to a named place, cleared for export. From that point, the buyer takes on risk and arranges onward transport. FCA is the recommended alternative to FOB for containerized cargo and multimodal shipments.
FOB (Free On Board) — One of the most widely used terms in ocean trade. The seller handles export clearance and delivers goods on board the vessel at the named port. Risk transfers to the buyer at that point. FOB is for sea freight only and should not be used for containerized cargo or air shipments.
CFR (Cost and Freight) — The seller pays for ocean freight to the destination port but risk transfers to the buyer once goods are loaded on board at the origin port. The buyer arranges import clearance and onward delivery.
CIF (Cost, Insurance and Freight) — Same as CFR but the seller is also required to arrange minimum cargo insurance. CIF is sea only. The minimum insurance required under CIF is Clause C, which is the most basic level of coverage. For higher value goods, CIP is the better choice. For more on what cargo insurance actually covers, see our post on cargo insurance explained.
CIP (Carriage and Insurance Paid To) — Similar to CIF but applies to any transport mode. CIP requires the seller to provide all-risk insurance coverage to at least 110% of the cargo value under Institute Cargo Clause A, a meaningful upgrade from CIF’s minimum requirement.
DAP (Delivered at Place) — The seller delivers goods to a named destination, ready for unloading. The buyer handles import clearance and pays any duties. DAP is commonly used for e-commerce and B2B shipments where the seller wants to control the logistics but not the import process.
DDP (Delivered Duty Paid) — The seller handles everything: export clearance, freight, import clearance, duties, and delivery to the named destination. DDP places maximum obligation on the seller and is the only Incoterm where the seller acts as the importer of record at destination. This is convenient for buyers but carries significant risk for sellers who are not familiar with import regulations at destination.
DPU (Delivered at Place Unloaded) — The seller delivers and unloads goods at a named place. DPU replaced DAT in the 2020 revision, broadening delivery locations beyond terminals to any named place.
Have questions on which INCO Terms are best for your company?
