Incoterms Explained: How Trade Terms Allocate Cost and Risk in International Shipments

What Incoterms do and do not cover

Incoterms define two things: the point at which costs transfer from seller to buyer, and the point at which risk transfers. These two points are always the same location under each Incoterm, which avoids the confusion of having cost and risk transfer at different places. Incoterms do not define payment terms, title transfer, or remedies for breach of contract. A contract citing FOB does not determine when the buyer must pay or what happens if the goods are defective; those are governed by the sales contract and applicable law.

Incoterms also do not determine what insurance must be carried. Only two terms (CIF and CIP) require the seller to arrange insurance; under all other terms, whoever bears the risk at a given moment is responsible for arranging their own coverage if they want it. Many disputes arise because buyers assume the seller’s insurance covers them through delivery, when in fact the risk transferred to the buyer at the named point and no insurance covered the transit leg under the buyer’s risk.

The 11 Incoterms 2020

The 11 terms divide into two groups: seven that apply to any mode of transport, and four that apply only to sea and inland waterway transport.

EXW — Ex Works (named place). The seller makes the goods available at their premises; the buyer bears all costs and risks from that point. EXW puts the maximum obligation on the buyer: the buyer arranges pickup, export clearance, loading, carriage, insurance, and import clearance. It is rarely appropriate for international trade because the buyer is responsible for export formalities in the seller’s country, which is practically difficult and sometimes legally impossible for a foreign entity.

FCA — Free Carrier (named place). The seller delivers the goods to the carrier nominated by the buyer at a named place. If the named place is the seller’s premises, delivery is complete when the goods are loaded onto the collecting vehicle. If the named place is elsewhere (a port, a terminal), delivery is complete when the goods are handed over to the carrier. FCA is versatile and works for all modes of transport including container shipments, where FOB often creates problems (see below).

CPT — Carriage Paid To (named place of destination). The seller pays for carriage to the named destination but risk transfers to the buyer when the goods are handed to the first carrier in the country of export. The seller pays for transport but the buyer bears the risk during the main carriage. This creates an asymmetry that buyers need to understand: if the goods are damaged in transit, the seller is not responsible even though the seller paid for the freight.

CIP — Carriage and Insurance Paid To (named place of destination). Same as CPT but the seller must also arrange and pay for cargo insurance to the named destination. Incoterms 2020 raised the minimum insurance requirement under CIP to Institute Cargo Clauses (A), which is the most comprehensive cover, compared to the minimum Clauses (C) that applies under CIF. CIP is the preferred term for container and multimodal shipments where comprehensive seller-arranged insurance is wanted.

DAP — Delivered at Place (named place of destination). The seller delivers when the goods are placed at the buyer’s disposal on the arriving conveyance, ready for unloading at the named destination. The seller bears all costs and risks to that point except import duties and taxes. DAP is widely used for door-to-door delivery where the buyer handles import clearance.

DPU — Delivered at Place Unloaded (named place of destination). The seller delivers and bears risk until the goods are unloaded at the named place. DPU is the only Incoterm that requires the seller to unload at destination. It replaced DAT (Delivered at Terminal) in Incoterms 2020 and can apply to any named place, not just a terminal.

DDP — Delivered Duty Paid (named place of destination). The seller bears all costs and risks to the named destination, including import duties and taxes. DDP is the maximum obligation for the seller. It requires the seller to handle import clearance in the buyer’s country, which may be difficult or legally restricted. A seller quoting DDP must account for all import duties, VAT, and local taxes in the price.

FAS — Free Alongside Ship (named port of shipment). The seller delivers when the goods are placed alongside the vessel at the named port. Risk transfers at that point. FAS is used for bulk cargo and breakbulk shipments where the buyer nominates the vessel and arranges loading.

FOB — Free On Board (named port of shipment). Risk transfers when the goods are on board the vessel. The seller handles export clearance; the buyer pays freight and arranges insurance. FOB is very commonly cited in contracts but is frequently misapplied: it was designed for breakbulk cargo, not containers. When goods are containerized, the seller hands the container to the carrier at an inland container depot or terminal long before it goes on board; using FOB means the risk remains with the seller during a period when the seller has no control over the goods. FCA should be used instead for container shipments.

CFR — Cost and Freight (named port of destination). The seller pays freight to the named destination port but risk transfers when the goods are on board the vessel at the port of shipment. Same asymmetry as CPT: seller pays freight, buyer bears risk during the voyage. CFR applies only to sea and inland waterway transport.

CIF — Cost, Insurance and Freight (named port of destination). The seller pays freight and arranges cargo insurance to the named destination port, but risk still transfers when the goods are on board at the port of shipment. CIF requires only minimum insurance cover (Institute Cargo Clauses C), which excludes many common risks including theft and rough handling. For more comprehensive cover, buyers should specify a higher standard or use CIP instead.

Choosing the right Incoterm

The right Incoterm depends on which party has better control over the logistics, which party has better access to freight and insurance rates, and how risk-tolerant each party is.

When the buyer has strong logistics capabilities and wants control over freight costs and carrier selection, terms like FCA, FOB, or CFR give the buyer that control. When the seller has better logistics infrastructure or the buyer lacks import clearance capability in the seller’s country, terms like DAP, DPU, or DDP are more appropriate.

For containerized ocean freight (the most common scenario in international trade), FCA at the seller’s named premises or port of export, CIP to the destination port or buyer’s facility, or DAP to the buyer’s door are the most practical choices. FOB and CIF are technically correct for sea freight but were designed for an era before containerization and create risk gaps in container supply chains.

For air freight, CPT or CIP to the destination airport, or DAP to the buyer’s facility, work cleanly. EXW is rarely appropriate unless the buyer truly has the capability to manage export formalities in the seller’s country.

Insurance under Incoterms

Only CIF and CIP require the seller to arrange insurance. Under all other terms, each party is responsible for their own coverage during the period they bear the risk. This means buyers using FCA, FOB, or DAP terms must arrange their own cargo insurance from the risk transfer point to their facility. Sellers using EXW bear no obligation to insure at all; the buyer bears risk from the seller’s premises and must have coverage from that point.

The insurance minimum under CIF is Institute Cargo Clauses (C), which is the most restrictive standard cover and excludes theft, pilferage, non-delivery, and many weather-related risks. Incoterms 2020 raised the CIP standard to Clauses (A), the broadest cover. Buyers trading under CIF who want comprehensive protection should either negotiate Clauses (A) insurance in the contract or use CIP instead.

Import and export clearance under Incoterms

Export clearance is the seller’s responsibility under all terms except EXW. Import clearance is the buyer’s responsibility under all terms except DDP. This division means that under most Incoterms, each party handles clearance in their own country, which is the practical and legally straightforward arrangement. EXW and DDP are the exceptions and both create complications: EXW requires the buyer to arrange export clearance in the seller’s country (often legally impossible without a customs broker with authority to act), and DDP requires the seller to handle import duties and clearance in the buyer’s country (requiring import licenses and tax registration the seller may not have).

Common errors with Incoterms

• Using FOB for containerized cargo. FOB is designed for breakbulk. For containers, use FCA (seller’s premises or named place) to ensure risk transfers at the practical handover point.
• Using EXW for international trade. EXW requires the buyer to arrange export clearance in the seller’s country. This is legally complex and practically difficult for a foreign buyer. FCA is almost always a better choice: it keeps export clearance with the seller and gives the buyer control of onward transport.
• Assuming CIF includes comprehensive insurance. CIF requires only Clauses (C), the minimum. Specify Clauses (A) or use CIP to get comprehensive seller-arranged cover.
• Not naming the specific place. Every Incoterm must be followed by a named place or port. “FOB” alone is incomplete and unenforceable; “FOB Shanghai” or “FOB Port of Los Angeles” is correct. The more specific the named place, the clearer the cost and risk allocation.
• Not citing the version year. Incoterms rules change across editions. A contract should cite “Incoterms 2020” explicitly to avoid disputes about which edition applies.
• Assuming Incoterms govern payment or title transfer. Incoterms only cover delivery, cost allocation, and risk transfer. Payment terms (30 days, letter of credit, open account) and title transfer are separate matters governed by the sales contract.

Frequently asked questions

What are Incoterms and why do they matter?

Incoterms are a set of 11 standardized three-letter codes published by the International Chamber of Commerce that define the rights and obligations of buyers and sellers in international trade contracts. Each Incoterm specifies who arranges and pays for transportation, insurance, and customs clearance, and the exact point at which risk of loss or damage transfers from seller to buyer. They matter because without a shared, unambiguous definition of these obligations, international trade contracts are interpreted differently in different legal systems, leading to cost disputes, insurance gaps, and liability arguments when shipments are lost or damaged. By citing an Incoterm and version year in the contract, both parties agree to a precise set of obligations without having to negotiate every detail from scratch.

What is the difference between FOB and FCA?

FOB (Free On Board) transfers risk when the goods are physically loaded on board the vessel at the port of shipment. FCA (Free Carrier) transfers risk when the seller delivers the goods to the carrier nominated by the buyer at a named place. For breakbulk cargo shipped directly on a vessel, FOB and FCA produce similar outcomes. For containerized cargo (the vast majority of ocean trade today), FCA is the more appropriate term: in containerized shipping, the seller hands the container to a terminal operator or carrier at an inland depot or port terminal, often days before the ship departs. Under FOB, the seller continues to bear risk during this period when the goods are at a terminal outside the seller’s control. FCA transfers risk at the practical handover point, eliminating this gap. The International Chamber of Commerce explicitly recommends FCA over FOB for container trade in the Incoterms 2020 guidance.

What does DDP mean and when should it be used?

DDP (Delivered Duty Paid) means the seller bears all costs and risks of delivering the goods to the named destination, including export clearance, international freight, import duties, and local taxes. It is the maximum obligation for the seller and the most convenient option for the buyer, who simply receives the goods at their door with no customs or logistics involvement required. DDP is appropriate when the seller has a strong logistics operation and is registered for tax purposes in the buyer’s country, or when the seller uses a freight forwarder or third-party logistics provider capable of handling import clearance. It is problematic when the seller is not registered to pay VAT or import duties in the buyer’s country, as the seller may be unable to legally clear the goods through customs. In those cases, DAP (Delivered at Place) is often used instead: the buyer handles import clearance and duties while the seller delivers to the door.

What is the difference between CIF and CIP?

Both CIF and CIP require the seller to pay for carriage and arrange cargo insurance to a named destination, but they differ in two important ways. First, CIF applies only to sea and inland waterway transport, while CIP applies to all modes of transport including air, road, and multimodal. Second, the minimum insurance standard differs: CIF requires only Institute Cargo Clauses (C), which is the most restrictive cover and excludes many common risks; CIP requires Institute Cargo Clauses (A), the broadest standard, following an upgrade in Incoterms 2020. For containerized or multimodal shipments, CIP is the more appropriate term and provides more comprehensive insurance. For bulk cargo shipped by sea where Clauses (C) is acceptable, CIF remains appropriate, though the parties can always contract for a higher insurance standard.

Who pays for import duties under each Incoterm?

Under all Incoterms except DDP, the buyer pays import duties and handles import clearance. Under DDP (Delivered Duty Paid), the seller pays all import duties, taxes, and customs charges at the destination. This is the only Incoterm that shifts import clearance responsibility to the seller. Under DAP and DPU, the seller delivers to the destination but the buyer handles import clearance and pays duties before the goods can be released. Under FOB, CFR, CIF, FCA, CPT, and CIP, the seller handles and pays for export clearance only; the buyer is responsible for all import-side costs. Under EXW, even export clearance is the buyer’s responsibility, making it the term under which the buyer handles the most logistics.

What Incoterms work best for e-commerce and small parcel shipments?

For e-commerce and small parcel shipments where the seller ships directly to consumers or small businesses in the buyer’s country, DAP (Delivered at Place) and DDP (Delivered Duty Paid) are the most practical. DAP delivers to the buyer’s door with the buyer responsible for import duties; this can create a poor customer experience if the buyer receives a surprise duty bill at delivery. DDP includes all duties in the seller’s price, creating a seamless delivered experience for the buyer. Many cross-border e-commerce platforms require sellers to offer DDP pricing to avoid customs surprises for end customers. The main challenge with DDP for e-commerce sellers is the need to register for VAT in the destination country and manage duty payments across multiple markets, which typically requires a customs broker or third-party logistics provider with local capabilities.