Incoterms 2020 Explained: All 11 Rules in Plain English

Short answer: Incoterms (International Commercial Terms) are a set of 11 standard three-letter rules, published by the International Chamber of Commerce, that define exactly who is responsible for what in a shipment — who pays for each leg of transport, who handles export and import clearance, and, crucially, at what point the risk passes from seller to buyer. Agreeing an Incoterm up front prevents the single most common trade dispute: "I thought you were paying for that."

The current version is Incoterms 2020. Here's what each rule means, without the jargon.

Why Incoterms matter

Every Incoterm answers three questions:

1. Who arranges and pays for transport (and which legs)?
2. Who clears customs for export and import?
3. Where does risk transfer — the exact point after which damage or loss is the buyer's problem?

Get this agreed and written on your invoice and contract (e.g. "FOB Shanghai, Incoterms 2020") and everyone knows their obligations. Leave it vague and you get surprise charges and finger-pointing when cargo is damaged.

The two families

• Rules for any mode of transport (7): EXW, FCA, CPT, CIP, DAP, DPU, DDP. Use these for air, road, rail, or containerised ocean freight.
• Rules for sea & inland waterway only (4): FAS, FOB, CFR, CIF. Use these only for non-containerised bulk/break-bulk by water. (A common mistake is using FOB for containers — technically FCA is correct there.)

Responsibility at a glance

Reading left→right, the seller's responsibility grows from EXW (buyer does almost everything) to DDP (seller does almost everything).

Key nuance: under CPT, CIP, CFR and CIF the seller pays for carriage to the destination but risk still passes early (at hand-over/loading at origin). So the seller can be paying freight on goods that are already legally the buyer's risk — which is exactly why who insures the cargo matters.

The 11 rules in plain English

EXW (Ex Works) — Seller just makes the goods available at their factory/warehouse. The buyer arranges everything else: collection, export clearance, freight, import, delivery. Maximum buyer responsibility; sellers like it, buyers should be wary unless they have a forwarder.

FCA (Free Carrier) — Seller delivers, export-cleared, to a carrier or place named by the buyer. Risk passes there. The modern, container-friendly replacement for FOB — and one of the most useful rules.

CPT (Carriage Paid To) — Seller pays freight to the named destination, but risk passes when the goods reach the first carrier. No insurance obligation.

CIP (Carriage and Insurance Paid To) — Like CPT, but the seller must also buy insurance (all-risks level under 2020) to the destination. Good for buyers who want cover without arranging it.

DAP (Delivered at Place) — Seller delivers to the named destination, ready to unload. Buyer handles import clearance and unloading. Popular for door deliveries.

DPU (Delivered at Place Unloaded) — Same as DAP but the seller also unloads. The only rule where the seller unloads at destination.

DDP (Delivered Duty Paid) — Seller does it all, including import duties and taxes, delivering to the buyer's door. Maximum seller responsibility; simplest for the buyer, but the seller takes on foreign customs risk.

FAS (Free Alongside Ship) — Seller delivers alongside the vessel at the origin port. Bulk/break-bulk only.

FOB (Free on Board) — Seller delivers, export-cleared, loaded on board the vessel; risk passes once on board. Sea freight only — don't use it for containers (use FCA).

CFR (Cost and Freight) — Seller pays freight to the destination port; risk passes at origin loading. No insurance obligation.

CIF (Cost, Insurance and Freight) — Like CFR, plus the seller buys insurance to the destination port. Very common for bulk sea trade.

How to choose the right Incoterm

• New to importing / no forwarder? Lean toward DAP or DDP — the seller handles most of the journey.
• Want control over freight and cost? FCA (any mode) or FOB (bulk sea) let you manage the main carriage.
• Shipping containers? Prefer FCA / CIP / CPT over FOB / CIF (which are for non-containerised water freight).
• Who should insure? If risk passes early (CPT, CFR) but the seller pays freight, make sure someone is actually insuring the cargo — CIP/CIF build it in.
• Always name the place precisely: "FCA Frontier Summit Warehouse, Douala, Incoterms 2020" — not just "FCA".

Where a forwarder fits in

Your freight forwarder executes whatever Incoterm you agree — arranging the legs you're responsible for, clearing customs, and making sure the bill of lading and invoice state the term correctly. If you're unsure which rule protects you best, that's a conversation to have before you book.

Not sure which Incoterm to use for your shipment? Talk to us — tell us the lane and cargo, and we'll recommend the rule that puts cost and risk where you want them.

FAQ

What does Incoterms stand for?
International Commercial Terms — standardized ICC rules defining buyer/seller responsibilities in international trade.

What is the latest version of Incoterms?
Incoterms 2020, in force since 1 January 2020. Always state the year on your contract.

What's the difference between FOB and FCA?
FOB is for non-containerised sea freight (risk passes when goods are on board). FCA works for any mode and passes risk when goods are handed to the carrier — the correct choice for containers.

Which Incoterm is best for the buyer?
DDP puts the most responsibility on the seller (including import duties), so it's simplest for the buyer — though it may be priced in. DAP is a common middle ground.

Do Incoterms cover payment or ownership?
No. Incoterms only cover delivery, cost, and risk. Payment terms and transfer of title are handled separately in your sales contract.