Incoterms 2020 Explained: A Practical Shipper’s Guide
Incoterms (International Commercial Terms) are standardized trade rules published by the International Chamber of Commerce. They define exactly where the buyer’s and seller’s responsibilities begin and end. Getting them right prevents costly disputes over freight, insurance and customs.
What Incoterms actually define
- Who arranges and pays for transport at each stage.
- Where the risk of loss or damage passes from seller to buyer.
- Who handles export and import customs formalities.
- Who is responsible for insurance (where specified).
The most common Incoterms
- EXW (Ex Works): The buyer takes on almost all cost and risk from the seller’s premises.
- FOB (Free On Board): The seller delivers goods on board the vessel; risk passes once loaded. Used for sea freight.
- CIF (Cost, Insurance and Freight): The seller pays freight and minimum insurance to the destination port. Risk still passes at origin.
- DAP (Delivered At Place): The seller delivers to a named destination; the buyer handles import clearance.
- DDP (Delivered Duty Paid): The seller bears maximum responsibility, including import duties and clearance.
Sea-only vs any-mode terms
Four Incoterms (FAS, FOB, CFR, CIF) apply only to sea and inland waterway transport. The remaining seven (EXW, FCA, CPT, CIP, DAP, DPU, DDP) work for any mode, including air, road and multimodal shipments. Using a sea-only term for an air shipment is a common and avoidable mistake.
How to choose the right term
Choose based on how much control and risk each party wants. New importers often prefer DAP or DDP so the seller manages most logistics. Experienced buyers with their own freight forwarder may prefer FOB or FCA to control shipping costs. Always state the named place precisely (e.g., "FOB Nhava Sheva") and reference "Incoterms 2020" in the contract.