Incoterms® are standardized trade rules published by the International Chamber of Commerce (ICC). They define important responsibilities between seller and buyer for delivery, transport arrangements, export/import formalities, allocation of certain costs and the point at which risk of loss or damage transfers.
As of 2026, Incoterms® 2020 remains the current ICC ruleset. The rules contain 11 terms: seven that can be used for any mode or modes of transport and four designed for sea and inland-waterway transport.
What Incoterms Do—and Do Not—Define
Incoterms help define:
- where delivery takes place;
- when risk transfers from seller to buyer;
- which party arranges and pays for specified transport stages;
- which party handles export and import customs formalities under each rule; and
- whether the seller has an insurance obligation under the chosen rule.
Incoterms do not by themselves determine ownership/title to the goods, payment terms, product quality obligations, transfer of intellectual property, remedies for breach or every cost in the commercial contract. Those matters must be covered elsewhere in the agreement.
The 11 Incoterms® 2020 Rules
| Rule | Mode | Seller’s Main Delivery Point / Responsibility |
|---|---|---|
| EXW — Ex Works | Any mode | Goods made available to buyer at named place, typically seller’s premises; seller has minimal delivery obligation |
| FCA — Free Carrier | Any mode | Seller delivers to buyer’s nominated carrier/person at named place |
| CPT — Carriage Paid To | Any mode | Seller pays carriage to named destination, but risk transfers when goods are delivered to the carrier |
| CIP — Carriage and Insurance Paid To | Any mode | Like CPT, with seller also required to obtain specified insurance cover |
| DAP — Delivered at Place | Any mode | Seller delivers at named destination ready for unloading |
| DPU — Delivered at Place Unloaded | Any mode | Seller delivers after unloading at named destination |
| DDP — Delivered Duty Paid | Any mode | Seller delivers at named destination and handles import clearance/duties, subject to local legal ability |
| FAS — Free Alongside Ship | Sea/inland waterway | Seller places goods alongside vessel at named port of shipment |
| FOB — Free On Board | Sea/inland waterway | Seller delivers goods on board buyer’s nominated vessel at named port of shipment |
| CFR — Cost and Freight | Sea/inland waterway | Seller pays freight to destination port, but risk transfers when goods are on board vessel at shipment port |
| CIF — Cost, Insurance and Freight | Sea/inland waterway | Like CFR, with seller also arranging specified insurance cover |
Cost Transfer and Risk Transfer Are Not Always the Same Point
This is one of the most important Incoterms concepts. Under the “C” rules—CPT, CIP, CFR and CIF—the seller pays for carriage to an agreed destination, but risk transfers earlier at the contractual delivery point.
For example, under CFR the seller pays the ocean freight to the named destination port, but the risk of loss or damage transfers when the goods are delivered on board the vessel at the port of shipment. The same on-board delivery/risk principle applies to CIF. The older phrase “passing the ship’s rail” is not the Incoterms® 2020 delivery test.
Any Mode vs Sea-Only Rules
The seven rules for any mode are EXW, FCA, CPT, CIP, DAP, DPU and DDP. FAS, FOB, CFR and CIF are intended only for sea or inland-waterway transport where delivery is made alongside or on board a vessel.
The ICC specifically notes that FOB is not appropriate where goods are handed to a carrier before they are on board the vessel, such as at a container terminal. In such cases, parties should consider FCA instead. This distinction is particularly important for containerized shipments.
FCA vs FOB for Containerized Cargo
| FCA | FOB |
|---|---|
| Can be used for any transport mode | Sea/inland-waterway only |
| Suitable where seller delivers to a carrier or terminal before vessel loading | Delivery requires goods to be on board the vessel |
| Often more suitable for container traffic delivered to a terminal | More suited to cargo delivered directly on board, including many bulk/general-cargo trades |
Insurance Under CIP and CIF
CIP and CIF are the two Incoterms® 2020 rules that require the seller to obtain cargo insurance for the buyer’s risk. Their required insurance levels differ under the ICC rules: CIP generally requires a higher level of cover, while CIF requires minimum cover unless the parties agree otherwise.
The parties should still review the actual policy, exclusions, insured value, claims process and cargo risk rather than assuming that the Incoterm alone provides sufficient protection.
Worked Example: FCA vs DAP
Assume a supplier in Germany sells equipment to a buyer in Bahrain.
Under FCA Supplier Warehouse, Hamburg, Germany – Incoterms® 2020, the seller completes the agreed FCA delivery at the named point and the buyer takes responsibility for the main carriage from that contractual delivery point.
Under DAP Buyer Warehouse, Manama, Bahrain – Incoterms® 2020, the seller arranges transport to the buyer’s named destination and delivers the goods ready for unloading. The buyer handles import clearance under DAP.
These two quotations should not be compared on price alone because they include very different transport responsibilities and risk positions. The buyer should normalize them to a comparable landed or total cost basis.
How to Write an Incoterm Correctly in a Contract or PO
A useful format is:
[Incoterm] [precise named place/port] – Incoterms® 2020
Examples:
- FCA Supplier Warehouse, Hamburg, Germany – Incoterms® 2020
- DAP Buyer Warehouse, Manama, Bahrain – Incoterms® 2020
- FOB Port of Shanghai, China – Incoterms® 2020
The named point should be as precise as practical. A vague term such as “FOB China” does not clearly establish the contractual port or delivery point.
Common Incoterms Mistakes
- Using an Incoterm without naming the place or port.
- Failing to state the edition, for example Incoterms® 2020.
- Using FOB for containerized cargo without considering FCA.
- Assuming the party paying freight also bears transit risk for the whole journey.
- Assuming Incoterms determine legal title/ownership.
- Choosing DDP without checking whether the foreign seller can legally act as importer and meet local tax/customs requirements.
- Ignoring unloading responsibilities under DAP versus DPU.
- Assuming CIF/CIP insurance will automatically meet every business need.
Interview Question: What Is the Difference Between FOB and CIF?
A strong answer is: Both FOB and CIF are sea/inland-waterway rules and both transfer risk when the goods are on board the vessel at the port of shipment. Under FOB, the buyer arranges the main ocean carriage. Under CIF, the seller pays the cost and freight to the named destination port and also obtains the required insurance, even though risk transferred earlier at shipment.
Related SCMANA Guides
References
- International Chamber of Commerce, Incoterms® 2020 — Rules for Any Mode or Modes of Transport
- International Chamber of Commerce, Incoterms® 2020 — Rules for Sea and Inland Waterway Transport
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