Incoterms 2020: the practical guide for exporters and importers

The two questions every Incoterm answers

Cost allocation and risk transfer are separate questions, and Incoterms sometimes answer them at different points in the journey, which is the single most common source of confusion. Under CFR and CIF, for example, the seller pays freight all the way to the destination port, but risk passes to the buyer much earlier, once the goods are loaded on board at origin.

Reading a term correctly means checking both: where does the cost obligation end, and separately, where does risk end. They are not always the same place, and a shipper who assumes the two always match is the shipper who finds out the hard way, usually after a claim.

The four groups, and who books and pays

Group E has one term, EXW (Ex Works). The seller's only job is to make the goods available at its own premises. The buyer arranges and pays for every leg from there: export clearance, main carriage, import clearance, and final delivery. This is the lightest obligation a seller can carry, and the heaviest a buyer can take on.

Group F covers FCA, FAS and FOB. The seller delivers the goods to a carrier or a port that the buyer has arranged, and export clearance is the seller's job in all three, but the buyer books and pays for the main carriage from that point on. The buyer effectively controls the freight contract, which matters if the buyer has a preferred carrier or a consolidation programme.

Group C covers CFR, CIF, CPT and CIP. Here the seller books and pays for carriage all the way to the named destination, and under CIF and CIP the seller also arranges insurance, but risk still transfers to the buyer earlier, at origin, not at the destination the seller is paying to reach. This is the group most often misread, because a buyer who sees "seller pays freight to Rotterdam" reasonably assumes the seller is also on the hook if the cargo is damaged mid ocean. It is not.

Group D covers DAP, DPU and DDP. These are the only terms where the seller carries both cost and risk through to the named destination. DDP goes furthest of all 11 terms: the seller also clears the goods through import and pays the duty, leaving the buyer only to unload. DAP and DPU stop short of import clearance, which remains the buyer's job.

Exactly where risk transfers, term by term

EXW: risk passes when the goods are placed at the buyer's disposal at the seller's named premises, before loading. The seller does not even load the vehicle.

FCA: risk passes when the goods are handed to the carrier nominated by the buyer, at the seller's premises or another named place. This is the term the ICC recommends in place of FOB for containerised cargo, because the container yard or CFS, not the ship's rail, is the natural handover point.

FAS: risk passes when the goods are placed alongside the vessel at the named port of shipment, on the quay or a lighter, before loading.

FOB: risk passes once the goods are loaded on board the vessel at the named port of shipment. FOB is written for break-bulk and bulk cargo loaded directly onto a ship, not for cargo that sits in a container yard for days before it is ever near a vessel.

CFR: risk passes at the same point as FOB, on board at the port of shipment, even though the seller is paying freight onward to the destination port named in the contract.

CIF: risk transfer point is identical to CFR. The seller's extra obligation is insurance, not risk, which is the distinction buyers most often get wrong.

CPT: risk passes when the goods are handed to the first carrier, which may be well before the coast if the shipment starts inland, even though the seller pays carriage through to the named destination.

CIP: risk transfer point is identical to CPT. Like CIF, the seller's extra obligation is insurance.

DAP: risk passes when the goods are placed at the buyer's disposal at the named destination, ready for unloading but not unloaded, and before import clearance.

DPU: risk passes once the goods are unloaded at the named place of destination. DPU is the renamed successor to the old DAT term, and it is the only Incoterm in either the 2010 or 2020 sets where the seller is responsible for unloading.

DDP: risk passes when the goods are placed at the buyer's disposal at the named destination, cleared for import, duty paid, but still on the delivering vehicle, not unloaded.

The three terms most often used wrongly

FOB on a containerised shipment is the most common error in the whole set. FOB's risk-transfer point, on board the vessel, assumes cargo is loaded directly at the rail. Containerised cargo is sealed and handed over at a container yard or depot days before it is anywhere near the ship, so an FOB contract leaves an ambiguous stretch where nobody is clearly on the hook if the container is damaged or lost between the yard and the vessel. The ICC has recommended FCA for containerised trade since well before the 2020 revision for exactly this reason, and most freight forwarders will flag an FOB container booking as a red flag.

EXW looks like the simplest term for a seller, since the buyer handles everything past the factory gate, but it quietly leaves the seller exposed on export clearance. Many countries require the exporter of record to be a locally registered entity or to hold specific export documentation, and under EXW the seller is still that exporter of record even though the buyer is arranging the truck. If the buyer's nominated carrier cannot produce what the seller's customs authority needs, the shipment stalls at the seller's own border with the seller's name on the export declaration.

DDP looks like the friendliest term for a buyer, since the seller clears import and pays duty, but it leaves the seller carrying a tax liability in a jurisdiction where it usually has no local tax registration to reclaim it against. Import VAT and duty paid under DDP by a foreign seller with no local presence often cannot be recovered the way a locally registered importer could recover it, which turns what looks like a service into a real, non-recoverable cost baked into the seller's margin on every shipment.

Which terms suit perishable cargo

FCA and CIP are the terms best suited to produce, seafood and other perishable exports moving in containers or by air. FCA hands risk to the buyer at a clear, verifiable point, the container yard or carrier's custody, with a timestamped receipt, which matters when a cold-chain dispute turns on exactly when a reefer unit was last checked. CIP adds the seller-arranged insurance on top, at the higher Institute Cargo Clauses A minimum, which is the broader cover perishable goods need against spoilage-adjacent risks like handling delay or temperature excursion in transit.

CIF and CFR are weaker fits for perishables specifically because their risk-transfer point, on board the vessel at origin, sits well before the goods reach the buyer, while the seller is still the one paying (and under CIF, insuring) the voyage. A buyer relying on CIF cover for a refrigerated shipment should check the policy's minimum terms closely, since CIF's Institute Cargo Clauses C minimum is a narrow, named-perils policy that does not automatically cover temperature-related spoilage.

DAP and DDP suit a buyer who wants the seller to own the outcome all the way to the door, which some importers of perishable goods prefer precisely because it puts pressure on the seller to manage the cold chain end to end, but sellers should price that risk deliberately rather than default into a D-term out of habit.

Insurance under CIF and CIP

CIF and CIP are the only two Incoterms that obligate the seller to buy cargo insurance on the buyer's behalf, and the 2020 revision changed the minimum level required under each. Under CIF, the seller need only buy the minimum cover set out in Institute Cargo Clauses (C), a named-perils policy that excludes many of the risks that matter most for food cargo, such as spoilage from delay. Under CIP, the 2020 revision raised the default minimum to Institute Cargo Clauses (A), the broadest standard market cover, all-risks subject to standard exclusions.

In both cases the default minimum insured value is 110 percent of the contract price, covering the goods plus a margin for the buyer's expected profit, and in both cases the seller and buyer can agree a higher level of cover in the contract if the standard minimum does not match what is actually being shipped. A buyer accepting a CIF quote for refrigerated cargo should assume the built-in cover is thinner than it sounds and negotiate the clause level explicitly rather than relying on the term's name.

What changed from Incoterms 2010, and matching the term across documents

Three changes carry practical weight for exporters moving from 2010 contracts to 2020 ones. DAT (Delivered at Terminal) was renamed DPU (Delivered at Place Unloaded), widening it beyond formal terminals to any named place, so long as the seller can unload there. CIP's minimum insurance requirement rose from Institute Cargo Clauses C to Institute Cargo Clauses A, closing a gap that had left CIP buyers under-insured relative to what the term implied. And FCA gained an explicit option for the seller to request an on-board bill of lading from the carrier after loading, useful for exporters who need that document to satisfy a letter of credit but were previously stuck with FCA's standard receipt.

Whichever term is chosen, it has to say the same thing in three places: the sale contract, the commercial invoice, and the transport document, usually the bill of lading or air waybill. A contract that specifies FCA but an invoice or bill of lading that reads FOB creates a real gap a bank can reject at letter-of-credit stage, or a customs broker can flag at clearance, because the stated term is what determines who was liable at the moment something went wrong. The named place matters as much as the three letters: "FCA" alone is not a complete term, "FCA Rotterdam container terminal" is, and every document referencing the sale should carry the identical wording, not a paraphrase.