If you’ve ever stared at a purchase order that says “FOB Shanghai” or “DDP Los Angeles” and quietly wondered what you actually just agreed to, you’re not alone. Incoterms confuse even people who’ve been in freight for years, mostly because the terms sound similar but shift very different obligations — and costs — between buyer and seller.
Here’s the short version before we get into the details: Incoterms 2020 are eleven three-letter rules, published by the International Chamber of Commerce, that define exactly where the seller’s responsibility ends and the buyer’s begins — for costs, risk, and (in some terms) insurance. Get the wrong one on a contract and you can end up paying for insurance you didn’t need, or discovering that “your” cargo was legally the buyer’s problem the moment it left the warehouse.
Why This Isn’t Just Paperwork
I’ve reviewed enough purchase orders to say this with confidence: the Incoterm on the contract is usually the single line item that decides who eats the cost when something goes wrong mid-shipment. A container gets damaged in transit, a vessel is delayed at port, customs holds a shipment for inspection — the Incoterm, not the invoice total, tells you whose problem that is.
That’s also why Incoterms matter for pricing. Two suppliers quoting the “same” price under EXW and DDP are not actually comparable numbers — one excludes freight, insurance, and duties entirely, and the other bundles all of it in. New importers compare these headline prices directly more often than you’d expect, and it’s an easy way to end up over budget.
The Two Families of Incoterms 2020
The eleven rules split into two groups, and the split itself is useful to remember because it tells you when each group applies:
Rules for any mode of transport (used for air, road, rail, sea, or multimodal shipments): EXW, FCA, CPT, CIP, DAP, DPU, DDP.
Rules for sea and inland waterway transport only (bulk cargo, break bulk, or anything where the goods are handed over at a specific vessel or port): FAS, FOB, CIF, CFR.
That second point trips people up constantly. FOB and CIF were written for an era of break-bulk shipping where cargo crossed a ship’s rail by crane. If you’re shipping in a container, the goods are handed to the carrier at a container yard well before the vessel — so technically FOB doesn’t describe what’s physically happening. The ICC’s own guidance recommends FCA instead for containerized freight, precisely for this reason. A lot of contracts still use FOB for container shipments out of habit, and it mostly works out — but it’s worth knowing you’re using a term slightly outside its intended scope.
Breaking Down All 11 Terms
Below is the practical breakdown: who arranges transport, who pays, and where risk actually transfers from seller to buyer. This is the part worth bookmarking.
Any mode of transport
- EXW — Ex Works. Seller’s only job is to make the goods available at their own premises. Buyer handles everything from there: loading, export clearance, main transport, import clearance, delivery. Maximum obligation on the buyer, minimum on the seller.
- FCA — Free Carrier. Seller delivers the goods, cleared for export, to a carrier or location named by the buyer. Risk transfers at that handover. This is the term ICC recommends over FOB for container cargo.
- CPT — Carriage Paid To. Seller arranges and pays for transport to the named destination, but risk transfers to the buyer once the goods are handed to the first carrier — not when they arrive. That gap surprises people.
- CIP — Carriage and Insurance Paid To. Same as CPT, but the seller must also buy cargo insurance — and as of the 2020 revision, at a higher minimum coverage level (Institute Cargo Clauses A, “all risks”) than the old CIF/CIP standard.
- DAP — Delivered at Place. Seller delivers the goods, ready for unloading, at the named destination. Buyer handles import clearance and duties.
- DPU — Delivered at Place Unloaded. The only Incoterm where the seller is responsible for unloading at the destination. Everything else about it mirrors DAP.
- DDP — Delivered Duty Paid. Maximum obligation on the seller: delivery, import clearance, and duties all included. Sounds convenient for the buyer, but sellers who aren’t set up to handle foreign customs procedures can create serious delays trying to fulfill this one.
Sea and inland waterway only
- FAS — Free Alongside Ship. Seller delivers the goods alongside the vessel at the port of shipment. Buyer takes over from there, including loading.
- FOB — Free on Board. Seller delivers once the goods are loaded on board the vessel. Widely used, technically intended for non-containerized cargo.
- CFR — Cost and Freight. Seller pays for transport to the destination port, but risk transfers once goods are on board at the origin port — same timing quirk as CPT.
- CIF — Cost, Insurance and Freight. Same as CFR, plus the seller must insure the cargo — though at a lower minimum coverage level than CIP (Institute Cargo Clauses C is acceptable here, which only covers named risks, not “all risks”).
Where People Actually Get Burned
Three mistakes show up over and over in the contracts I’ve seen:
First, treating FOB and FCA as interchangeable for container shipments. They’re not — the risk transfer point is genuinely different, and in a dispute, that difference is what an insurer or arbitrator will look at.
Second, assuming CIF and CIP insurance coverage is the same. It isn’t, and this one has real money behind it: CIF only requires minimum coverage (Institute Cargo Clauses C), while CIP now requires the broader “all risks” coverage (Institute Cargo Clauses A) as of the 2020 update. A buyer who assumes CIP-level protection under a CIF contract can find out the hard way, after a claim gets denied, that partial losses like water damage from rough handling simply weren’t covered.
Third — and this is the one that costs the most in practice — first-time exporters quoting DDP without actually knowing how to clear customs in the destination country. It looks like a value-add on the quote. It becomes a demurrage bill and an angry buyer when the shipment sits at a foreign port because nobody on the seller’s side knew how to file the import declaration.
How to Actually Choose One
A rough rule of thumb that holds up reasonably well: the less experience you have shipping internationally, the more you want a term that keeps responsibility on the side of whoever has that experience. New exporters are often better off quoting FCA or CPT and letting an experienced buyer (or their freight forwarder) handle the international leg, rather than reaching for DDP because it “sounds more professional.”
On the buying side, the questions worth asking a supplier are simple: Where exactly does risk transfer? Who’s arranging insurance, and at what coverage level? And does the quoted price include duties, or not? If a supplier can’t answer those three questions clearly, that’s worth treating as a signal on its own.
👉 See the official ICC Incoterms® 2020 rules and full rule text
The Bottom Line
Incoterms 2020 aren’t just abbreviations on a purchase order — they’re the actual allocation of cost, risk, and responsibility between two parties who may never meet in person. Misreading one term can mean paying for insurance twice, discovering a claim isn’t covered, or absorbing a customs delay that was never supposed to be your problem. Worth the ten minutes it takes to actually check.
Source: International Chamber of Commerce (ICC), Incoterms® 2020 official rules — iccwbo.org.
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Written by the TradeMentorHQ editorial team. We research primary sources — ICC rules, WCO and customs-authority guidance, and UCP 600 — before every article, and we’re upfront about how the site is produced on our About page. Spotted something that needs a correction? Let us know.