Understanding Incoterms 2020
Your comprehensive guide to International Commercial Terms and how they impact your shipping strategy
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The 11 Incoterms 2020
Master the rules that govern international commercial transactions and determine responsibility for shipment
Seller makes the goods available at their premises. Buyer bears all risks and costs from that point forward.
Seller delivers goods to a carrier nominated by the buyer at a named location.
Seller pays for transport to destination, but risk transfers to buyer once goods are handed to carrier.
Similar to CPT, but seller also provides insurance coverage for goods in transit.
Seller bears all costs and risks in delivering goods to named destination, not unloaded.
Seller delivers goods to destination and bears cost of unloading (new in Incoterms 2020).
Seller bears maximum responsibility, delivering goods to destination with all duties and taxes paid.
Seller delivers goods alongside vessel at named port. Buyer assumes all risk and costs from that point.
Seller delivers goods on board the vessel at named port. Buyer arranges freight and insurance.
Seller pays freight to destination port, but risk transfers to buyer once on board vessel.
Seller pays freight and insurance, but risk transfers to buyer once goods are on board vessel.
Risk & Responsibility Matrix
Quick reference showing who bears risk, cost, and responsibility under each term
| Incoterm | Seller Pays Freight | Seller Pays Insurance | Seller Clears Export | Buyer Clears Import |
|---|---|---|---|---|
| EXW | ✓ | |||
| FCA | ✓ | ✓ | ||
| CPT | ✓ | ✓ | ✓ | |
| CIP | ✓ | ✓ | ✓ | ✓ |
| DAP | ✓ | ✓ | ✓ | |
| DPU | ✓ | ✓ | ✓ | |
| DDP | ✓ | ✓ | ||
| FAS | ✓ | ✓ | ||
| FOB | ✓ | ✓ | ||
| CFR | ✓ | ✓ | ✓ | |
| CIF | ✓ | ✓ | ✓ | ✓ |
Key Differences Explained
Understanding what separates seller vs. buyer obligations
🚚 Transport Costs
Who pays for freight from origin to destination? Terms like CPT, CIP, DAP, DPU, and DDP have the seller pay. FCA, FAS, FOB, CFR, and CIF have varying arrangements.
📋 Insurance
Who provides insurance coverage during transit? Only CIP and CIF require the seller to arrange insurance. All other terms leave this to the buyer.
🛂 Customs Clearance
Who handles export and import customs procedures? Seller typically clears export (except EXW); only DDP has seller clear import duties.
⚠️ Risk Transfer
When does risk of loss shift from seller to buyer? This varies significantly and affects insurance needs and liability in case of damage or loss.
🚢 Transport Mode
Can the term be used for all transport modes? Sea-only terms (FAS, FOB, CFR, CIF) cannot be used for air, rail, or combined transport.
💰 Cost Allocation
Overall cost burden on seller increases from EXW through DDP. Choose based on negotiating power, relationships, and risk tolerance.
Best Practices for Incoterms Selection
🎯 Know Your Relationship
Consider your relationship with the supplier. Established, trusted partners may offer better terms. New relationships may require seller protection.
💡 Evaluate Cost Impact
Calculate total landed cost under each term. Some sellers may negotiate lower prices for EXW, offsetting increased buyer costs elsewhere.
📍 Check Transport Mode
Ensure your chosen term aligns with your transport method. Sea-only terms won’t work for air cargo. Use multimodal terms for combined shipments.
🔍 Document Clearly
Always specify Incoterms 2020 in contracts. Include port/location names, currency, and any special conditions to avoid disputes.
⚖️ Balance Risk & Cost
Higher responsibility on sellers means lower risk for buyers, but at a cost. Find the right balance based on your business model.
🤝 Communicate Expectations
Clearly communicate insurance, payment, and delivery expectations. Misunderstandings about responsibilities can lead to costly disputes.