Incoterms 2020: what each term actually allocates

Incoterms are International Commercial Terms, published by the International Chamber of Commerce, currently in their 2020 edition. They do not set a price, they do not transfer legal title to goods, and they are not a contract of carriage. What they do is allocate three things between a buyer and a seller in a sale contract: which party pays for which leg of transport and its related costs, at what point risk of loss or damage passes from seller to buyer, and who is responsible for arranging insurance, export clearance, and import clearance.

A shipment can go from quote to delivery without the Incoterm ever coming up. It starts to matter the moment something goes wrong: cargo damaged in transit, a customs hold nobody expected, an unexpected demurrage bill, a dispute over who owed what to whom. At that point the three-letter code sitting in the sale contract is the answer. If the parties picked one that does not fit the mode of transport or the reality of how the goods actually move, the answer can get expensive fast, and usually for the party who assumed the term meant something it did not.

Seven of the eleven terms work for any mode of transport, including multimodal moves: EXW, FCA, CPT, CIP, DAP, DPU, and DDP. The other four are written for sea and inland waterway transport only: FAS, FOB, CFR, and CIF. Using a sea-only term on an air or trucked shipment is a straightforward error; using one on a containerized ocean shipment, which is far more common, is the subtler trap covered below.

EXW, Ex Works: the seller's obligation ends at their own door. The buyer arranges everything from that point forward, including export clearance, main carriage, and import clearance. Risk passes to the buyer the moment goods are made available at the seller's premises, before they have even left the building.

FCA, Free Carrier: the seller delivers goods, cleared for export, to a carrier or a place named by the buyer, and risk passes to the buyer at that handover. FCA has become the recommended default for containerized freight over FOB, for reasons the traps section below explains.

CPT, Carriage Paid To: the seller pays freight to a named destination, but risk passes to the buyer much earlier, at the point the seller hands the goods to the first carrier at origin. Cost and risk splitting at two different points in the journey is a pattern worth remembering; it shows up again below.

CIP, Carriage and Insurance Paid To: functions like CPT, except the seller must also buy cargo insurance. Incoterms 2020 raised the required coverage level for CIP to the broader Institute Cargo Clauses A, an all-risk standard, rather than the older minimum-coverage clause that still applies under CIF.

DAP, Delivered at Place: the seller bears cost and risk all the way to a named destination, but not unloading. The buyer handles unloading and import clearance once the goods arrive.

DPU, Delivered at Place Unloaded: the same as DAP, except the seller is also responsible for unloading at the named destination. It is the one term in the set that places an unloading obligation on the seller.

DDP, Delivered Duty Paid: the seller bears cost and risk the entire way to the buyer's door, including import duties and taxes. This is the maximum obligation a seller can take on under Incoterms, and it is riskier than it looks, as the next section explains.

FAS, Free Alongside Ship: the seller delivers goods alongside the vessel at the port of shipment. It is rare in modern container trade and mostly still used for bulk cargo.

FOB, Free on Board: the seller delivers the goods on board the vessel, and risk passes once they are loaded. It is the most familiar term to most shippers, still used out of habit even where it fits poorly, which is exactly the trap below.

CFR, Cost and Freight: the seller pays freight to the destination port, but risk passes at the same point as FOB, when the goods are loaded. The seller has no insurance obligation under CFR.

CIF, Cost, Insurance and Freight: the same as CFR, with the seller also required to insure the goods, at the Incoterms 2020 minimum coverage level, the Institute Cargo Clauses C, unless the parties agree to something broader.

EXW looks like minimal seller obligation, which is exactly its appeal, but it shifts a lot onto the buyer, including export clearance in the seller's own country. A foreign buyer's agent often cannot legally file that declaration at all, which is why many forwarders will not actually quote a true EXW move without quietly stepping in to handle origin formalities themselves, defeating the point of the term the parties wrote down. FCA usually captures the same commercial intent, seller handling origin logistics, without creating an export-clearance problem that cannot legally be solved as written.

DDP is the mirror image. The seller takes on import duty, tax, and clearance obligations in a country where it may have no legal registration to act as importer of record, and in a meaningful number of jurisdictions a foreign seller cannot be importer of record at all. A DDP promise, in that case, cannot always be fulfilled exactly as written, and it exposes the seller to duty-rate volatility and clearance delays entirely outside their control. Any DDP quote is worth treating as a genuine estimate rather than a locked number, confirmed against whether the seller, or the seller's broker, can legally act as importer at destination before the term goes into a contract at all.

FOB versus FCA on containerized freight is the trap that costs the most money without anyone noticing at the time. FOB was written for break-bulk cargo, loaded piece by piece with a crane onto a ship's rail, and it defines risk transfer as the moment goods are on board. Containerized cargo does not work that way: the box is packed and sealed well before it reaches the vessel, often days earlier at an inland yard or the seller's own facility, then trucked to the port and handed off. Under an FOB contract the seller nominally still carries risk until loading, but has already lost physical custody once the box disappears behind the terminal gate, so a loss in the yard sits in a gap FOB was never written to answer. That gap is exactly why FCA, passing risk at the moment the carrier or its terminal agent takes custody, has been the recommended term for container freight for years, even though plenty of shippers keep writing FOB out of habit or a letter-of-credit template that only offers the classic terms. It rarely causes a problem, until there is a claim.

The common thread across all three traps is that a mismatched Incoterm rarely gets renegotiated mid-shipment, so its cost shows up only once something has already gone wrong: a container damaged at an inland yard under an FOB contract nobody thought through, a DDP shipment held at customs because the seller cannot legally be the importer of record, an EXW deal where the buyer's forwarder only discovers on pickup day that just the seller can file the export declaration. None of these are the freight itself going wrong. They are the paperwork failing to match the physical reality of how the goods actually moved.

Match the term to the mode first. For containerized freight, default to FCA, CPT, or CIP, and reserve FOB, CFR, and CIF for genuinely vessel-side, non-containerized cargo where risk truly does transfer at the ship's rail.

Match the term to who can legally act at each border, before it goes in the contract, not after a shipment gets stuck. Confirm the seller can be importer of record at destination before agreeing to DDP; confirm the buyer's agent can legally file export declarations at origin before agreeing to EXW.

Write the named place precisely. FCA Shanghai is not specific enough on its own; name the actual container yard or the seller's facility. A vague named place is the second most common source of an Incoterms dispute, right behind picking the wrong term entirely.

Incoterms are one clause in a larger arrangement, not a substitute for a full contract of carriage, marine insurance, or a clear statement of who is the importer of record on customs paperwork. Get the rest of the sale contract to agree with the term that was chosen, and the three-letter code will almost never need to come up again after the ink is dry.