Incoterms are three-letter rules published by the International Chamber of Commerce that describe the division of costs and risk between a seller and a buyer. They are not a contract, not a payment method, and not a substitute for legal advice. They are a shared vocabulary — and once you know it, the arguments that used to happen after a shipment goes wrong stop happening at all, because the answer was decided at the quotation stage.
Two moments, not one
Almost every cross-border dispute traces back to a single misunderstanding: treating cost and risk as the same point. They are separate.
- The cost point is where the seller stops paying for transport, insurance or handling.
- The risk point is where the buyer becomes responsible for the goods if they are lost or damaged.
For most terms these two are in the same place. The exception is the C-group — CFR, CIF, CPT and CIP — where the seller pays the freight to the destination but risk transfers much earlier, usually the moment the goods are loaded or handed to the first carrier. In practice this means an importer can be paying nothing extra on delivery while owning cargo that is somewhere in the middle of an ocean.
All eleven rules, and what they actually mean
Four groups, organised by how far the seller's responsibility goes. The last column is the sentence most often misunderstood.
| Rule | Mode | Seller is responsible for | Risk passes to buyer | Common misunderstanding |
|---|---|---|---|---|
| EXW — Ex Works | Any | Making goods available at their premises | At the seller's premises, before loading | Buyers think the seller handles export paperwork. They usually do not. |
| FCA — Free Carrier | Any | Delivering to the carrier the buyer nominated, and clearing for export | On handover to that carrier | People use FOB for container freight when FCA fits better. |
| FAS — Free Alongside Ship | Sea only | Placing goods alongside the vessel at the port of shipment | Alongside the vessel | Rarely appropriate outside bulk and break-bulk cargo. |
| FOB — Free On Board | Sea only | Getting the goods loaded on board the vessel | Once goods are on board | Used on quotations for air and road freight, where it does not legally apply. |
| CFR — Cost and Freight | Sea only | Freight to the destination port | Once goods are on board, at origin | “Cost and freight” sounds like all risk is included. It is not. |
| CIF — Cost, Insurance and Freight | Sea only | Freight plus minimum marine insurance | Once goods are on board, at origin | The default cover is the narrowest grade, not all risks. |
| CPT — Carriage Paid To | Any | Carriage to the named destination | On handover to the first carrier | Same cost/risk split as CFR, available for any transport mode. |
| CIP — Carriage and Insurance Paid To | Any | Carriage plus all-risk insurance | On handover to the first carrier | The insurance grade is higher than CIF — this is the 2020 change people miss. |
| DAP — Delivered at Place | Any | Delivery to the named place, ready to unload | At the named place, before unloading | Buyers are surprised to be billed duty and import tax on top. |
| DPU — Delivered at Place Unloaded | Any | Delivery and unloading at the named place | After unloading | The only rule where the seller must unload — replaced the old DAT in 2020. |
| DDP — Delivered Duty Paid | Any | Everything: delivery, import clearance, duty and taxes | At the named place, duties paid | Sellers underestimate local tax registration; buyers lose the ability to reclaim import tax. |
Choosing a term without regret
There is no universally correct term, but there is a useful default for each situation. The test is simple: who is better placed to handle each part of the journey?
- Buying from overseas and want it simple? Use DAP. The seller gets it to your address; you keep control of customs clearance and pay your own duty, which is where a business wants control — especially if you can recover import tax.
- Have your own freight forwarder and a good rate? Use FCA or FOB. You choose the carrier, you control the transit, and your forwarder can handle origin handling on your behalf.
- Selling to an overseas customer who is nervous? Quote DAP and make clear that duty and import tax are payable by them. It reads as helpful and keeps you out of a foreign tax registration.
- Sending parcels to consumers? DAP is the norm, with the carrier collecting duty and tax from the recipient at delivery. Some carriers offer a delivered-duties-paid service; if you use it, build the cost into your retail price rather than absorbing it later.
- High-value cargo where you genuinely need all-risk cover? Use CIP, and read the insurance certificate to confirm the cover grade rather than assuming.
What to write next to the Incoterm
A quotation that says only “FOB” has left four decisions to chance. Add these lines to every cross-border quote or purchase order and most disputes never start:
- The named place, precisely. “FOB Ningbo, China” rather than “FOB China”. Ports, terminals and addresses matter.
- The Incoterms version. “Incoterms 2020”. Rules change between editions and the version in force is the one you named.
- Payment terms and currency. The deposit percentage, when the balance falls due, the currency, and who bears bank charges.
- What happens if the goods are late, short or damaged. Notice periods, remedies and who pays for what.
- Which law and which forum. You can name arbitration instead of court, and name the seat. Deciding this before a dispute is dramatically cheaper than deciding it during one.
Frequently asked questions
What is the difference between risk and cost under Incoterms?
Cost is who pays the freight, insurance and handling. Risk is who has to bear the loss if the goods are damaged or destroyed. Under the C-rules (CFR, CIF, CPT, CIP) the seller pays the freight all the way to the destination but risk passes to the buyer much earlier, at the point of loading or handing over to the first carrier. That gap catches out importers who assume that because the seller arranged shipping, the seller is responsible for the cargo.
Which Incoterm is best for a first-time importer?
Usually DAP, or FCA/FOB if you have your own freight forwarder. Under DAP the seller is responsible for delivery to your address and you handle the import clearance and the duty. It removes the overseas logistics burden from you while keeping customs control in your hands, which is where a first-time importer wants it.
Is EXW a good idea for importers?
It is usually a bad idea for an importer. Under EXW the buyer is responsible for everything from the seller's loading bay, including export clearance in a country where the buyer has no registration and no established relationship with the authorities. Many exporters also load the vehicle on the buyer's behalf without accepting liability, so the risk sits with you for a process you do not control.
Does DDP mean I pay no duty?
No. Under DDP the seller pays the duty and taxes, so nothing is charged to you on delivery, but the cost is inside the price you agreed. If you are a VAT/GST-registered business that can recover import tax, DDP can prevent you from reclaiming it because the import is recorded in the seller's name. Check the arrangement before assuming DDP is cheaper.
Do Incoterms apply automatically?
No. They only apply if the contract refers to them explicitly, including the named place and the year — for example, “CIF Rotterdam Port, Incoterms 2020”. A term without a place, or without a version, is ambiguous and will be argued about at the worst possible moment.