What are Incoterms?

What Incoterms are, and what they are not

Incoterms are eleven three-letter codes published by the International Chamber of Commerce that answer four questions about a shipment: who pays for each leg of transport, where the risk of loss passes from seller to buyer, who must buy insurance and to what standard, and who handles export and import customs.

They do not decide who owns the goods, when payment is due, what happens if the seller breaches, or which country's law governs the contract. Title and payment terms are separate clauses. An Incoterm with no named place and no governing-law clause is not a contract, it is a slogan.

The rules in force in 2026 are the Incoterms 2020 revision, published in September 2019 and effective from 1 January 2020. The ICC revises roughly every ten years, so the next edition is expected around 2030. Contracts should still say which edition applies: write CIF Los Angeles, Incoterms 2020, because a bare CIF could be read against the 2010 or even the 2000 rules.

The eleven terms

Any mode of transport — seven rules

• EXW, Ex Works — buyer collects from the seller's premises. Seller does nothing but make the goods available. Buyer handles export clearance in a country where it usually has no standing.
• FCA, Free Carrier — seller delivers to a carrier nominated by the buyer, cleared for export. The modern default for container cargo.
• CPT, Carriage Paid To — seller pays carriage to a named destination; risk passes when goods are handed to the first carrier.
• CIP, Carriage and Insurance Paid To — CPT plus insurance, at Institute Cargo Clauses (A) all-risks minimum since the 2020 revision.
• DAP, Delivered at Place — seller delivers to the named place, ready for unloading; buyer clears import and pays duty.
• DPU, Delivered at Place Unloaded — the only rule where the seller must unload. Replaced the old DAT in 2020 and widened it beyond terminals.
• DDP, Delivered Duty Paid — seller does everything, including import clearance, duty, and taxes.

Sea and inland waterway only — four rules

• FAS, Free Alongside Ship — seller places goods alongside the vessel at the named port.
• FOB, Free On Board — risk passes when goods are on board the vessel.
• CFR, Cost and Freight — seller pays ocean freight; risk still passes on loading.
• CIF, Cost Insurance and Freight — CFR plus minimum insurance, at Institute Cargo Clauses (C).

Where risk actually passes

Read this column, not the price column. Cost and risk transfer at different points in six of the eleven rules, and that mismatch is what produces uninsured losses.

• EXW — at the seller's premises, before loading
• FCA — when handed to the buyer's carrier at the named place
• FAS — alongside the vessel
• FOB, CFR, CIF — when the goods are on board the vessel at origin
• CPT, CIP — when handed to the first carrier, which may be a truck leaving the factory
• DAP, DPU, DDP — at the named destination

The four rules where the seller pays the main carriage but the buyer carries the risk during it — CFR, CIF, CPT, CIP — are the ones that generate disputes. The seller's obligation ends legally at origin while their invoice covers the whole voyage. If the vessel sinks, the seller has performed and still gets paid.

The cost split, priced out

One shipment, four terms, so you can see what each code is really worth. 500 stainless steel kitchen tools, 4.2 CBM, Ningbo to a Los Angeles warehouse, 8.5% duty, USD 6,000 of goods.

• Goods — USD 6,000.00 — inside every quote
• Export packing, marking, origin haulage, export clearance — USD 240.00 — buyer's cost under EXW only
• Origin terminal handling and loading — USD 190.00 — buyer's cost under EXW and FAS
• Ocean freight, LCL — USD 780.00 — buyer's cost under EXW, FAS, FOB
• Marine insurance — USD 45.00 — seller's obligation only under CIF and CIP
• Destination terminal handling, CFS, delivery order — USD 490.00 — buyer's cost under everything except DAP, DPU, DDP
• Brokerage and ISF — USD 200.00 — buyer's cost under everything except DDP
• Duty, MPF, HMF — USD 550.21 — buyer's cost under everything except DDP
• Drayage, chassis, fuel — USD 505.00 — buyer's cost under everything except DAP, DPU, DDP

Which produces four very different quoted prices for the same delivered goods:

• EXW Ningbo — quoted USD 6,000, your remaining cost USD 2,765.21, landed USD 8,765.21
• FOB Ningbo — quoted USD 6,430, your remaining cost USD 2,525.21, landed USD 8,955.21 at a supplier who marks up the origin leg, or USD 8,390.21 if you negotiate it flat
• CIF Los Angeles — quoted USD 6,825, your remaining cost USD 1,745.21, landed USD 8,570.21
• DDP Los Angeles warehouse — quoted USD 8,150, your remaining cost nil, landed USD 8,150

The EXW quote is the lowest number and the highest landed cost. That inversion is the single most expensive misunderstanding in first-time importing.

What changed in the 2020 revision

• DAT became DPU. The old Delivered at Terminal only worked at a terminal; DPU works at any place where unloading is possible.
• CIP insurance rose to ICC (A). All-risks cover is now the CIP default. CIF deliberately stayed at the narrow ICC (C) named-perils minimum, because it is used for bulk commodity trades.
• FCA gained an on-board bill of lading option. Sellers on FCA terms can now require the carrier to issue an on-board bill of lading to the seller, which finally made FCA workable under letters of credit.
• Own-means-of-transport was recognised in FCA, DAP, DPU and DDP, for buyers and sellers who truck their own cargo.
• Security-related obligations and costs were written explicitly into each rule.
• The user guidance was rewritten around the four questions above, with cost lines gathered into a single article per rule.

The mistakes that cost the most

• Accepting EXW to get the lowest sticker price. You inherit export customs in a country where you have no broker, no registration, and often no legal ability to file. Real cost lands 2 to 3 times the EXW quote.
• Using FOB for containers. FOB risk passes when goods cross onto the vessel, but a container is handed over at a terminal days earlier. The gap between handover and loading is uninsured under a literal reading. FCA is the correct rule for containerised cargo, and the 2020 bill-of-lading fix removed the last reason not to use it.
• Omitting the named place. DAP alone is meaningless. DAP Rotterdam and DAP the buyer's Rotterdam warehouse are different obligations with a four-figure difference.
• Assuming CIF insurance is real insurance. ICC (C) does not cover water damage, theft, or non-delivery.
• Treating DDP as free customs handling. The seller becomes importer of record, which most foreign suppliers cannot legally be, so the entry is filed in a third party's name and you lose both your paperwork and your import VAT reclaim.
• Mixing the Incoterm with the payment term. An Incoterm never states when money moves. That is your letter of credit or open-account clause.

The 80/20 for most B2B importers

Three rules cover the great majority of small and mid-sized trade: FCA or FOB when you want freight control and cost visibility, CIF when you want the seller to solve origin logistics, and DAP when you want door delivery but need to remain importer of record for VAT purposes. DDP is a beginner's convenience and an auditor's headache. EXW is almost never right unless you have a forwarder with a strong presence at origin.

Full comparison in the Incoterms comparison guide.

Price the term, not the label

An Incoterm is a cost-allocation instruction, so the only way to compare two quotes on different terms is to convert both to landed cost at your door. Put each quote into the landed-cost calculator, add the legs the term leaves to you, and rank by the final per-unit number. The cheapest headline price wins about a third of the time.