Incoterms Explained in Plain English

If you have ever received a quote with letters like FOB or DAP after the price, you have met Incoterms. They look like jargon, but the idea is simple: when goods travel from a seller to a buyer, somebody has to arrange transport, pay for it, clear customs and carry the risk if something is lost or damaged. Incoterms say who does what. This article offers Incoterms explained in plain English, with practical advice on choosing between them.

Incoterms is a trademark of the International Chamber of Commerce (ICC), which publishes the rules. The current edition at the time of writing is Incoterms 2020. This article is a general introduction; consult the official ICC text and a qualified adviser for contracts.

What Incoterms do (and do not do)

Incoterms are standard three-letter trade terms that define, between buyer and seller:

Delivery: where the seller’s job ends and the buyer’s begins.
Costs: who pays for transport, insurance, export and import clearance, and loading and unloading.
Risk: at what point the risk of loss or damage passes from seller to buyer.

They do not:

Set the price or payment terms
Decide when ownership (title) passes
Replace a sales contract
Cover what happens after a breach or a dispute
Apply automatically; you must write them into the contract, ideally with the edition and named place, for example “FCA Hamburg Incoterms 2020”

Two families: any mode and sea only

Incoterms 2020 contain eleven rules in two groups.

Rules for any mode of transport (including multimodal):
EXW, FCA, CPT, CIP, DAP, DPU, DDP

Rules for sea and inland waterway transport only:
FAS, FOB, CFR, CIF

A common error is using a sea-only term, such as FOB, for container shipments that are handed to a carrier at an inland terminal. In those cases the any-mode equivalent (FCA) usually fits better.

The eleven rules in plain English

EXW (Ex Works)

The seller makes the goods available at its own premises. The buyer arranges everything else: loading, export clearance, transport and import. Maximum responsibility for the buyer. Often used for simple domestic deals, but export clearance can be difficult for a foreign buyer, which is a common source of problems.

FCA (Free Carrier)

The seller delivers the goods, cleared for export, to the carrier or other party named by the buyer at a named place. If the named place is the seller’s premises, the seller loads the goods; if it is elsewhere, the buyer unloads. A flexible, widely recommended term for containerised and multimodal shipments.

CPT (Carriage Paid To)

The seller arranges and pays for carriage to a named destination, but risk passes to the buyer once the goods are handed to the first carrier. So the seller pays for the journey, but the buyer carries the risk during it.

CIP (Carriage and Insurance Paid To)

Like CPT, but the seller must also buy cargo insurance. Under Incoterms 2020, CIP requires a higher level of insurance cover than CIF, equivalent to the broadest standard clauses, unless the parties agree otherwise.

DAP (Delivered at Place)

The seller delivers when the goods are placed at the buyer’s disposal on the arriving means of transport, ready for unloading, at the named destination. The seller bears the risk and cost up to that point, including export clearance. The buyer unloads and handles import clearance, duties and taxes.

DPU (Delivered at Place Unloaded)

Introduced in 2020 to replace DAT. The seller delivers once the goods are unloaded at the named place. This is the only rule that requires the seller to unload.

DDP (Delivered Duty Paid)

The seller delivers cleared for import and bears all costs and risks up to the named destination, including import duties and taxes. Maximum responsibility for the seller. It can be tricky if the seller cannot easily handle import clearance in the buyer’s country, so many sellers prefer DAP.

FAS (Free Alongside Ship)

The seller delivers when the goods are placed alongside the vessel at the named port, for example on the quay. Sea only. Used mostly for bulk or heavy cargo.

FOB (Free On Board)

The seller delivers when the goods are on board the vessel nominated by the buyer at the named port of shipment. Risk passes at that point. Sea only. Very widely used, though often misused for containers.

CFR (Cost and Freight)

The seller pays the cost of carrying the goods to the destination port, but risk passes to the buyer once the goods are on board at the port of shipment. Sea only.

CIF (Cost, Insurance and Freight)

Like CFR, plus the seller buys minimum cargo insurance for the buyer’s benefit. Sea only.

Quick comparison table

Rule	Who arranges main carriage	Risk passes	Export clearance	Import clearance
EXW	Buyer	At seller’s premises	Buyer	Buyer
FCA	Buyer	When handed to buyer’s carrier	Seller	Buyer
CPT	Seller	When handed to first carrier	Seller	Buyer
CIP	Seller	When handed to first carrier	Seller	Buyer
DAP	Seller	At destination, ready to unload	Seller	Buyer
DPU	Seller	At destination, unloaded	Seller	Buyer
DDP	Seller	At destination, ready to unload	Seller	Seller
FAS	Buyer	Alongside ship	Seller	Buyer
FOB	Buyer	On board vessel	Seller	Buyer
CFR	Seller	On board at origin port	Seller	Buyer
CIF	Seller	On board at origin port	Seller	Buyer

This table is a simplification. Always refer to the official rules for detailed obligations.

Why the “risk” point matters

Imagine a container lost at sea. Under FOB or CIF, the buyer already bears the risk once the goods are on board, so the buyer must claim from the insurer or carrier. Under DAP, the risk remains with the seller until arrival, so the seller must deal with the loss. Whoever has the risk should usually hold the insurance, which is why mismatches between “who pays freight” and “who bears risk” (as in CPT, CFR or CIF) deserve attention.

How to choose

Consider:

Your experience. If you are new to international trade and lack a forwarder, EXW places all the work on you, whereas DAP might hand it to the seller.
Mode of transport. Use sea-only terms only for conventional sea shipments; choose FCA, CPT, CIP, DAP, DPU or DDP for containers and multimodal movements.
Control. Whoever arranges transport controls timing and cost. If you have strong freight rates, you may prefer to arrange shipping yourself (FCA or FOB).
Customs capabilities. Who is better placed to clear customs? That party should handle it.
Risk and insurance. Make sure whoever bears the risk is insured appropriately.
Price comparability. When comparing quotes, make sure they use the same term. A cheap EXW price may be more expensive than a DAP price once you add freight.

Common mistakes

Choosing a term without a named place. “FOB” alone is incomplete; “FOB Shanghai” is better.
Using FOB or CIF for containers handed over inland.
Assuming the seller handles insurance under terms that do not require it.
Assuming DDP is “easy” for the buyer; the seller may be unable to clear customs properly, leading to delays.
Mixing old and new editions. Specify “Incoterms 2020” so there is no confusion with previous editions.
Confusing delivery with payment. Incoterms do not say when you pay.
Ignoring local rules. Some countries restrict certain terms or require particular parties to clear goods.

Example: the same sale under different terms

Imagine a buyer in one country purchasing a pallet of goods from a manufacturer elsewhere.

Under EXW: the buyer collects at the factory, handles export and import clearance, pays all freight and bears all risk from pick-up.
Under FCA (seller’s premises): the seller loads the buyer’s truck and clears exports; the buyer handles the rest.
Under CIP (destination warehouse area): the seller arranges transport and insurance to the named place, but risk passes at handover to the first carrier.
Under DAP (buyer’s door): the seller delivers on the arriving vehicle; the buyer unloads and clears import.
Under DDP: the seller does almost everything, including import duties, and delivers.

The same goods cost different amounts and carry different responsibilities in each case, which is why comparing prices without comparing terms is misleading.

Practical tips for writing Incoterms into a contract

Write the rule, the named place and the edition: “DAP Rotterdam warehouse, Incoterms 2020”.
Be precise about the place. A port name can be too broad; specify the terminal or address.
State who is responsible for loading, unloading and any security or inspection requirements.
Cross-check your insurance arrangements with the chosen term.
Align your payment instruments with the term. For example, if using a letter of credit, make sure the documents required match the terms.
Discuss your choice with your freight forwarder.

For the wider picture of a trade transaction, read our international trade basics for small companies and how to write a purchase order.

International Trade Basics for Small Companies
Freight Forwarders: What to Compare Before Choosing

Frequently asked questions

Are Incoterms legally required?
No. They are optional, but widely used. They only apply if you include them in your contract.

What is the difference between FOB and FCA?
FOB is for sea transport and delivery happens on board the vessel. FCA applies to any mode and delivery happens when goods are handed to the carrier at a named place. FCA is usually better for containers.

Which Incoterm is best for a beginner?
There is no single answer. Many beginners prefer a term where the seller handles more of the journey (for example DAP) or a flexible one like FCA with a trusted forwarder. Ask a forwarder to compare landed costs.

Do Incoterms say who pays customs duties?
They say who is responsible for import clearance and its costs, generally the buyer except under DDP. Taxes and duties still depend on local law.

Conclusion

Incoterms are a shared shorthand that answers three questions: where does delivery happen, who pays for what, and who carries the risk. Pick the rule that matches your mode of transport and capabilities, name the place and the edition, and make sure your insurance and payment terms line up. A few extra minutes on the term can prevent expensive disputes later.