Incoterms Explained

Incoterms are a set of standardized three-letter trade terms published by the International Chamber of Commerce that define exactly where risk, cost, and responsibility transfer from seller to buyer in an international sale. Getting the wrong term into a contract can silently shift thousands of euros in freight, insurance, and customs liability onto the party who least expected it.

Before standardized terms, "delivered" meant different things in different countries — one party assumed the seller paid for ocean freight, the other assumed the buyer did, and disputes ended up in court. Incoterms remove that ambiguity by defining, for each term, three things: the point where risk of loss or damage passes, who arranges and pays for carriage, and who is responsible for export/import customs clearance. They do not cover price, payment terms, or governing law — those remain separate contract clauses.

The current version, Incoterms 2020, groups eleven terms into two categories: rules for any mode of transport (including multimodal), and rules for sea and inland waterway transport only. Choosing the wrong category — for example using an FOB term for a shipment that actually moves by truck and never touches a vessel — is one of the most common contract errors and can leave a gap in insurance coverage.

Terms for any mode of transport: EXW (Ex Works), FCA (Free Carrier), CPT (Carriage Paid To), CIP (Carriage and Insurance Paid To), DAP (Delivered at Place), DPU (Delivered at Place Unloaded), and DDP (Delivered Duty Paid). These work for road, rail, air, sea, or multimodal shipments and are the safer default for containerized cargo.

Terms for sea and inland waterway only: FAS (Free Alongside Ship), FOB (Free on Board), CFR (Cost and Freight), and CIF (Cost, Insurance and Freight). These reference a "ship's rail" or vessel loading point, so they only make sense for bulk or break-bulk cargo loaded directly onto a vessel — not for containers handed to a carrier at an inland terminal.

• EXW — buyer takes on nearly all risk and cost from the seller's door onward; maximum buyer responsibility.
• FCA — seller delivers to a named carrier or terminal; increasingly the recommended default for container trade.
• DAP / DDP — seller carries risk and cost almost to the buyer's door; DDP even includes import duties.
• CIF / CIP — seller pays freight and insurance to destination, but risk transfers earlier, at origin.

The Incoterm chosen determines who books the freight, which directly affects who controls cost and schedule. A buyer using EXW controls carrier selection and can consolidate multiple suppliers' goods into one shipment, but takes on export customs formalities that a foreign buyer often cannot legally complete alone in the seller's country — a frequent EXW pitfall. Conversely, DDP shifts import duties and taxes onto the seller, who may not be registered for VAT or duty deferment in the buyer's country, creating customs delays that neither party anticipated.

Insurance only appears explicitly in CIF and CIP; under 2020 rules, CIP requires higher-level "Institute Cargo Clauses (A)" coverage while CIF still only requires minimum "Clauses (C)" coverage, so a CIF buyer receiving a shipment insured at minimum level may face gaps for theft or rough handling.

For containerized general cargo, most trade practitioners now recommend FCA over FOB, since FOB technically requires goods to cross the ship's rail — a concept that does not apply cleanly to a container handed over at an inland container yard days before loading. Using FOB for container trade can leave a coverage gap between the inland terminal and the vessel.

• Match the term to the actual transport mode — sea-only terms for vessel-loaded bulk, "any mode" terms for containers and multimodal.
• Confirm who is legally able to complete export/import clearance in each country before agreeing to EXW or DDP.
• Specify the named place precisely (e.g. "FCA Rotterdam Container Terminal") — a vague place name is a common source of disputes.
• Always state which Incoterms version applies ("Incoterms 2020") in the contract, since older versions remain valid and can still be used by agreement.