Incoterms 2020 Guide: Responsibilities, Costs, and Risk

Incoterms® 2020 help buyers and sellers define who arranges transportation, who pays specific costs, and where the risk of loss or damage transfers. They are widely used in international and domestic sales contracts, but choosing a three-letter rule without understanding its consequences can create unexpected charges, insurance gaps, customs problems, and disputes. This Incoterms2020 guide explains the practical points importers and exporters should review before agreeing to a term.

What Incoterms 2020 Define

The International Chamber of Commerce publishes the Incoterms rules. The current edition, Incoterms 2020, contains 11 rules. Each rule allocates specific obligations between the seller and buyer, including delivery, transportation arrangements, costs, export and import formalities, and the point where risk transfers.

Incoterms do not replace a complete sales contract. They do not determine ownership of the goods, payment terms, price adjustments, product specifications, remedies for breach, sanctions compliance, or every consequence of delay. Those matters should be addressed separately in the contract. The official rules and publications are available from the International Chamber of Commerce.

The 11 Incoterms 2020 Rules

Seven rules may be used with any mode or combination of modes:

• 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
• DDP – Delivered Duty Paid

Four rules are intended only for sea and inland waterway transportation when delivery occurs alongside or on board a vessel:

• FAS – Free Alongside Ship
• FOB – Free on Board
• CFR – Cost and Freight
• CIF – Cost, Insurance and Freight

EXW and FCA: Important Differences at Origin

Under EXW, the seller places the goods at the buyer’s disposal at the named location, usually the seller’s facility. The buyer assumes extensive responsibility from that point. However, the buyer may face practical difficulty arranging loading or completing export formalities in the seller’s country.

FCA is often more practical for international shipments. The seller delivers the goods to the carrier or another party nominated by the buyer at the named place and handles export clearance. The exact named location matters because it determines delivery responsibilities and whether the seller must load the collecting vehicle.

FOB, CFR, and CIF for Ocean Shipments

FOB, CFR, and CIF are commonly used in ocean trade, but they are not automatically appropriate for every container shipment. Under these rules, delivery and risk transfer are linked to the goods being on board the vessel. When containerized cargo is handed to a carrier or terminal before loading, FCA may better reflect the actual delivery process.

Under FOB, the buyer arranges the main carriage. Under CFR, the seller pays the cost and freight to the named destination port, but risk transfers when the goods are on board at origin. CIF follows the same risk structure, while also requiring the seller to obtain the level of cargo insurance specified by the rule. Buyers should not assume that paying the main freight means the seller retains transit risk to destination.

Because insurance requirements and commercial needs may differ, both parties should review the policy terms, limits, exclusions, and claims process. Freight180 provides additional information about cargo insurance for international shipments.

CPT and CIP for Multiple Modes of Transport

CPT and CIP may be used for containerized, air, road, rail, or multimodal transportation. Under both rules, the seller contracts and pays for carriage to the named destination. However, risk normally transfers earlier, when the goods are delivered to the carrier at origin—not when they reach the named destination.

CIP also requires the seller to obtain insurance under the conditions established by Incoterms 2020. The parties should identify the delivery point and destination precisely so that cost and risk are not mistakenly treated as transferring at the same place.

DAP, DPU, and DDP at Destination

Under DAP, the seller delivers the goods at the named destination ready for unloading, while the buyer normally handles unloading and import clearance. Under DPU, the seller also bears the responsibility and risk of unloading at the named destination.

DDP places the broadest obligation on the seller, including import clearance and payment of applicable import duties and taxes. It should be used cautiously because a foreign seller may not be legally or practically able to act as importer of record, register for taxes, obtain permits, or complete local customs procedures. Before agreeing to DDP, confirm the destination-country requirements with qualified customs and tax professionals.

How to Use This Incoterms 2020 Guide

Always write the chosen rule, the precise named place or port, and “Incoterms® 2020” in the sales contract. For example, a contract should identify a specific terminal, warehouse, port, or address rather than naming only a city or country.

• Confirm where delivery occurs and where risk transfers.
• Identify who books each transportation segment and pays each charge.
• Determine who completes export and import formalities.
• Review insurance requirements and any additional coverage needed.
• Align the Incoterm with the payment method, documentary requirements, and actual cargo handoff.

A freight forwarder can explain how a proposed term affects transportation planning and quotations, but the buyer and seller must agree on the commercial term. Legal, customs, and tax questions should be reviewed with the appropriate qualified professionals. Freight180 coordinates ocean freight, air freight, inland transportation, insurance, warehousing, and customs-related services for businesses shipping from the USA to Latin America and the Caribbean.