ELISHAR Knowledge Centre
Incoterms 2020: Costs, Responsibilities and Risk in International Trade
Trade terms determine much more than who pays for freight. Learn how to specify the delivery point, establish who handles customs and align the seller, buyer and freight forwarder.
What Incoterms cover, and what they do not
The International Chamber of Commerce’s Incoterms® 2020 rules help define which party arranges transport, insurance, documents and customs formalities, who bears each cost and when the risk of loss or damage passes from seller to buyer. ICC sets out 11 rules. See ICC’s official explanation.
An Incoterm does not replace a sales contract. It does not, by itself, determine the sale price, payment terms, transfer of ownership or applicable law. These matters should also be set out expressly in the contract.
ICC’s official introduction explains the scope of the rules and how to incorporate them into a contract.
An Incoterm does not replace a sales contract. It does not, by itself, determine the sale price, payment terms, transfer of ownership or applicable law. These matters should also be set out expressly in the contract.
ICC’s official introduction explains the scope of the rules and how to incorporate them into a contract.
Two groups of rules
Seven rules apply to any mode or combination of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP. Four apply specifically to sea and inland waterway transport: FAS, FOB, CFR and CIF.
This distinction is particularly important for containerised cargo. The question is where the goods are actually delivered and when risk transfers, rather than simply whether a vessel forms part of the journey.
This distinction is particularly important for containerised cargo. The question is where the goods are actually delivered and when risk transfers, rather than simply whether a vessel forms part of the journey.
Differences to understand before agreeing a shipment
Under FCA, delivery takes place at the named place. At the seller’s premises, delivery occurs once the goods are loaded onto the transport arranged by the buyer; at another location, the applicable delivery requirements differ. FOB concerns delivery on board a vessel. The use of sea transport alone therefore does not make FOB the appropriate choice.
Under CIF and CIP, the seller pays for transport and insurance to the agreed destination, but risk transfers to the buyer earlier: under CIF, on delivery on board the vessel; under CIP, on delivery to the carrier as specified by the rule. The default insurance cover differs, so the terms actually agreed must be checked.
Under DAP, goods are delivered at the destination ready for unloading, and the buyer handles import formalities. Under DDP, the seller also handles import clearance and the applicable duties and taxes under the rule. Before selecting DDP, check whether the seller can fulfil these requirements in the destination country.
Further reading: ICC rules for any mode of transport and ICC rules for sea transport.
Under CIF and CIP, the seller pays for transport and insurance to the agreed destination, but risk transfers to the buyer earlier: under CIF, on delivery on board the vessel; under CIP, on delivery to the carrier as specified by the rule. The default insurance cover differs, so the terms actually agreed must be checked.
Under DAP, goods are delivered at the destination ready for unloading, and the buyer handles import formalities. Under DDP, the seller also handles import clearance and the applicable duties and taxes under the rule. Before selecting DDP, check whether the seller can fulfil these requirements in the destination country.
Further reading: ICC rules for any mode of transport and ICC rules for sea transport.
The named place is part of the term
Writing only “FCA” or “DAP” is not enough. Specify a precise location and the edition, for example: FCA seller’s warehouse, full address, Incoterms® 2020. A few kilometres between a factory gate, terminal and port can change collection, loading, terminal and waiting costs.
The named location must be understood by the seller, buyer, forwarder, insurer and customs representatives. If the parties use different names for the same place, include an address or clear delivery instructions.
The named location must be understood by the seller, buyer, forwarder, insurer and customs representatives. If the parties use different names for the same place, include an address or clear delivery instructions.
Choosing terms that fit the transaction
No single term is best for every importer. The choice depends on each party’s ability to manage transport, familiarity with local requirements, negotiating position with carriers, insurance needs and the level of cost transparency required:
- Match the rule to the mode of transport and the actual delivery point.
- Check who can handle export and import clearance in each country.
- Distinguish the point where risk transfers from the party paying for transport.
- Confirm who arranges insurance and the scope of cover.
- Agree terminal, storage, unloading and local transport costs in writing.
What to send your forwarder before confirming the order
Send the supplier’s quotation showing the Incoterm and named place, collection and delivery addresses, cargo description, packaging, weight, dimensions and schedule. This allows the forwarder to identify which stages are already covered and which services still need to be arranged.
Early coordination with your freight forwarder and customs broker helps identify gaps before dispatch, when corrections are usually easier.
For illustration, if CIP to a named destination has been agreed, do not assume that the seller’s payment for transport means the seller retains risk until arrival. Identify the risk transfer point and the insurance document separately, and review them alongside the shipment documents.
Early coordination with your freight forwarder and customs broker helps identify gaps before dispatch, when corrections are usually easier.
For illustration, if CIP to a named destination has been agreed, do not assume that the seller’s payment for transport means the seller retains risk until arrival. Identify the risk transfer point and the insurance document separately, and review them alongside the shipment documents.
Questions and answers
Which Incoterm is best?
No single rule suits every transaction. The choice depends on transport mode, delivery point, each party's ability to handle customs, insurance needs and the degree of control required.
Do costs and risk transfer at the same point?
Not always. Under some Incoterms rules, one party pays for transport to a later point even though risk has transferred earlier. Review cost allocation and risk transfer separately.
Is DDP always more convenient for the buyer?
DDP may appear straightforward for the buyer, but it is suitable only when the seller can meet the destination country's import, registration and tax requirements. Otherwise, delays and unexpected costs may result.
Can an Incoterm be changed after dispatch?
A change requires clear commercial agreement and coordination with the forwarder, insurer and customs representatives. Once cargo is moving, some costs and risks have already arisen, so agree the rule and named place before booking.
This article provides general information for initial planning. Documentation, import requirements, customs procedures and trade terms vary according to the goods, country and circumstances. Obtain advice specific to your shipment before taking action.
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