Incoterms® 2020: the 11 rules explained simply

The 11 rules at a glance

Only two rules require the seller to take out insurance: CIP (Institute Cargo Clauses A cover or equivalent) and CIF (minimum Institute Cargo Clauses C cover). The detail of each rule is set out below.

The 7 rules for any mode of transport

EXW - Ex Works : the seller places the goods at the buyer's disposal at the agreed place - usually its own premises - packed and ready for loading. Risk transfers to the buyer from that moment: loading, transport, export and import formalities are at the buyer's cost and risk. It is the Incoterm most favourable to the seller, but often awkward for a non-resident buyer (export formalities).

FCA - Free Carrier : the seller hands the goods over, cleared for export, to the carrier nominated by the buyer, either at its own premises - where it loads the collecting vehicle - or at another agreed place, where the goods are delivered ready for unloading. Risk transfers on that handover. FCA is today the recommended alternative to EXW and FOB for containerised flows.

CPT - Carriage Paid To : the seller pays for the main carriage to the agreed point, but risk transfers to the buyer as soon as the goods are handed to the first carrier. Watch the split between the point where costs transfer and the point where risks transfer.

CIP - Carriage and Insurance Paid To : identical to CPT, with the addition of insurance taken out by the seller for the buyer's benefit, in line with Institute Cargo Clauses (A) or equivalent cover, unless the parties agree otherwise. Risk nonetheless still transfers on handover to the first carrier, not at destination. It is the recommended Incoterm for high-value multimodal consignments.

DAP - Delivered at Place : the seller bears the costs and risks up to the point where the goods are placed at the buyer's disposal, ready for unloading, at the agreed destination. Import clearance remains the buyer's responsibility.

DPU - Delivered at Place Unloaded : successor to DAT, DPU is the only Incoterm that requires the seller to unload the goods at destination. The costs and risks of transport up to unloading are borne by the seller; import duties and taxes remain with the buyer.

DDP - Delivered Duty Paid : the seller bears the costs and risks up to the agreed destination and takes on all formalities - export, transit and import - as well as import duties and taxes. Unloading at destination remains, in principle, the buyer's responsibility. It is the most demanding Incoterm for the seller, to be handled with care if you are not familiar with the customs, tax and VAT obligations of the destination country.

The 4 sea and inland waterway rules

FAS - Free Alongside Ship : reserved for sea transport. The seller delivers the goods alongside the vessel at the agreed port of shipment, cleared for export. Risk passes at that moment. It suits bulk cargo and out-of-gauge packages in particular.

FOB - Free On Board : the seller delivers the goods on board the vessel nominated by the buyer at the agreed port of shipment, cleared for export. Risk and costs transfer once the goods are loaded on board the vessel - no longer at the “ship's rail”, a reference the ICC dropped with Incoterms 2010. Best avoided for containers, for which FCA is more suitable (the container is handed over at the terminal, not loaded on board by the seller).

CFR - Cost and Freight : the seller pays the sea freight to the port of destination, but risk transfers to the buyer as soon as the goods are loaded on board at the port of departure. As with CPT, the split between costs and risks is a contractual point to watch.

CIF - Cost, Insurance and Freight : identical to CFR, with the addition of minimum marine insurance (Institute Cargo Clauses C) taken out by the seller, often topped up by additional cover on the buyer's side. Risk still transfers on loading on board at the port of departure, even though the seller pays freight and insurance to the port of destination.

How to choose the right Incoterm

Three practical criteria guide the choice:

• The mode of transport: pure sea, or multimodal / containerised
• The level of control you want over the logistics chain
• Your command of customs and tax formalities in the destination country

An ill-suited Incoterm can generate extra costs, disputes or an allocation of responsibilities that was poorly anticipated on an international consignment.

The most frequent mistakes

The ones we correct most often for our customers:

• Using EXW for international shipments: a non-resident buyer cannot always clear the goods for export
• Using FOB for containers: prefer FCA at the terminal
• Not stating the exact place after the Incoterm: “FCA Bergheim, Freight Solutions warehouse” is safer than “FCA France”
• Agreeing to DDP without having checked the tax obligations of the destination country (import VAT, fiscal representative where applicable)

How we support you

At Freight Solutions, as manager and architect of freight flows, we advise our customers on the choice of Incoterm for every import or export operation: securing documents, coordinating the freight forwarder, handling customs, ad valorem insurance. Our customs team and our European and international transport plan support you across the whole chain, from the factory to the final delivery point.

Need a view on which Incoterm to use for your next consignment? Our team is available to analyse your flow and propose the safest and most economical configuration. Contact us from the Contact page of this site.

Please note: this guide gives a practical summary of the Incoterms® 2020 rules. It does not replace the official publication of the International Chamber of Commerce, and the choice of a rule has to be assessed contract by contract, according to the goods, the mode of transport and the applicable regulations.