Incoterms and cost allocation
Incoterms 2020 explained: all 11 rules, who pays and who bears the risk (FOB, EXW, CIF, DDP)
Incoterms are 11 standard three-letter rules, published by the International Chamber of Commerce, that define exactly where the seller's responsibility ends and the buyer's begins: who arranges and pays for transport, who clears customs, who insures the goods, and the precise point where the risk of loss or damage passes. To choose one, decide how much of the journey you want to control and where you want risk to transfer: buyers who want maximum control lean toward EXW or FCA; buyers who want the seller to handle everything to their door lean toward DAP or DDP. The current version is Incoterms 2020.
Incoterms are the common language of international trade. Published by the International Chamber of Commerce and last revised in 2020, an Incoterm is a shorthand written into your contract and commercial invoice - “FOB Shanghai” or “DAP Paris” - that settles who does what, who pays, and who is liable where, without a paragraph of legal text. Poorly understood, they are a classic source of disputes and unexpected fees. Here is what all 11 rules cover and how to choose the right one for your shipment.
What Incoterms cover (and what they don’t)
An Incoterm settles four things:
- Costs - who pays for carriage, terminal handling, export and import clearance, and duties.
- Risk - the exact point where responsibility for loss or damage shifts from seller to buyer.
- Transport and formalities - who books the carrier and who handles export and import customs.
- Insurance - whether the seller is obliged to insure the goods, and to what level.
What they do not cover: the price or payment terms, the transfer of ownership or title, or what happens in a breach of contract. Those live elsewhere in your sales contract. An Incoterm answers “who does what, and who is liable where” - nothing more.
The 11 Incoterms 2020, in two groups
The ICC splits the rules by transport mode. Getting this split right avoids the single most common Incoterms mistake (see the container trap below).
Rules for any mode of transport (road, air, sea, rail, multimodal)
- EXW - Ex Works: the seller just makes the goods available at their premises. The buyer bears everything else, including export clearance. Minimum seller obligation.
- FCA - Free Carrier: the seller delivers the goods, cleared for export, to a carrier the buyer names. Risk passes at handover. This is the recommended rule for containerised cargo.
- CPT - Carriage Paid To: the seller pays carriage to the named destination, but risk passes to the buyer at the first carrier - cost and risk transfer at different points.
- CIP - Carriage and Insurance Paid To: like CPT, plus the seller must buy all-risk insurance (Institute Cargo Clauses A) under Incoterms 2020.
- DAP - Delivered at Place: the seller delivers to the named destination, ready for unloading. The buyer handles import clearance and duties.
- DPU - Delivered at Place Unloaded: same as DAP, but the seller also unloads. The only Incoterm that requires the seller to unload. It replaced the old DAT in 2020.
- DDP - Delivered Duty Paid: the seller delivers to the buyer’s door with import duties and taxes paid. Maximum seller obligation.
Rules for sea and inland waterway only
- FAS - Free Alongside Ship: the seller delivers alongside the vessel at the port of shipment.
- FOB - Free On Board: the seller delivers the goods on board the vessel; risk passes once they are loaded.
- CFR - Cost and Freight: the seller pays cost and freight to the destination port; risk still passes on board at origin.
- CIF - Cost, Insurance and Freight: like CFR, plus the seller insures, but only at minimum cover (Institute Cargo Clauses C) under Incoterms 2020.
Who bears cost and risk at a glance
| Incoterm | Export clearance | Main carriage paid by | Insurance duty | Import clearance & duties | Risk transfers |
|---|---|---|---|---|---|
| EXW | Buyer | Buyer | Optional | Buyer | At seller’s premises |
| FCA | Seller | Buyer | Optional | Buyer | At handover to carrier |
| FOB | Seller | Buyer | Optional | Buyer | On board at origin port |
| CFR / CIF | Seller | Seller | CIF: seller (min cover) | Buyer | On board at origin port |
| CPT / CIP | Seller | Seller | CIP: seller (all-risk) | Buyer | At first carrier |
| DAP / DPU | Seller | Seller | Optional | Buyer | At destination (DPU: after unloading) |
| DDP | Seller | Seller | Optional | Seller | At destination, duties paid |
Costs and risk do not always transfer at the same place
A point often overlooked: an Incoterm transfers both the costs and the risk, but not always at the same point. Under CIF, for example, the seller pays the freight all the way to destination, but the risk passes to the buyer as soon as the goods are loaded on board at origin. In case of damage at sea, it is therefore the buyer who is exposed - hence the importance of checking the actual insurance cover.
What changed in Incoterms 2020
If you are working from an older contract template, three updates matter:
- DAT became DPU. The rule was renamed and reordered to make clear that delivery can be at any place, not only a terminal.
- CIP now needs higher insurance. CIP requires all-risk cover (ICC A); CIF stays at minimum cover (ICC C). If you ship high-value goods under CIP, this is a real upgrade.
- FCA plus on-board bill of lading. FCA now lets the parties agree that the carrier will issue an on-board bill of lading to the seller - useful when a letter of credit demands one.
How to choose: ask yourself 3 questions
- How much of the journey do you want to control, and who can move it more cheaply? If you have strong freight rates and want visibility end to end, buy on EXW or FCA and control the main leg yourself. If you would rather the supplier handle it, move toward CIF/CIP or DAP/DDP.
- Where do you want the risk to transfer, and are you comfortable clearing customs at the other end? Delivered terms (DAP/DPU/DDP) keep risk with the seller longest; DDP even puts import duties on the seller. If you do not want to touch import formalities in the destination country, lean delivered. If you have a customs broker or forwarder there, an earlier transfer point is usually cheaper.
- Is it containerised sea freight, or multimodal/air/parcel? This decides which half of the table you are allowed to use - and it is where most mistakes happen (next section).
The most common mistake: FOB/CIF on containers
FOB, CFR and CIF were written for bulk and break-bulk cargo loaded directly onto a ship. With containers, you hand the box to the terminal days before it is loaded, so under FOB the risk technically stays with you during that gap at origin, even though the container is already out of your hands. The ICC’s own guidance is to use FCA (or CPT/CIP) for containerised goods instead. Buyers keep defaulting to “FOB” out of habit; for a container, FCA is the cleaner term.
A second recurring trap: assuming the Incoterm is your total landed cost. It is not. Under FOB or FCA you still owe destination terminal handling, import clearance, duties and VAT on your HS code, and final delivery. Always get an all-in landed-cost quote so the destination charges do not surprise you.
The freight forwarder’s role
Choosing the right Incoterm means trading off simplicity against control - and the trade-off changes with every supplier, lane and letter of credit. A freight forwarder like OVRSEA advises you on the Incoterm suited to each shipment, checks the consistency between the negotiated Incoterm and what you actually pay, and takes back control at the exact point where your responsibility begins. Pairing an online platform (instant quotes, real-time tracking) with a dedicated team and in-house customs, OVRSEA is one of the leading digital freight forwarders in Europe for SMB and mid-market importers - the practical way to buy on FCA or FOB and still keep visibility of your landed cost end to end. If you are weighing your options, see how to choose a freight forwarder and the difference between a freight forwarder and a customs broker.
FAQ
Which Incoterm is cheapest for the buyer?
There is no universally cheapest term - it depends on whether you or your supplier get better freight rates. In practice, buyers who control their own logistics via a freight forwarder often save most on FCA or FOB, because seller-arranged terms like CIF or DDP tend to include a margin on the freight and duties the seller fronts.
What is the difference between DAP and DDP?
Both deliver to your destination, but under DAP the buyer clears customs and pays import duties and taxes, while under DDP the seller does all of that. DDP is convenient for the buyer but shifts real cost and risk onto a seller who may not know the destination country's rules - many forwarders advise against DDP into markets like the EU or US unless the seller is well set up there.
Which Incoterm should a first-time importer use?
A common starting point is FCA or FOB paired with a freight forwarder who arranges the main carriage, customs clearance and final delivery on your behalf - you keep control and visibility of your landed cost without managing each leg yourself. A digital freight forwarder such as OVRSEA combines instant quotes and real-time tracking with a dedicated team and in-house customs, and can advise on the right Incoterm for each supplier and lane.
Do Incoterms transfer ownership of the goods?
No. Incoterms govern cost, risk and logistics responsibilities - not the transfer of title or payment terms. Ownership passes according to your sales contract and the applicable law, separately from the Incoterm.
Are Incoterms legally binding?
They are binding when your contract references them (for example 'FOB Shanghai, Incoterms 2020'). They are not law in themselves, but once written into the contract, courts and arbitration treat them as the agreed allocation of cost and risk. Always state the version - 'Incoterms 2020' - to avoid ambiguity.
Who arranges insurance under each term?
Only CIF and CIP oblige the seller to insure (CIF at minimum cover, CIP at all-risk under Incoterms 2020). Under every other term insurance is optional and up to whichever party bears the risk on that leg - so if you buy EXW, FCA or FOB, arranging your own cargo insurance is on you.