Key Takeaways
- Incoterms define who pays for shipping, insurance, and customs at each stage of delivery
- The 11 Incoterms 2020 rules split into two groups: any transport and sea/inland waterway transport only
- Use DAP or DDP for delivered-to-door; use FCA or CPT for most standard shipments
- Always specify the Incoterms version (2020) in your sales contract
- Incoterms only cover buyer-seller obligations, not transfer of ownership
What Are Incoterms?
Incoterms — short for International Commercial Terms — are a standardised set of trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers in international shipping contracts.
In plain English: Incoterms answer the question “Who pays for what?”
Specifically, they clarify:
- Delivery point: Where the seller hands over goods to the buyer
- Risk transfer: When risk passes from seller to buyer
- Cost division: Who pays for shipping, insurance, and customs clearance at each stage
This matters because international freight involves multiple parties — shipper, carrier, customs broker, warehouse operator — and Incoterms establish who is responsible for each stage.
The 11 Incoterms 2020 Rules
Incoterms 2020, the latest version effective since 1 January 2020, contains 11 rules. They split into two groups:
Group 1: Any Mode of Transport
These seven terms can be used regardless of how the goods are shipped:
- 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
Group 2: Sea/Inland Waterway Transport Only
These four terms are exclusively for sea freight:
- FAS — Free Alongside Ship
- FOB — Free on Board
- CFR — Cost and Freight
- CIF — Cost, Insurance and Freight
Breaking Down Each Incoterm
EXW — Ex Works
The seller makes goods available at their premises. The buyer arranges everything from collection onwards — loading, transport, customs, insurance.
When to use: Only when your buyer has strong logistics capabilities. Generally unfavourable for buyers.
Seller’s obligations: Make goods available at factory/warehouse Buyer’s obligations: Loading, export formalities, transport, import formalities, insurance
FCA — Free Carrier
The seller delivers goods to a carrier (or named place) nominated by the buyer. Risk transfers when the carrier takes possession.
When to use: Most common for general cargo. Works for any transport mode.
Seller’s obligations: Export packaging, marking, export clearance, delivery to carrier Buyer’s obligations: Transport, insurance, import clearance
CPT — Carriage Paid To
The seller pays for transport to a named destination. Risk transfers when goods are handed to the first carrier.
When to use: When you want the seller to arrange transport but avoid customs complexity.
Seller’s obligations: Export clearance, transport costs to destination Buyer’s obligations: Insurance, import clearance, risk during transport
CIP — Carriage and Insurance Paid To
Like CPT, but the seller must also obtain insurance covering the buyer’s risk during transport.
When to use: When you want the seller to arrange transport and insurance.
Seller’s obligations: Export clearance, transport costs, minimum insurance cover Buyer’s obligations: Import clearance, risk transfer
DAP — Delivered at Place
The seller delivers goods ready for unloading at the named destination. The buyer handles import clearance and unloading.
When to use: Very popular for delivered-to-door shipments. Seller bears all transport costs to destination.
Seller’s obligations: Export clearance, transport to destination, delivery ready for unloading Buyer’s obligations: Import clearance, unloading
DPU — Delivered at Place Unloaded
The seller delivers goods after unloading at the named destination. This is the only Incoterm where the seller is responsible for unloading.
When to use: When the seller must handle unloading at destination — useful for heavy or hazardous cargo.
Seller’s obligations: Export clearance, transport, unloading at destination Buyer’s obligations: Import clearance
DDP — Delivered Duty Paid
The seller delivers goods with import clearance completed and duty paid. Maximum seller obligation.
When to use: When you want to offer a fully landed service to your buyer (and are registered for import in the destination country).
Seller’s obligations: Everything — export and import clearance, transport, duty, taxes Buyer’s obligations: Assist the seller with import requirements
FAS — Free Alongside Ship
The seller delivers goods alongside the vessel. Used for sea freight only.
When to use: When buyer arranges ocean freight and handles loading.
Seller’s obligations: Export clearance, delivery alongside vessel Buyer’s obligations: Loading, ocean freight, insurance, import clearance
FOB — Free on Board
The seller delivers goods on board the vessel. The foundational sea freight term.
When to use: Most common for sea freight shipments. Seller handles loading onto the vessel.
Seller’s obligations: Export clearance, delivery on board vessel, loading Buyer’s obligations: Ocean freight, insurance, import clearance
CFR — Cost and Freight
The seller pays for transport and loading onto the vessel. Risk transfers when goods are on board.
When to use: Similar to FOB but seller arranges and pays for ocean freight.
Seller’s obligations: Export clearance, transport to port, loading, ocean freight Buyer’s obligations: Insurance, import clearance
CIF — Cost, Insurance and Freight
Like CFR, but the seller must also obtain insurance.
When to use: When you want to include insurance in your quoted price.
Seller’s obligations: Export clearance, transport, loading, ocean freight, insurance Buyer’s obligations: Import clearance
Quick Reference Chart
| Term | Delivery Point | Risk Transfer | Who Pays Freight |
|---|---|---|---|
| EXW | Seller’s premises | When goods placed at buyer’s disposal | Buyer pays all freight |
| FCA | Carrier (named place) | When handed to carrier | Buyer pays main freight |
| CPT | Named destination | When handed to first carrier | Seller pays freight to destination |
| CIP | Named destination | When handed to first carrier | Seller pays freight to destination |
| DAP | Named destination (ready for unloading) | When goods available for unloading | Seller pays freight |
| DPU | Named destination (unloaded) | After unloading at destination | Seller pays freight and unloading |
| DDP | Named destination (duty paid) | When goods available for unloading | Seller pays everything including duty |
| FAS | Alongside vessel at port | When placed alongside vessel | Buyer pays freight |
| FOB | On board vessel | When goods on board vessel | Buyer pays freight |
| CFR | Named destination port | When goods on board vessel | Seller pays freight |
| CIF | Named destination port | When goods on board vessel | Seller pays freight |
UK-Specific Considerations
Brexit and Incoterms
Since Brexit, UK-EU trade involves customs clearance on both sides. When using DAP or DDP for EU deliveries, ensure your Incoterm choice accounts for:
- UK export declaration
- EU import declaration
- Duty and VAT obligations
- EORI numbers for both UK and EU
For more on EORI numbers and UK customs registration, see our EORI number guide.
Insurance Requirements
Under CIP and CIF, sellers must obtain insurance. CIP requires Institute Cargo Clauses (A) — maximum cover, while CIF requires Institute Cargo Clauses (C) — minimum cover. The minimum insurance required under Incoterms 2020 is 110% of CIF value.
DDP and UK Import
Using DDP as a UK buyer means you’re responsible for import clearance and duty. This requires a UK EORI number and customs broker (or directCDS account access).
How to Choose the Right Incoterm
Consider Your Buyer’s Capability
If your buyer is an experienced importer, they may prefer FOB or FCA to control their own shipping. If they’re a smaller business, DAP or DDP removes the logistics burden.
Factor In Your Pricing Strategy
Your Incoterm determines what’s included in your price:
- EXW / FCA: Lower quoted price, buyer pays more
- DDP: Higher quoted price, buyer pays less
Account for Your Logistics Capability
Can you arrange freight? Clear customs in the destination country? If not, stick with FCA or FOB.
Match the Transport Mode
For sea freight: FOB, CIF, CFR, FAS. For any mode (including sea): DAP, DDP, FCA, CPT, CIP.
Common Mistakes to Avoid
Not Specifying the Version
Always state “Incoterms 2020” in your contract. Using old versions (2010, 2000) can cause confusion.
Mixing Terms
Don’t combine Incoterms with other trade terms. Keep it simple.
Assuming Incoterms Cover Everything
Incoterms don’t cover:
- Transfer of ownership
- Payment terms
- Product quality specifications
- Contract of sale terms
These require separate contractual provisions.
Frequently Asked Questions
What is the most commonly used Incoterm? FCA (Free Carrier) and DAP (Delivered at Place) are the most commonly used in modern trade. FOB remains dominant for sea freight.
Should I use DDP as a UK importer? Only if you’re registered for UK import and prepared to pay duty upfront. Most UK importers use DAP or FCA to avoid import complexity. Our guide to import VAT covers the key considerations.
What’s the difference between CIP and CIF? CIP applies to any mode of transport; CIF is sea-only. Both require insurance, but CIP is more versatile. For a full comparison, see our FOB vs CIF guide.
Can I use Incoterms for UK domestic sales? Yes, Incoterms can be used for domestic contracts, though they were designed for international trade. The rules still apply.
What happens if I don’t specify Incoterms? Nothing in law requires Incoterms. Without them, the law defaults to common law principles, which can be ambiguous and lead to disputes.