Few three-letter acronyms cause as many disputes as Incoterms. They look like jargon, but they answer two questions that decide who wins or loses money on every international shipment: who pays for each leg of the journey, and at what exact point does risk pass from the seller to the buyer?
What Are Incoterms?
Incoterms — short for International Commercial Terms — are a set of 11 standardised three-letter rules published by the International Chamber of Commerce (ICC). The current edition is Incoterms 2020. They do not replace your sales contract; they slot into it and define the division of cost, risk and responsibility between seller and buyer.
The 11 Rules at a Glance
Seven rules work for any transport mode (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and four are for sea/inland-waterway only (FAS, FOB, CFR, CIF). They run on a spectrum: at one end EXW (Ex Works) puts almost everything on the buyer; at the other DDP (Delivered Duty Paid) puts almost everything on the seller.
FOB — Free On Board
Under FOB, the seller delivers the goods, cleared for export, on board the vessel at the named origin port. Risk passes once the goods are on board. From that moment the buyer pays the ocean freight, insurance and destination charges. FOB is popular because it gives the buyer control of the main carriage — but note the ICC recommends FCA instead for containerised cargo, since containers are handed over at a terminal, not loaded directly by the shipper.
CIF — Cost, Insurance and Freight
With CIF, the seller pays the cost and freight to the destination port and buys insurance for the buyer. Crucially, risk still passes at the origin port (when goods are on board) even though the seller pays freight to destination — a classic source of confusion. CIF only applies to sea freight; its all-mode cousin is CIP.
DDP — Delivered Duty Paid
DDP is the maximum obligation for the seller: they deliver to the buyer's door, having paid export and import customs duties and taxes. It is the simplest term for the buyer but the riskiest for the seller, who must navigate a foreign customs regime — including, in many countries, VAT they may not be able to recover.
How to Choose
- Want control of freight and a better rate? Buy on FCA/FOB and arrange carriage yourself.
- Want a simple all-in landed price? Lean toward DAP or DDP.
- Shipping containers? Prefer FCA, CPT or CIP over FAS/FOB/CFR/CIF.
- Always name the precise place (e.g. "FOB Shanghai" or "DAP Jebel Ali") and the Incoterms 2020 edition in the contract.
Sources & Further Reading
- International Chamber of Commerce — Incoterms® 2020 Rules (iccwbo.org).
- ICC guidance on container shipments and the FCA recommendation.
- UK Department for Business & Trade — Incoterms guidance for exporters.
This article is general guidance, not legal advice. Always confirm terms in your written contract.
