Incoterms 2020 Explained: Which One Should You Use?

Incoterms (International Commercial Terms) define who is responsible for what in an international shipment — who pays for transport, who bears the risk at each stage, and who handles insurance and customs. Published by the International Chamber of Commerce (ICC), the current version is Incoterms 2020, which has been in effect since January 2020.

Choosing the wrong Incoterm can leave you paying for costs you didn't expect or bearing risk you didn't know you had. This guide explains each term in plain English and helps you choose the right one for your trade.

Why Incoterms matter

Incoterms determine three critical things. First, the point at which risk transfers from seller to buyer — this defines who bears the financial consequence if cargo is damaged, delayed, or lost at any stage of the journey. Second, who pays for what — transport, insurance, customs clearance, terminal handling, and all the other costs involved in moving goods internationally. Third, who is responsible for arranging what — booking the carrier, arranging insurance, handling export and import customs.

Getting this wrong can be expensive. A buyer on DDP terms who doesn't realise they're responsible for all costs until final delivery may be shocked by demurrage charges at a congested port. A seller on FOB terms who assumes risk transfers when the goods leave their warehouse may discover they're still liable until the cargo is loaded on the vessel.

The 11 Incoterms 2020

Incoterms 2020 defines 11 terms, split into two groups: terms for any mode of transport and terms specifically for sea and inland waterway transport.

Any mode of transport (7 terms)

EXW — Ex Works. The seller makes the goods available at their premises. The buyer bears all costs and risk from that point — including export customs, loading, and all transport. This is the minimum obligation for the seller and maximum obligation for the buyer.

FCA — Free Carrier. The seller delivers the goods to the carrier at a named place (their premises or another location). Risk transfers when the goods are handed to the carrier. The seller handles export customs. This is the most commonly recommended term for containerised shipments because risk transfers at a clearly defined point.

CPT — Carriage Paid To. The seller pays for transport to the named destination, but risk transfers when the goods are handed to the first carrier at origin. This means the seller pays for shipping but doesn't bear the risk during transit. Confusing? Yes. That's why CPT requires clear communication about insurance.

CIP — Carriage and Insurance Paid To. Same as CPT, but the seller must also arrange insurance covering the buyer's risk during transit. Under Incoterms 2020, CIP requires "all risks" insurance coverage (ICC A clauses) — an upgrade from the previous minimum requirement.

DAP — Delivered at Place. The seller delivers the goods to the named destination, bearing all cost and risk until arrival. The buyer handles import customs clearance and unloading. DAP is popular for shipments where the seller wants to control the logistics but the buyer handles local customs.

DPU — Delivered at Place Unloaded. Same as DAP, but the seller also handles unloading at the destination. This is the only Incoterm where the seller is responsible for unloading.

DDP — Delivered Duty Paid. The seller bears all costs and risk until the goods are delivered to the buyer's premises, including import customs clearance and duty payment. This is the maximum obligation for the seller. DDP means the seller owns the entire logistics chain — and every delay, every demurrage charge, every customs issue is their problem.

Sea and inland waterway transport only (4 terms)

FAS — Free Alongside Ship. The seller delivers the goods alongside the vessel at the port of loading. Risk transfers at that point. Rarely used for containerised cargo because containers are typically delivered to the terminal, not alongside the vessel.

FOB — Free on Board. The seller delivers the goods on board the vessel at the port of loading. Risk transfers when the goods pass the ship's rail. FOB is one of the most commonly used terms in ocean freight, particularly in commodity trading. However, for containerised cargo, the ICC recommends FCA instead because the risk transfer point (on board the vessel) is difficult to determine for containers that are loaded at a terminal, not at the ship's rail.

CFR — Cost and Freight. The seller pays for transport to the destination port, but risk transfers when the goods are loaded on board at origin. Like CPT, there's a split between who pays and who bears the risk.

CIF — Cost, Insurance and Freight. Same as CFR, but the seller must also arrange insurance. Under Incoterms 2020, CIF only requires minimum insurance coverage (ICC C clauses) — less than CIP. CIF is very widely used in international trade, particularly for commodities and regular trade where both parties understand the terms well.

Which Incoterm should you use?

For containerised ocean freight, the ICC recommends FCA over FOB because the risk transfer point is clearer. In practice, FOB and CIF remain the most commonly used terms for ocean shipments.

If you're a buyer and want maximum control over your logistics, FOB or FCA gives you the ability to choose your own carrier, route, and tracking platform. If you're a seller and want to offer a delivered price, CIF or DDP packages the logistics into the selling price but means you're bearing the transport risk and costs.

The key consideration from a tracking and cost management perspective: the party bearing the risk at any given stage of the journey is the one who should be tracking the shipment. If you're on DDP terms, you need intelligence on every stage from origin to final delivery — including port congestion, demurrage risk, and customs delays at the destination. If you're on FOB terms, the buyer needs that intelligence from the moment the cargo is loaded.