Incoterms® 2020 Explained: Which Rule Should You Use, and When?

Every international sale needs to answer the same questions: who arranges shipping, who pays for insurance, and at what exact point does risk pass from seller to buyer? Incoterms®, published by the International Chamber of Commerce, answer those questions with 11 standardized three-letter rules.

The 11 rules, grouped by mode of transport

Any mode of transport:

• EXW (Ex Works) — seller's only job is to make goods available at their premises; buyer handles everything else
• FCA (Free Carrier) — seller delivers to a carrier named by the buyer
• CPT (Carriage Paid To) — seller pays freight to the named destination, risk transfers earlier
• CIP (Carriage and Insurance Paid To) — like CPT, plus seller arranges insurance
• DAP (Delivered At Place) — seller delivers, ready for unloading, at the named destination
• DPU (Delivered at Place Unloaded) — seller also unloads the goods
• DDP (Delivered Duty Paid) — seller handles everything, including import duty

Sea and inland waterway only:

• FAS (Free Alongside Ship) — seller delivers alongside the vessel
• FOB (Free On Board) — risk transfers once goods are loaded onto the vessel
• CFR (Cost and Freight) — seller pays freight, risk still transfers at loading
• CIF (Cost, Insurance and Freight) — like CFR, plus seller arranges insurance

Why the mode-of-transport split matters

FOB, CIF, CFR and FAS were designed for classic sea freight, where "loaded onto the vessel" is a clear, unambiguous point to transfer risk. For containerized or multimodal shipments, that point is often murky (the container may sit at a terminal for days before loading) — which is exactly why ICC recommends FCA, CPT or CIP instead of FOB/CIF for container shipments.

How to choose the right rule

Ask three questions:

1. How much control do you want over shipping and insurance? EXW gives the seller the least involvement; DDP gives the buyer the least involvement.
2. What's your transport mode? Container shipment → prefer FCA/CPT/CIP over FOB/CIF.
3. What's your relationship and risk tolerance with this trading partner? New or higher-risk partners often favor terms that keep more control (and less prepayment exposure) with the party better positioned to manage it.

A quick worked comparison

Under FOB Izmir, the buyer pays freight and insurance from the port of loading onward, and bears risk from the moment goods are on the vessel. Under CIF Izmir, the seller pays that freight and insurance — but risk still transfers at the same point (loading). The buyer's total cost is similar either way; what changes is who arranges and prepays for freight and insurance.

Frequently asked questions

Do Incoterms cover payment terms?

No. Incoterms define cost and risk allocation for delivery — not payment method or timing, which is a separate agreement (see international payment methods).

Which Incoterm is safest for a first-time buyer?

DDP puts the least burden on the buyer, since the seller handles transport, insurance, and import duty. It's often more expensive per unit, since the seller is pricing in that risk and effort.

Can Incoterms be modified in a contract?

Yes, though doing so can create ambiguity. If you deviate from the standard rule, spell out exactly what's changed in the sales contract.

Related tools and reading

• Incoterms Center — all 11 rules with responsibility breakdowns
• Incoterms Selector — guided wizard to pick the right rule
• Incoterms Cost Calculator
• Glossary: Incoterms

Conclusion

Incoterms exist to remove ambiguity from international sales contracts — but only if both parties actually understand what a given three-letter code commits them to. When your transport mode is containerized, default to FCA/CPT/CIP over the sea-only rules, and always name the location precisely (e.g. "FOB Izmir Port," not just "FOB").

Not sure which rule fits your deal? Try the Incoterms Selector →