If you sell goods across borders, the Incoterm you pick decides who pays for freight, who carries the risk if the cargo is damaged, and who clears customs. Get it wrong and you either lose margin or get into an ugly dispute after the container leaves. This guide shows you how to read the 11 Incoterms 2020 rules, match them to your deal, and avoid the traps that hurt first-time exporters.
What an Incoterm actually decides
An Incoterm is a three-letter code from the International Chamber of Commerce (ICC). It settles three practical questions between buyer and seller:
- Cost: who pays inland transport, main freight, insurance, and duties.
- Risk: the exact point where responsibility for loss or damage passes from you to the buyer.
- Obligations: who handles export clearance, import clearance, and documents.
What an Incoterm does not do: it does not transfer ownership, set the payment terms, or replace your sales contract. Those live in separate clauses.
The 11 rules in plain groups
Any transport mode (road, air, sea, multimodal)
EXW, FCA, CPT, CIP, DAP, DPU, DDP. These work when your goods move in containers or by air, or when the journey mixes modes.
Sea and inland waterway only
FAS, FOB, CFR, CIF. These are built around a ship’s rail and loose or bulk cargo. A common error is using FOB for a container that a truck picks up from your factory. For containers, FCA is the correct match, because you hand the box to the carrier at a terminal, not over the ship’s side.
How to choose: the factors that matter
- Who has the better freight rates? If the buyer’s forwarder is cheaper on your lane, a term like FCA or FOB lets them control the main freight.
- How much risk can you manage abroad? DDP puts import clearance and duty on you in a country whose rules you may not know. That is the heaviest term for a seller.
- Do you want a simple quote? Buyers often prefer CIF or CIP because the landed cost to their port is clear.
- Insurance: only CIF and CIP require the seller to buy cargo insurance. Under the others, insurance is optional, so agree who covers the gap.
| Term | Seller pays freight? | Risk passes at | Import clearance |
| EXW | No | Seller’s premises | Buyer |
| FCA | No (main freight) | Named place / carrier | Buyer |
| CIF | Yes, to destination port | On board vessel | Buyer |
| DAP | Yes, to destination | At destination, not unloaded | Buyer |
| DDP | Yes, all in | At destination | Seller |
A real scenario
A furniture maker sold two containers to a European retailer on EXW terms, thinking it kept things simple. The buyer’s forwarder never confirmed pickup timing, the goods sat in the factory yard, and when a leak damaged one crate, the buyer argued the seller was negligent because the cargo was still on the seller’s property. Switching future orders to FCA (named terminal) fixed it: the maker delivered to the port, risk passed cleanly at handover, and the paperwork trail was undisputed.
Common mistakes and how to fix them
- Using FOB for containerized cargo. Fix: use FCA, where risk passes when you hand the container to the carrier, not at the ship’s rail.
- Quoting EXW to look cheap. It shifts all export clearance to a buyer who may not be able to file export declarations in your country. Fix: use FCA so you handle export formalities.
- Choosing DDP without knowing local VAT and duty rules. Fix: only use DDP where you have a reliable local agent, or switch to DAP and let the buyer clear imports.
- Not naming a precise place. “CIP Germany” is vague. Fix: write the exact named place, e.g. “CIP Munich terminal.”
- Assuming CIF insurance is generous. The default cover is minimum. Fix: agree higher cover in the contract if the goods are fragile or high value.
Action checklist
- Confirm the transport mode before picking a term.
- State the Incoterm, the exact named place, and the Incoterms version (e.g. “FCA Shanghai, Incoterms 2020”).
- Agree who buys insurance and at what cover level.
- Check that whoever handles import clearance can legally do so in that country.
- Match the Incoterm to your payment method, so a letter of credit’s shipment terms line up.
Conclusion and next step
Pick the term that matches your transport mode, your freight leverage, and how much foreign risk you can realistically manage. Your next step: pull your last three export contracts and check whether each Incoterm was named with a precise place and version. If not, correct the template before your next quote.
FAQ
What is the safest Incoterm for a new exporter?
FCA is a strong default. You handle export clearance and hand off risk early at a named point, without taking on foreign import duties as you would under DDP.
Do Incoterms replace a sales contract?
No. They cover cost, risk, and delivery duties only. Ownership transfer, payment terms, warranties, and dispute resolution must be written separately in the contract.
Can I still use FOB and CIF?
Yes, but only for sea and inland waterway shipments where goods pass over the ship’s side, such as bulk or break-bulk cargo, not for containers.
Who buys insurance under DAP?
Neither party is obligated to. The seller bears the risk to destination, so the seller usually insures the leg, but you should state this in the contract.
References
- International Chamber of Commerce (ICC), Incoterms 2020 rules.