Incoterms Explained

The Incoterms 2020 rules that define who's responsible for cost and risk, and exactly when responsibility transfers.

Incoterms (International Commercial Terms), published by the International Chamber of Commerce, are standardized three-letter terms that define exactly where cost and risk transfer from seller to buyer in an international shipment. Getting the wrong Incoterm into a purchase agreement is a common, avoidable source of disputes — each term implies a very different cost and liability picture, even when the price on the invoice looks the same.

EXW — Ex Works

The seller's only obligation is to make goods available at their own premises. The buyer handles everything from there: loading, export clearance, international freight, import clearance, and delivery. Maximum control for the buyer, maximum logistics burden too.

FOB — Free On Board

The seller delivers goods loaded onto the shipping vessel at the named port of origin and handles export clearance; risk transfers to the buyer once goods are on board. One of the most common terms in China sourcing because it draws a clean, well-understood line at the origin port.

FCA — Free Carrier

The seller delivers goods to a carrier or location named by the buyer, with export clearance handled by the seller. More flexible than FOB for air freight or containerized shipments not loaded directly onto a vessel by the seller.

CFR — Cost and Freight

Like FOB, but the seller also pays for freight to the destination port. Risk still transfers to the buyer once goods are loaded at origin — the seller is paying for freight, not taking on the risk during transit.

CIF — Cost, Insurance, and Freight

Same as CFR, with the seller also required to obtain minimum insurance coverage for the shipment. Common in ocean freight; buyers should confirm exactly what level of coverage "minimum" actually means, since it's often less than full replacement value.

DAP — Delivered at Place

The seller handles everything, including transport, up to a named destination, but the buyer is responsible for import clearance and any import duties at that point.

DDP — Delivered Duty Paid

The seller's maximum obligation: they handle transport, import clearance, and duties, delivering goods ready for the buyer to receive with nothing further owed. Convenient for the buyer, but confirm the seller is actually equipped to handle destination-country customs correctly — getting this wrong on a DDP shipment is the seller's problem contractually, but it's still the buyer's shipment sitting in a customs hold.