Incoterms 2020 Explained

Incoterms® 2020 are the ICC's 11 three-letter rules that allocate costs, risks and delivery obligations between seller and buyer in an international sale. Every commercial contract, quotation and Letter of Credit should reference an Incoterm, its named place, and the 2020 version explicitly - e.g. "CIF Rotterdam Incoterms® 2020".

Incoterms are voluntary contractual rules. They do not transfer title to goods, govern payment terms, or override national law. They also do not apply automatically - they only apply when the contract says so.

The 11 rules at a glance

Seven rules apply to any mode of transport. Four apply only to sea and inland waterway carriage.

Any mode of transport

• EXW - Ex Works. Seller places goods at its own premises. Buyer bears all cost and risk from that point, including loading. Minimum seller obligation.
• FCA - Free Carrier. Seller delivers cleared for export to the buyer's nominated carrier at a named place. Most flexible rule for containers. In 2020, buyers may instruct the carrier to issue an on-board B/L to the seller - solving a long-standing LC issue.
• CPT - Carriage Paid To. Seller pays freight to the named destination; risk transfers to the buyer at first carrier.
• CIP - Carriage and Insurance Paid To. Same as CPT, plus seller arranges insurance to Institute Cargo Clauses A (all-risks) - upgraded from Clauses C in 2020.
• DAP - Delivered at Place. Seller delivers to a named place in the buyer's country, ready for unloading.
• DPU - Delivered at Place Unloaded. Same as DAP, but seller also unloads. Replaces the 2010 DAT rule; broadened from "terminal" to any place.
• DDP - Delivered Duty Paid. Seller bears all cost including import duty and VAT/GST to the buyer's premises. Maximum seller obligation.

Sea and inland waterway only

• FAS - Free Alongside Ship. Seller delivers alongside the vessel at the named port of shipment, cleared for export.
• FOB - Free on Board. Seller delivers on-board the vessel at the named port of shipment. Historically the most common Incoterm; still widely misused for containers.
• CFR - Cost and Freight. Seller pays freight to named port of destination; risk transfers on-board at loading port.
• CIF - Cost, Insurance and Freight. Same as CFR, plus seller arranges minimum-cover marine insurance (Institute Cargo Clauses C) for 110% of the invoice value.

Cost vs risk - the critical split

For every C-term (CFR, CIF, CPT, CIP) the seller pays freight to a far destination but risk transfers to the buyer much earlier - typically at the origin port or first carrier. This is the single most misunderstood point in international trade. If a CIF Rotterdam cargo is lost mid-Atlantic, the buyer files the insurance claim, not the seller, because risk transferred at Shanghai.

Choosing the right rule

• Containerised cargo: use FCA, CPT, CIP, DAP, DPU or DDP - never FOB, FAS, CFR or CIF. Under FOB the seller retains risk until on-board loading, which is impractical when a container has already been stuffed and gated in.
• Bulk / breakbulk shipped on a named vessel: FAS, FOB, CFR, CIF are appropriate.
• Multimodal moves (truck + ocean + rail): FCA, CPT, CIP, DAP, DPU, DDP.
• With Letter of Credit: avoid EXW (seller cannot clear for export; documentary chain is fragile). CIP and DAP combine well with LCs.
• Buyer wants control over freight: FCA or FOB.
• Seller can offer landed pricing: DPU or DDP. DDP puts import clearance on the seller - only use if the seller can act as importer-of-record in the destination country.

Insurance under CIF and CIP

Under CIF, the seller must arrange minimum cover marine insurance under Institute Cargo Clauses C - a named-perils policy that covers only major casualty events (fire, sinking, collision). The insured value is 110% of the invoice value in the currency of the contract, giving the buyer a 10% margin above landed value.

Under CIP, the 2020 version raised the required cover to Institute Cargo Clauses A - an all-risks policy. Same 110% valuation. The parties can contract for a lower level of cover under CIP but must agree so explicitly.

Incoterms 2020 vs Incoterms 2010

Five substantive changes matter in practice:

1. DAT → DPU. Delivered at Terminal was renamed Delivered at Place Unloaded and broadened beyond terminals.
2. CIP insurance upgraded. From Clauses C to Clauses A (all-risks). CIF stays at Clauses C.
3. FCA on-board bill of lading option. Buyer may instruct the carrier to issue an on-board B/L to the seller, solving the FCA-with-LC problem where LCs demand on-board transport documents.
4. Explicit security-related obligations. Both parties' obligations for transport-security compliance are spelled out.
5. Own-transport recognition. Rules now acknowledge the seller or buyer may use their own transport rather than a third-party carrier.

Common mistakes

• Using FOB for containers. If the LC requires FOB and the goods are containerised, either amend to FCA or accept that the "on board" moment is ambiguous.
• Omitting the named place. "CIF" is meaningless; "CIF Rotterdam Incoterms 2020" is enforceable.
• Confusing cost with risk. CFR/CIF sellers pay freight to destination but risk transfers at origin.
• Choosing DDP without the ability to be importer-of-record. In most jurisdictions, only a locally-registered entity can act.
• Assuming Incoterms cover transfer of title. They do not - that is governed by the sales contract and applicable national law (CISG, national codes).

Working with the calculators

1. Not sure which rule? Run the Incoterms Selector Wizard. It walks through transport mode, insurance preference and counterparty trust.
2. Need to visualise cost split and risk transfer for a specific rule? Use the Incoterms 2020 Cost & Risk Visualiser - it shows the exact obligation matrix for all 11 rules.
3. Preparing an LC? Cross-check documents against Incoterm choice in the Incoterms Document Mapper.
4. Structuring payment terms? The Incoterms × Payment Matrix shows which rules pair cleanly with LC, DP, DA and open account.

Full Incoterms 2020 text is available from the ICC. This guide summarises for decision-support only.