Which Incoterm Should I Use? A Decision Framework
A five-question framework that maps transport mode, control preference, LC status and destination-clearance capability to the right Incoterms 2020 rule.
Incoterms 2020 gives you 11 three-letter rules. Most trades can be narrowed to two or three candidates in about a minute if you answer the right questions in the right order. This guide is that framework - written so you can run through it before every new contract and land on a defensible choice.
Question 1 - Transport mode
FOB, CFR and CIF are sea/inland-waterway onlyand drafted for cargo loaded over the ship's rail. FCA, CPT, CIP, DAP, DPU, DDP and EXW are multi-modal. If your shipment involves air, road, rail or containers, the first three are off the list.
Question 2 - Container, bulk, or break-bulk
For containers, the ICC recommends FCA over FOB, CIP over CIF, and CPT over CFR. The reason is a real risk gap: with containers the seller loses physical control at the terminal gate, hours or days before vessel loading, but under FOB remains on risk until the box is stowed. Bulk and break-bulk loaded directly under the seller's supervision can still use FOB, CFR or CIF cleanly.
Question 3 - LC and on-board B/L requirement
If the sale is under a letter of credit that requires an on-board bill of lading (UCP 600 Article 20) - which most LCs do - the delivery point of the Incoterm must be compatible. Rules that deliver at the vessel (FOB, CFR, CIF) produce an on-board B/L naturally. Rules that deliver before the vessel (EXW, FCA, CPT, CIP) need the Incoterms 2020 A6/B6 clause where the buyer instructs the carrier to issue an on-board B/L to the seller after loading. Write A6/B6 into the sales contract explicitly.
Question 4 - Destination clearance
DDP puts import clearance on the seller. That works when the seller has a local entity or a permanent VAT registration in the destination country. If not, the seller physically cannot clear - and DAP or DPU is the right answer, with the buyer as importer of record. Never assume DDP without checking that the seller can actually file the entry.
Question 5 - Freight and insurance pricing
If the seller has stronger freight rates (large exporter, volume contract) it makes sense to bundle freight into the price - CPT, CIP, CFR, CIF. If the buyer has stronger rates (large importer with global freight tender) they should buy FCA or FOB and arrange transport themselves. Insurance is a similar calculation - CIP requires minimum ICC (A) cover, which is expensive; CIF requires only ICC (C) which is cheap but very limited.
The decision matrix
- Container, buyer arranges freight, no LC: FCA (named terminal)
- Container, seller arranges freight, no LC: CPT or CIP (destination port/terminal)
- Container, LC with on-board B/L required: FCA + A6/B6 clause, or CIP + A6/B6
- Bulk/break-bulk over ship's rail, LC: FOB, CFR or CIF (all still valid)
- Retail import, seller as importer of record: DDP
- Retail import, buyer clears: DAP or DPU
Run your specific shipment through the wizard
The Incoterms Selector Wizard asks these five questions and returns the ICC- recommended rule plus the runner-up. Once you have a candidate, use the Incoterms Visualiser to see the risk-and-cost transfer point on a shipment diagram, and the Incoterms × Documents Matrix to see which party provides which document.
Frequently asked questions
How do I choose the right Incoterm?#
Five questions in order: (1) What is the transport mode - sea only, or any/multi-modal? (2) Is the shipment containerised, bulk, or break-bulk? (3) Under an LC that requires an on-board bill of lading? (4) Who is willing to clear customs at destination - buyer or seller? (5) Who has the better freight and insurance pricing? Your answers narrow the 11 rules to one or two candidates.
Which Incoterms are container-appropriate?#
FCA, CPT, CIP, DAP, DPU and DDP work for containers and any mode. EXW technically works but the ICC discourages it because the seller does not clear for export. FOB, CFR and CIF are drafted for bulk and break-bulk cargo loaded over the ship's rail - using them on containers creates a risk gap between terminal delivery and vessel loading. See the FCA vs FOB guide for the mechanics.
What is the most commonly used Incoterm?#
By transaction count, FOB remains the most-used rule globally - largely by inertia and because it aligns with LC practice. By ICC recommendation, FCA should be more common because most containerised trade needs it. For destination-cleared retail imports, DAP is widely used; DDP is used when the seller is willing to act as importer of record.
When should I never use EXW?#
Under EXW, the buyer has to clear the goods for export from the seller's country - which is legally difficult in almost every jurisdiction, because the exporter of record has to be resident. It also leaves the buyer with no VAT-recovery evidence. The ICC recommends FCA at the seller's premises instead, which achieves the same commercial position but with the seller handling export clearance.
How does the Incoterm affect the letter of credit?#
Massively. LCs typically require an on-board bill of lading (UCP 600 Article 20). Rules that deliver before the vessel (EXW, FCA, CPT, CIP) do not naturally produce an on-board B/L - either use A6/B6 to have the carrier issue one after loading, or switch to a rule that does. Rules that include insurance (CIF, CIP) satisfy LC insurance-certificate requirements automatically.