Introduction: Why Incoterms Matter for Your Business
Are you confused about who should pay for shipping? Unsure when risk transfers from seller to buyer? You’re not alone. Understanding Incoterms is crucial for successful international trade, and at NexaCrest International, we’re here to make it simple.
Incoterms (International Commercial Terms) are standardized trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities, costs, and risks between buyers and sellers in international transactions.
This guide will help you:
- Understand all 11 Incoterms 2020 rules
- Know exactly who pays for what at each stage
- Identify when risk transfers from seller to buyer
- Choose the right Incoterm for your shipments
- Avoid costly misunderstandings and disputes
Understanding the Basics: What Are Incoterms?
Incoterms answer three critical questions in every international transaction:
- Who pays? Which party covers freight, insurance, duties, and other costs?
- Who does? Which party arranges transport, handles documentation, and manages logistics?
- When does risk transfer? At what point does responsibility shift from seller to buyer?
The Color-Coded System
Throughout this guide, we use a simple color system:
- 🔵 Blue = Buyer’s Responsibility – The buyer pays or handles this
- 🔴 Red = Seller’s Responsibility – The seller pays or handles this
- 🟡 Yellow = Negotiable – Parties can agree who handles this
The Two Main Categories
Incoterms are divided into two categories based on who pays for the main freight:
📦 Freight Collect Terms (Buyer Pays Freight)
- EXW, FCA, FAS, FOB, CFR, CIF
💰 Freight Prepaid Terms (Seller Pays Freight)
- CPT, CIP, DAP, DPU, DDP
Freight Collect Terms (Buyer Pays Main Freight)
1. EXW – Ex Works (Place)
“Pick it up from our door”
Risk Transfers: At the seller’s premises when goods are made available to buyer
Seller’s Responsibilities:
- Prepare and package goods for export
- Make goods available at their facility
Buyer’s Responsibilities:
- Everything else! Loading, transport, export clearance, main carriage, insurance (optional), import clearance, delivery
Best For: Experienced buyers with strong logistics capabilities
Key Note: This gives the buyer maximum control but also maximum responsibility. The seller has minimal obligations.
2. FCA – Free Carrier (Place)
“Delivered to your carrier”
Risk Transfers: When goods are handed over to the buyer’s nominated carrier
Seller’s Responsibilities:
- Export packaging
- Loading onto buyer’s transport
- Transport to carrier location
- Export customs clearance
Buyer’s Responsibilities:
- Main carriage costs
- Insurance (optional)
- Import clearance
- Unloading at destination
Best For: Most flexible option – works for any transport mode. Very popular for containerized shipments.
Key Note: Seller completes export formalities, which is often more practical than EXW.
3. FAS – Free Alongside Ship (Port)
“Delivered next to the ship”
Risk Transfers: When goods are placed alongside the vessel at the named port
Seller’s Responsibilities:
- Transport to port
- Export clearance
- Place goods alongside ship
Buyer’s Responsibilities:
- Loading onto ship
- Main carriage
- Insurance (optional)
- Import clearance
- Delivery to final destination
Best For: Bulk cargo and break-bulk shipments (not containers)
Key Note: Only for sea and inland waterway transport. Rarely used for containerized cargo.
4. FOB – Free On Board (Port)
“Loaded on your ship”
Risk Transfers: When goods pass the ship’s rail (are loaded on board)
Seller’s Responsibilities:
- Transport to port
- Export clearance
- Loading onto vessel
- Origin port charges
Buyer’s Responsibilities:
- Main ocean/sea freight
- Insurance (optional)
- Destination port charges
- Import clearance
- Final delivery
Best For: Sea and inland waterway transport. Very popular globally.
Key Note: One of the most commonly used Incoterms. However, risk transfers when loaded, but seller pays freight only to the port.
5. CFR – Cost and Freight (Port)
“We’ll ship it, you insure it”
Risk Transfers: When goods pass the ship’s rail (on board vessel) – BUT seller pays freight to destination
Seller’s Responsibilities:
- Transport to origin port
- Export clearance
- Loading charges
- Main ocean freight to destination port
Buyer’s Responsibilities:
- Insurance (buyer should arrange!)
- Destination port charges
- Import clearance
- Final delivery
Best For: Sea freight when buyer wants to arrange their own insurance
Key Note: CRITICAL – Risk transfers when loaded, but seller pays freight. Buyer should insure from loading point!
6. CIF – Cost, Insurance and Freight (Port)
“We’ll ship and insure it”
Risk Transfers: When goods pass the ship’s rail (on board vessel)
Seller’s Responsibilities:
- Transport to origin port
- Export clearance
- Loading charges
- Main ocean freight to destination port
- Marine insurance (minimum coverage – Institute Cargo Clauses C or equivalent)
Buyer’s Responsibilities:
- Destination port charges
- Import clearance
- Final delivery
- Additional insurance if needed
Best For: Sea freight when seller arranges shipping and basic insurance
Key Note: Seller must provide insurance, but only minimum coverage (110% of contract value). Buyer may want additional coverage.
Freight Prepaid Terms (Seller Pays Main Freight)
7. CPT – Carriage Paid To (Place)
“We’ll deliver to the carrier at destination”
Risk Transfers: When goods are handed to the first carrier – BUT seller pays freight to destination
Seller’s Responsibilities:
- Export clearance
- Main carriage to named destination
- Delivery to carrier at destination
Buyer’s Responsibilities:
- Insurance (optional but recommended)
- Unloading at destination
- Import clearance
- Final delivery from carrier
Best For: Any mode of transport, especially multi-modal
Key Note: Like CFR but for any transport mode. Risk transfers early, seller pays freight to destination.
8. CIP – Carriage and Insurance Paid To (Place)
“We’ll deliver and insure to destination”
Risk Transfers: When goods are handed to the first carrier
Seller’s Responsibilities:
- Export clearance
- Main carriage to named destination
- Insurance (comprehensive coverage – Institute Cargo Clauses A or equivalent)
Buyer’s Responsibilities:
- Unloading at destination
- Import clearance
- Final delivery from carrier
Best For: Any mode of transport when seller provides comprehensive insurance
Key Note: Since 2020, CIP requires better insurance than CIF (Institute Cargo Clauses A vs. C). Good for valuable goods.
9. DAP – Delivered at Place (Place)
“We’ll deliver to your door, you unload”
Risk Transfers: When goods arrive at the named place, ready for unloading
Seller’s Responsibilities:
- Export clearance
- Main carriage
- Delivery to named destination
- All costs until goods arrive ready to unload
Buyer’s Responsibilities:
- Unloading
- Import duties and taxes
- Import clearance
Best For: Door-to-door shipments where buyer handles import clearance
Key Note: Popular for e-commerce and direct deliveries. Seller takes responsibility up to the buyer’s location.
10. DPU – Delivered at Place Unloaded (Place)
“We’ll deliver and unload”
Risk Transfers: When goods are unloaded at the named place
Seller’s Responsibilities:
- Export clearance
- Main carriage
- Delivery to named destination
- Unloading at destination
Buyer’s Responsibilities:
- Import duties and taxes
- Import clearance
- Any onward transport
Best For: Deliveries to terminals, warehouses, or when seller has unloading capability
Key Note: The ONLY Incoterm where seller must unload. New in 2020, replaced DAT (Delivered at Terminal).
11. DDP – Delivered Duty Paid (Place)
“We’ll handle everything to your door”
Risk Transfers: When goods arrive at the named place, ready for unloading
Seller’s Responsibilities:
- Everything! Export clearance, main carriage, import duties & taxes, import clearance, delivery to buyer’s location
Buyer’s Responsibilities:
- Only unloading (unless otherwise agreed)
Best For: When seller wants complete control and has import capability in buyer’s country
Key Note: Maximum obligation for seller. Seller must be able to handle import clearance in the destination country. Often challenging due to foreign tax/duty requirements.
Quick Comparison: Choosing the Right Incoterm
Minimum Seller Responsibility → Maximum Buyer Control
EXW – Buyer does everything
Balanced Responsibility
FCA – Most versatile, seller exports, buyer arranges main transport FOB – Popular for sea freight, clear division at vessel CFR/CIF – Seller ships, risk transfers when loaded CPT/CIP – Like CFR/CIF but any transport mode
Maximum Seller Responsibility → Minimum Buyer Hassle
DAP – Seller delivers, buyer clears customs DPU – Seller delivers and unloads DDP – Seller does everything including import clearance
Incoterms by Transport Mode
✈️ Any Mode (Omnimodal)
Can be used for any transport type:
- EXW, FCA, CPT, CIP, DAP, DPU, DDP
🚢 Sea and Inland Waterway Only
Only for port-to-port shipments:
- FAS, FOB, CFR, CIF
Common Mistake: Using FOB for air freight! Use FCA instead.
Critical Points to Remember
Insurance Responsibilities
| Incoterm | Insurance Responsibility |
|---|---|
| CIF | Seller MUST provide (minimum coverage) |
| CIP | Seller MUST provide (comprehensive coverage) |
| All Others | Negotiable – but buyer should arrange if seller doesn’t |
Important: Even when insurance is “negotiable,” one party should definitely arrange it. Don’t leave your goods uninsured!
Risk vs. Cost
This is crucial: The point where risk transfers is NOT always the same as who pays for freight!
Examples:
- CFR/CIF: Risk transfers when goods are loaded on ship, but seller pays freight to destination port
- CPT/CIP: Risk transfers to first carrier, but seller pays freight to destination
Why it matters: If goods are damaged in transit under CFR/CIF/CPT/CIP, the buyer bears the risk even though seller paid for transport!
Common Mistakes to Avoid
❌ Mistake #1: Using FOB for Air Freight
Problem: FOB is for sea transport only Solution: Use FCA for air shipments
❌ Mistake #2: Not Insuring Under CFR
Problem: Seller pays freight but risk transfers when loaded. Buyer thinks they’re covered. Solution: Buyer must arrange insurance from point of loading
❌ Mistake #3: Incomplete Incoterm Specification
Problem: Just saying “FOB” without specifying the port Solution: Always include: Incoterm + Named Place (e.g., “FOB Shanghai” or “DAP New York Warehouse”)
❌ Mistake #4: Using DDP Without Import Capability
Problem: Seller can’t handle import formalities in foreign country Solution: Use DAP and let buyer handle import clearance
❌ Mistake #5: Assuming Incoterms Cover Everything
Problem: Incoterms don’t cover payment terms, title transfer, or contract breaches Solution: Address these separately in your sales contract
How to Choose the Right Incoterm
Consider These Factors:
1. Your Experience Level
- Beginners: Consider terms where you have less responsibility (buyers: DDP/DAP; sellers: EXW/FCA)
- Experienced: Can handle more complex terms
2. Transport Mode
- Sea/Inland waterway: Can use any term
- Air/Road/Rail: Avoid FAS, FOB, CFR, CIF
3. Control Preferences
- Want control over shipping: Use terms where you arrange main carriage
- Want simplicity: Let the other party handle shipping
4. Cost Management
- Want predictable costs: Terms where you arrange shipping
- Want supplier to quote delivered price: Use CPT/CIP/DAP/DPU/DDP
5. Import/Export Capabilities
- Can you clear customs in foreign country? (Required for DDP as seller, EXW as buyer)
- Do you have customs broker relationships?
6. Risk Tolerance
- Lower risk appetite: Choose terms where risk transfers later
- Can manage risk: Terms with earlier transfer may offer cost advantages
Incoterms in Practice: Real Examples
Example 1: Electronics Manufacturer (China to USA)
Scenario: Chinese factory selling to US retailer
Option A – FOB Shanghai
- Chinese seller delivers to Shanghai port, loads on vessel
- US buyer arranges ocean freight, insurance, import clearance
- Good for: Experienced US buyer with freight forwarder
Option B – CIF Los Angeles
- Chinese seller arranges and pays for ocean freight and basic insurance
- US buyer handles import clearance
- Good for: US buyer wants predictable shipping costs
Option C – DDP Los Angeles Warehouse
- Chinese seller handles everything including US import duties
- US buyer just receives goods at warehouse
- Good for: US buyer wants turnkey solution
Example 2: Machinery Parts (Germany to India)
Scenario: German supplier shipping heavy machinery parts
Recommended: DAP Mumbai Buyer’s Factory
- German seller arranges all transport to buyer’s location
- Indian buyer handles import clearance (easier with local knowledge)
- Seller takes responsibility for safe delivery
- Buyer manages customs formalities in their own country
Example 3: Garment Orders (Bangladesh to UK)
Scenario: UK retailer ordering fashion items
Recommended: CIP London Heathrow
- Bangladesh seller arranges air freight and comprehensive insurance
- UK buyer handles import VAT and duties
- Seller ensures goods arrive safely
- Buyer manages final customs and delivery to warehouse
How NexaCrest International Can Help
At NexaCrest International, we understand that choosing and implementing the right Incoterms can be complex. Our team provides:
Expert Consultation
- Help you select the most appropriate Incoterm for your trade
- Advise on risk management and cost optimization
- Ensure compliance with international trade regulations
Full-Service Logistics
- Handle freight forwarding under any Incoterm
- Arrange comprehensive cargo insurance
- Manage customs clearance (import and export)
- Coordinate door-to-door delivery
Documentation Support
- Ensure proper Incoterm specification in contracts
- Prepare all required shipping documentation
- Provide guidance on letters of credit and payment terms
Training & Resources
- Train your team on Incoterms application
- Provide ongoing support and updates
- Share best practices from global trade experience
Incoterms 2020 vs. 2010: What Changed?
While many terms remained similar, key updates in 2020 include:
1. DAT Replaced by DPU
- Old: DAT (Delivered at Terminal)
- New: DPU (Delivered at Place Unloaded)
- Why: More flexibility – destination doesn’t have to be a “terminal”
2. Different Insurance Levels for CIF vs. CIP
- CIF: Minimum coverage (Institute Cargo Clauses C)
- CIP: Comprehensive coverage (Institute Cargo Clauses A)
- Why: CIP deemed suitable for higher-value goods requiring better protection
3. FCA Bill of Lading Option
- Buyer can now instruct carrier to issue Bill of Lading with on-board notation to seller
- Why: Helps with Letter of Credit requirements
4. Cost Allocation Clarity
- Better explanations of security-related costs
- Clearer guidance on terminal handling charges
Your Incoterms Checklist
Before finalizing any international sale, ensure you’ve covered:
✅ Incoterm is clearly specified with named place (e.g., “CIF Hamburg Port”)
✅ Both parties understand their responsibilities under the chosen term
✅ Insurance is arranged by the appropriate party (and adequate)
✅ Transport mode matches the Incoterm (no FOB for air freight!)
✅ Customs capabilities are in place (especially for EXW/DDP)
✅ Risk transfer point is understood by both parties
✅ Incoterm 2020 is specified (not outdated versions)
✅ Sales contract includes Incoterm and other essential terms
✅ Payment terms align with risk transfer and delivery
✅ Local regulations are considered (some countries restrict certain terms)
Conclusion: Master Incoterms for Successful Trade
Understanding Incoterms 2020 is essential for:
- Avoiding disputes and misunderstandings
- Managing costs effectively
- Controlling risk in international transactions
- Building smooth logistics operations
- Maintaining good supplier/customer relationships
Remember: The “best” Incoterm depends on your specific situation, capabilities, and business relationship. There’s no one-size-fits-all answer.
Key Takeaways:
- Know where risk transfers vs. who pays freight
- Always include the specific named place
- Ensure insurance is arranged by someone
- Match the Incoterm to your transport mode
- Consider your capabilities (especially for customs clearance)
Ready to Optimize Your International Shipments?
At NexaCrest International, we’re your trusted partner for seamless global trade. Whether you need help selecting the right Incoterm, managing complex logistics, or ensuring compliance, our expert team is here to help.
Contact Us Today:
📧 Email: letsconnect@nexacrestinternational.com 🌐 Website: www.nexacrestinternational.com 📞 Phone: +917676463030
Let’s make your international trade simple, efficient, and profitable.
Frequently Asked Questions
Q: Can I negotiate which Incoterm to use? A: Absolutely! Incoterms are part of your commercial negotiation. Choose what works best for both parties.
Q: Are Incoterms legally binding? A: Only if you incorporate them into your contract. Always reference “Incoterms® 2020” in your agreement.
Q: Can I modify an Incoterm? A: Yes, but document any variations clearly in your contract to avoid confusion.
Q: What if my supplier suggests an outdated Incoterm version? A: Request to use Incoterms 2020 for clarity and current best practices.
Q: Do Incoterms cover payment terms? A: No, they only cover delivery, risk, and costs. Payment terms are separate.
Q: Can I use different Incoterms for different items in one order? A: Yes, but specify clearly which term applies to which goods.
Published by NexaCrest International Your Partner in Global Trade Excellence
Categories: International Trade, Logistics, Import/Export, Shipping Tags: Incoterms 2020, International Shipping, FOB, CIF, DDP, DAP, Freight Forwarding, Export, Import
Share this guide with your team and partners!
Bookmark this page for quick reference whenever you need to verify Incoterm responsibilities.