The 11 Incoterms 2020 are a set of international rules, represented by three-letter acronyms, that define the responsibilities of buyers and sellers in sales contracts for goods. These terms are essential in international trade and are globally accepted by governments, entrepreneurs, and professionals. They help interpret the most common conditions in commercial transactions. Specifically, the 11 Incoterms regulate the following:
- The moment and place at which risk over the goods transfers from seller to buyer.
- The place of delivery of the goods.
- Who is responsible for contracting and paying for transport and insurance.
- Which documents each party is responsible for processing.
It is important to note that Incoterms rules are not set in stone; they are regularly updated by the International Chamber of Commerce. In the latest 2020 revision, the changes were minimal. The most significant adjustment was the renaming of DAT (Delivered At Terminal) to DPU (Delivered at Place Unloaded), likely due to its limited use and the restrictive interpretation of the term “Terminal”—despite the 2010 version clarifying that it was not limited to seaport terminals. DPU is intended for companies that sell project-based or highly delicate goods, requiring control over the entire logistics chain from origin to unloading and commissioning at destination (excluding customs procedures and payment of import duties).
In addition to the change from DAT to DPU, there were small updates to the CIP/CIF and FCA terms. In CIP/CIF, the insurance coverage requirements changed: previously, both terms required a minimum ICC "C" coverage. Under Incoterms 2020, if CIP is agreed, the coverage must now be ICC "A" (known as "all-risk" marine insurance), whereas CIF still requires at least ICC "C" coverage, which offers less protection than "A".
Regarding FCA, the 2020 version introduces an option for maritime transport whereby the buyer may instruct the carrier (or its agent) to issue a Bill of Lading (B/L) with the "on board" notation in the name of the seller. This document, which confirms that the goods have been loaded onto the vessel, is often used in letter of credit operations to justify delivery and enable payment to the seller.
The remaining changes are more formal in nature and relate to the presentation of information, clarification of expenses, and obligations of sellers or buyers to either contract transportation (as previously stated) or provide their own means of transport (a novelty in Incoterms 2020 for companies with their own fleets). It also includes general security requirements in transport (e.g., VGM) and explanatory notes that were not included in earlier versions.
The 11 Incoterms
In the current 2020 version, the 11 Incoterms are divided into those for any mode or multimodal transport (EXW, FCA, CPT, CIP, DAP, DPU, and DDP) and those for maritime and inland waterway transport only (FAS, FOB, CFR, and CIF). Each is briefly explained below:
EXW – Ex Works
The seller/exporter fulfills their obligations when the goods are made available to the buyer/importer at their premises. From that point on, all costs and responsibilities are transferred to the buyer. The seller bears no responsibility for loading the goods or handling export customs procedures. Mode of transport: Multimodal.
EXW implies minimal obligations for the seller. However, since the seller does not control export customs clearance, obtaining necessary documents (like the Single Administrative Document – SAD) to prove the export may be difficult. These are essential to avoid tax issues (e.g., VAT or IGV).
It is advisable to use EXW only in transactions between countries within the same customs or economic union (e.g., the European Union) or within states/regions of a single country where customs procedures are not required. It is also suitable for courier services (where the carrier typically collects the package directly).
FCA – Free Carrier
FCA is a versatile term. It can be used as FCA Factory or FCA Terminal (port, airport, etc.).
FCA Factory (seller’s premises): Recommended for full truckloads or containers. The seller must load the goods onto the buyer’s transport. Once loaded, responsibility passes to the buyer. FCA Factory is a better alternative to EXW because it avoids the risks EXW imposes on the seller.
FCA Terminal (buyer-designated location): Used for partial loads. The seller delivers the goods to a designated location. Unloading, handling, and consolidation are the buyer’s responsibility.
This term is useful when the buyer can negotiate better freight rates or when the seller has limited knowledge of international trade.
When documentary payment methods are involved, the buyer may instruct the carrier to issue a B/L with the "on board" notation so the seller can present it to the bank.
FAS – Free Alongside Ship
Delivery occurs in the country of origin when the seller places the goods on the port quay, having cleared them for export. From this point, all risks and responsibilities pass to the buyer. It does not include loading the goods onto the vessel.
FOB – Free On Board
Delivery occurs when the seller places the goods on board the vessel in the country of origin, fully loaded and export cleared.
The seller’s responsibility ends once the goods are on board the ship, at which point the carrier assumes control. This moment marks the transfer of risk to the buyer.
CFR – Cost and Freight
The seller pays for the main transport leg, but the risk during this journey is borne by the buyer. The buyer must secure the insurance. Delivery occurs once the goods are on board the ship, like in FOB, but under CFR, the seller must also pay for international transport.
CIF – Cost, Insurance, and Freight
The seller pays for the main transport and the insurance, but the risk is still borne by the buyer during the journey. Delivery is deemed to occur once the goods are on board the vessel.
The seller must obtain a minimum insurance policy (ICC "C") in favor of the buyer. However, different coverage can be agreed upon. It is common practice to insure up to 110% of the transaction value.
CPT – Carriage Paid To
The seller pays for the main transport leg, but the buyer assumes the risk. If multiple carriers are involved, the risk transfers when the goods are handed over to the first carrier at the agreed location, where the buyer has no control. It is advisable to specify in the contract if the transfer of risk should occur at a later stage.
CIP – Carriage and Insurance Paid To
The seller pays for both the transport and the insurance, but the buyer assumes the risk once the goods are handed over to the main carrier. It is important for the buyer to understand that, although the seller covers the insurance, the buyer assumes the risk once the goods leave the origin country.
The seller must obtain maximum insurance coverage (ICC "A") in favor of the buyer. Other arrangements can be made by mutual agreement. As with CIF, covering 110% of the transaction value is standard.
As with CPT, if multiple carriers are involved, risk transfers to the buyer when the goods are delivered to the first carrier.
DAP – Delivered At Place
Delivery occurs at any point in the destination country, always on the arriving vehicle (e.g., DAP factory, DAP transport hub), but without import customs clearance.
Given the extensive responsibilities of the seller, we do not recommend using DAP for deliveries to developing countries, where unforeseen issues can significantly increase and complicate costs.
DPU – Delivered at Place Unloaded
Goods are delivered in the destination country, unloaded at the agreed location, but without import customs clearance. It is the only Incoterm that requires the seller to unload the goods at the destination.
This term is ideal for businesses that need to control the entire logistics chain, due to the nature of the goods or because installation is required at the buyer’s facilities.
As with DAP, we do not recommend DPU for countries with underdeveloped infrastructure, as unexpected events can lead to unpredictable and difficult-to-control expenses.
DDP – Delivered Duty Paid
Delivery occurs at any location in the destination country, always on the arriving vehicle (e.g., DDP factory, DDP transport hub). The DDP price includes all import duties and taxes.
It is advisable to use DDP for goods with low added value, where the seller has significant experience and control over the import process in the destination country. However, it is not recommended in countries with complex or unclear customs procedures or where the seller does not have an established local presence, as this could lead to unexpected delays and costs.
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