What Are Incoterms? The Complete Guide to All 11 Rules

A practical guide for exporters, importers, and anyone new to international trade.

A container of precision machinery leaves a factory in Bengaluru on a Monday. Three weeks later, it is lifted off a ship in Hamburg with a crushed corner and a damaged control panel. The Indian seller says the machine left in perfect condition.

The German buyer says the seller paid for the freight, so the problem belongs to the seller. Nobody is sure who should file the insurance claim, and both parties believe the contract backs them up.

This is exactly the kind of argument Incoterms exist to prevent. So, what are Incoterms? Incoterms, short for International Commercial Terms, are standardized rules published by the International Chamber of Commerce (ICC). They spell out who does what, who pays for what, and who carries the risk as goods travel from seller to buyer.

In this guide, you will learn what each of the 11 Incoterms 2020 rules means, where cost and risk change hands, how insurance and customs fit in, how to write an Incoterm correctly, and how to choose the right one for your own deal.

To make it concrete, we will follow one shipment from start to finish. Kaveri Precision Works, a hypothetical manufacturer in Bengaluru, is selling a CNC milling machine to Nordmann Maschinenbau GmbH, a hypothetical buyer in Hamburg, Germany.

We will re-run that same sale under different Incoterms and watch the responsibilities shift. All figures in the case study are illustrative.

What Are Incoterms?

Incoterms (International Commercial Terms) are a set of standardized trade rules published by the International Chamber of Commerce. They define who arranges transport, who pays which costs, who handles customs clearance, and the point at which the risk of loss or damage passes from seller to buyer.

The full name is International Commercial Terms, and the rules are written and maintained by the ICC, the global business organization that first published them in 1936. Think of each Incoterm as a three letter shorthand for a bundle of obligations. Instead of negotiating a dozen separate points, the buyer and seller agree on one code, such as FOB or DAP, and the rulebook fills in the detail.

That bundle covers four big questions:

• Delivery: where and how the seller completes its job of delivering the goods.
• Risk: the moment the buyer takes over the risk of accidental loss or damage.
• Cost: who pays for carriage, loading, unloading, insurance, and duties.
• Customs: who handles export clearance and who handles import clearance.

A common misunderstanding is that Incoterms apply only to cross border deals. They don’t. The rules can be used in international sales contracts and in domestic ones, which is useful for companies that want one consistent vocabulary across all their shipments.

What Incoterms are not is a shipping price label. A rule such as CIF is not just “price including freight.” It is a package of duties and risk allocations, and reading it as anything less is where most trouble starts.

A Brief History and the Incoterms 2020 Update

By the early twentieth century, trade had a language problem. A merchant in one port might understand “free on board” to mean one thing, while a buyer across the sea understood something slightly different. Courts in different countries interpreted the same phrase differently. The ICC stepped in and published the first Incoterms in 1936 to give traders a shared, predictable meaning for common delivery terms.

The rules have been revised several times since, as transport changed with containers, multimodal shipping, and electronic documents. The current edition is Incoterms® 2020, in effect since 1 January 2020, and it contains 11 rules.

Three changes in the 2020 edition are worth knowing:

1. DAT became DPU. Delivered at Terminal was renamed Delivered at Place Unloaded, to make clear that delivery can happen at any place, not only at a terminal.
2. Insurance levels split. CIF keeps the more limited Institute Cargo Clauses (C), while CIP now requires the broader Institute Cargo Clauses (A).
3. FCA documentation changed. The buyer and seller can agree that the buyer instructs its carrier to issue an on board bill of lading to the seller, which helps when payment depends on that document.

One practical point: older editions do not disappear. Parties can still choose Incoterms 2010, for example, if the contract says so. A newer edition does not automatically replace the version named in an existing agreement.

Why Incoterms Matter in International Trade

When Kaveri Precision Works agrees to sell a machine for a fixed price, the price is only the beginning of the story. Behind the invoice sits a long chain of tasks:

• Someone must collect the machine from the factory floor.
• Someone must load it onto a truck and secure it.
• Someone must book the sea freight and pay for it.
• Someone must insure the cargo, or decide not to.
• Someone must clear it through Indian export customs.
• Someone must clear it through German import customs and pay duties and taxes.
• Someone must unload it at the destination.

If the contract is silent, each side may assume the other will handle the tasks that cost money. The seller thinks, “the buyer is collecting it.” The buyer thinks, “the seller said delivered.” Weeks later, a container is sitting at a port with nobody willing to pay the storage fees.

Incoterms remove that guesswork. They allocate each task and cost to one side, so both parties can build their pricing and logistics around the same assumptions. A seller quoting EXW is offering a different deal than one quoting DDP, even if the headline price looks similar, because the buyer is covering very different work in each case.

Here is the idea that trips up even experienced traders, and we will return to it in Section 8: paying for freight is not the same as bearing risk. A seller can pay for the ship and still hand the risk to the buyer the moment the cargo is loaded.

What Incoterms Cover, and What They Don’t

Incoterms are narrow by design. They govern the delivery side of a sale and leave the rest to your contract.

And here is what they leave out:

• The sale price
• The payment method and schedule
• When legal ownership of the goods transfers
• Product quality and specifications
• Remedies if someone breaches the contract
• The governing law and how disputes are resolved

Risk versus ownership. These are separate ideas. Risk answers the question, “If the goods are accidentally destroyed today, who bears the loss?” Ownership answers, “Who legally owns the goods today?” A buyer can carry the risk before becoming the legal owner, depending on the contract. If ownership matters to you, for example when payment is delayed, say so explicitly rather than assuming an Incoterm covers it.

Are Incoterms legally binding? Not on their own. They are not law. They are contractual rules that apply only when the parties write them into their sales agreement. Once incorporated, they become part of the contract, subject to the governing law and anything else the parties have agreed.

How Incoterms Are Classified

The 11 rules fall into two groups by mode of transport:

• Seven rules for any mode or combination of transport: EXW, FCA, CPT, CIP, DAP, DPU, DDP.
• Four rules for sea and inland waterway transport only: FAS, FOB, CFR, CIF.

You can also sort them into four families by their first letter, which makes them far easier to remember:

• E rule (EXW): the seller does the minimum, just making the goods available.
• F rules (FCA, FAS, FOB): the seller delivers to a carrier or vessel the buyer has chosen, and the main transport is not paid by the seller.
• C rules (CPT, CIP, CFR, CIF): the seller pays for main transport, but risk passes early.
• D rules (DAP, DPU, DDP): the seller delivers at the destination and carries risk all the way there.

Picture a spectrum. On the far left sits EXW, where the seller’s duty ends at its own door. Moving right, the seller takes on more, first arranging export clearance, then paying for transport, then carrying risk to the destination. On the far right sits DDP, where the seller handles nearly everything, including import duties. Every rule in between is a different point on that line.

Types of Incoterms: Rules for Any Mode of Transport

These seven rules work for road, rail, air, sea, or multimodal shipments. Each entry covers what it means, who pays, where risk transfers, and when it fits best, using Kaveri’s Bengaluru to Hamburg machine as the example.

EXW (Ex Works)

What it means: The seller makes the goods available at its own premises or another named place, without loading them onto the buyer’s vehicle.

Who pays: The buyer pays for everything after that, including loading, transport, and both export and import clearance.

Risk: Passes when the goods are made available at the named place.

Best used when: The buyer has a strong logistics operation in the seller’s country. Nordmann would need to send a truck to Bengaluru and somehow complete Indian export formalities, which is often impractical for a foreign buyer.

FCA (Free Carrier)

What it means: The seller delivers the goods to the carrier or other party nominated by the buyer, at an agreed place, and clears them for export.

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Who pays: The seller covers pre-carriage and export clearance. The buyer arranges and pays for the main carriage.

Risk: Passes at the agreed delivery point. If that point is the seller’s premises, the seller loads the goods, if it is elsewhere, the goods are delivered ready for unloading.

Best used when: You want a flexible, modern rule for containers or multimodal shipments.

CPT (Carriage Paid To)

What it means: The seller arranges and pays for carriage to a named destination.

Who pays: The seller pays freight to that destination, import clearance and duties fall to the buyer.

Risk: Passes when the goods are handed to the first carrier, not on arrival.

Best used when: The seller has good freight rates and the buyer is comfortable carrying transit risk, usually with its own insurance.

CIP (Carriage and Insurance Paid To)

What it means: Like CPT, but the seller must also buy cargo insurance for the buyer’s benefit.

Who pays: The seller pays carriage and insurance to the named destination.

Risk: Still passes at handover to the first carrier.

Insurance level: Broad cover under Institute Cargo Clauses (A) or similar.

Best used when: The goods are valuable or fragile and the buyer wants strong protection arranged by the seller.

DAP (Delivered at Place)

What it means: The seller delivers the goods to the named destination, ready for unloading.

Who pays: The seller pays all transport and export clearance. The buyer pays for unloading and import clearance, including duties.

Risk: The seller carries it until the goods arrive at the named place.

Best used when: The seller wants to control the whole journey without dealing with foreign customs.

DPU (Delivered at Place Unloaded)

What it means: The seller delivers the goods at the named place and also unloads them.

Who pays: The seller covers transport, export clearance, and unloading. The buyer handles import clearance.

Risk: The seller carries it until the goods are unloaded.

Best used when: The seller has unloading capability at the destination, such as for heavy machinery that needs special equipment.

DDP (Delivered Duty Paid)

What it means: The seller takes on nearly everything, delivering the goods to the destination ready for unloading, with import duties and taxes paid.

Who pays: The seller pays all costs, including export and import clearance, duties, and taxes.

Risk: Carried by the seller until arrival.

Best used when: The seller knows the destination’s customs regime well.

Be careful: if the seller cannot legally act as importer in the destination country, DDP can become a nightmare.

Side by side callout: DAP versus DPU

The only real difference is who unloads. Under DAP, delivery is complete when the goods arrive, ready for unloading, and the buyer unloads. Under DPU, delivery is complete only after the seller has unloaded them. If a heavy machine needs a crane at Nordmann’s yard, DPU puts that cost and risk on Kaveri, while DAP puts it on Nordmann.

Types of Incoterms: Sea and Inland Waterway Rules

These four rules are tied to ships and barges. They should not be used for air only or road only shipments.

FAS (Free Alongside Ship)

The seller delivers the goods alongside the buyer’s nominated vessel at the named port, for example on the quay, and clears them for export. The buyer arranges the main carriage, and risk passes once the goods are alongside the ship. It suits bulk or heavy cargo that is not containerized.

FOB (Free On Board)

The seller delivers the goods on board the buyer’s nominated vessel at the named shipment port. Risk passes when the goods are on board. FOB is a classic rule for bulk and break bulk cargo, where the seller’s side really does lift the goods onto the ship.

CFR (Cost and Freight)

The seller puts the goods on board at the shipment port and pays freight to the named destination port. But risk transfers at the shipment port, not at destination. Insurance is the buyer’s responsibility.

CIF (Cost, Insurance and Freight)

The same as CFR, with one addition, the seller must arrange cargo insurance for the buyer’s benefit, at the more limited Institute Cargo Clauses (C) level by default. Risk still passes when the goods are on board at the shipment port.

Warning: Never use FAS, FOB, CFR, or CIF for air only or road only shipments. These rules refer to a vessel, and using them elsewhere creates a mismatch between the rule and the real handover point.

Why FOB isn’t automatically right for containers. Most containers are handed to a carrier or terminal days before they are loaded onto a ship. Under FOB, though, the seller keeps the risk until the goods are actually on board, even though it lost physical control long before. FCA lets the delivery point match the real handover. ICC specifically cautions against treating FOB as the default for every sea shipment.

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Cost vs Risk: The Concept Most People Get Wrong

Here is the sentence to remember: the party paying for transport is not necessarily the party bearing the risk during transport.

This is the defining feature of the four C rules. Under CPT and CIP, the seller pays carriage to the named destination, but risk passes when the goods are handed to the first carrier. Under CFR and CIF, the seller pays freight to the destination port, but risk passes when the goods are on board at the shipment port.

Case study replay: the Hamburg CIF shipment

Let’s run Kaveri’s sale as CIF Hamburg, Incoterms® 2020. Here is where responsibility sits at each step:

Notice the strange looking row: the seller pays for the sea voyage, yet the buyer holds the risk during it.

Mini scenario: damage mid voyage

A storm shifts the container in the Arabian Sea, and the machine’s control panel is crushed. Under CIF, the damage happened after risk passed to Nordmann, so Kaveri’s freight payment does not make it liable. Nordmann instead claims on the insurance policy that Kaveri was required to arrange, which is precisely why CIF includes an insurance duty.

If Kaveri had skipped the insurance, that would be a breach of contract, but the damage itself would still be Nordmann’s risk. And because default CIF cover is the more limited ICC (C) level, Nordmann may want to negotiate stronger cover up front.

How Insurance Works Under Incoterms

Only two of the 11 rules, CIF and CIP, require the seller to arrange cargo insurance, and in both cases the policy is for the buyer’s benefit. The two rules differ in how much cover they demand:

• CIF requires cover corresponding to Institute Cargo Clauses (C). In plain language, this is the narrowest standard set of cover. It generally responds to major events such as fire, explosion, stranding, or the vessel sinking, but not to many ordinary mishaps.
• CIP requires cover corresponding to Institute Cargo Clauses (A), which is much broader. It is often described as “all risks” cover, subject to standard exclusions.

The parties can always agree on something different, such as higher cover for fragile machinery. Typically, the insured amount should be at least the contract value plus a margin, so that the buyer is not left short after a claim.

Under the other nine rules, the absence of a seller insurance duty does not mean insurance is unnecessary. If you carry the risk during part of the journey, you should consider insuring it. Under FOB, for example, the buyer carries risk from the moment goods are on board, so a sensible buyer arranges its own policy.

Who Handles Customs Clearance?

Customs duties are one of the most common sources of cost surprises, so it helps to learn the general pattern:

• EXW: the buyer handles both export and import clearance.
• DDP: the seller handles both export and import clearance, and pays import duties and taxes.
• All other rules: the seller generally handles export clearance, and the buyer handles import clearance.

These are contractual allocations between buyer and seller. They do not override national law. Some countries limit who can act as an exporter or importer of record, or restrict which party can arrange certain services. A rule that looks perfect on paper may be difficult to apply in practice because of those local requirements, and ICC has published guidance on this issue.

The EXW pitfall. Under EXW, Nordmann would be responsible for completing Indian export formalities. A foreign buyer often has no registered presence in India, so the seller ends up doing the paperwork anyway, without a clear contractual duty. Both sides are then exposed to confusion and delay. This is why FCA is often the fix the seller is responsible for export clearance, which usually matches what is actually possible.

How to Write an Incoterm Correctly

A reliable format looks like this:

[Rule] [Named place or port], Incoterms® 2020

Here are examples of the difference between vague and precise:

• Weak: “FOB India”
• Better: “FOB Chennai Port, Incoterms® 2020”
• Weak: “FCA Bengaluru”
• Better: “FCA Seller’s Warehouse, [full address], Bengaluru, India, Incoterms® 2020”

The named place matters because it defines where delivery happens, and delivery drives the transfer of risk and costs. A city name alone is open to interpretation. A specific terminal, port, or street address is not.

The edition matters too. Since older versions can still be agreed, leaving off “Incoterms® 2020” invites debate over which rulebook applies.

Finally, remember that the named place means different things depending on the rule family. Under F rules such as FCA, it is where delivery and risk transfer happen. Under C rules such as CPT or CIF, the named place is where the seller pays carriage or freight to, which is not necessarily where risk passes.

How to Choose the Right Incoterm

There is no single best Incoterm. Instead of working through a generic checklist, ask yourself these questions in order:

1. What is the mode of transport? If the cargo is not going by sea or inland waterway, rule out FAS, FOB, CFR, and CIF immediately.
2. Who can control the logistics better? If you have strong freight contacts and rates, take on more (C or D rules). If the other side does, let them (E or F rules).
3. How much risk are you willing to carry? If you are uncomfortable carrying risk across an ocean, avoid D rules as a seller, or insist on strong insurance as a buyer.
4. Who can legally and practically handle customs? Be honest about local limits. A seller with no German import presence should think twice about DDP.
5. What are the insurance needs? High value or fragile goods may justify CIP, or a separately negotiated policy.

Quick recommendations by profile:

• First time exporter: FCA or CPT keeps your obligations clear and limited, and avoids dealing with foreign customs.
• Experienced importer with its own freight forwarder: FCA or FOB (for bulk sea cargo) gives you control over main carriage.
• Container shipper: FCA at your terminal or warehouse usually reflects reality better than FOB.

Common Incoterms Mistakes to Avoid

1. Assuming “seller pays shipping” means “seller bears risk.” Under CIF, the seller pays freight but the buyer holds the risk at sea. The result can be a disputed claim and an unexpectedly uninsured loss.
2. Treating Incoterms as ownership rules. If the contract is silent on title, a seller may think it still owns goods that the buyer is already treating as its own, which creates problems in insolvency or payment disputes.
3. Using FOB or CIF for air freight. The rule refers to a vessel that does not exist, so the delivery point becomes unclear and risk allocation can be argued either way.
4. Omitting the location or edition. Without a named place, the parties may genuinely disagree on where delivery happened, and therefore who must pay for a loss or cost.
5. Assuming all insurance is equivalent. A CIF buyer who expects all risks cover may discover that the minimum ICC (C) policy excludes the damage that actually occurred.
6. Using inconsistent terms across the contract and invoice. If the contract says FCA and the invoice says CIF, customs may question the declared value and delay clearance.

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Conclusion

If you remember only three things from this guide, make them these. First, an Incoterm is a package of obligations covering delivery, risk, cost, and customs, not just a shipping price abbreviation. Second, cost and risk are separate, the party paying for transport is not always the party carrying the risk. Third, precision matters. Name the rule, the exact place, and the edition, and align your contract, invoice, and insurance.

This article is educational and is not legal advice. The official ICC Incoterms® 2020 publication is the definitive source for the detailed obligations under each rule, and any real transaction should be reviewed against your contract and applicable law.

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About the Author

Hi, I’m SriHarsha, founder of shxhub.in.

I focus on explaining import export business topics in a practical, beginner friendly way, based on how exports actually work on the real ground especially documentation, quality control, and buyer expectations.