Incoterms 2020: delivery bases in plain words
A delivery basis under Incoterms 2020 answers two questions: who pays for each leg of the journey and at what moment the risk of accidental loss or damage to the goods passes from the seller to the buyer.
In Incoterms 2020 there are eleven terms: EXW, FCA, FAS, FOB, CFR, CIF, CPT, CIP, DAP, DPU, DDP. A term does not replace the contract: it does not describe the payment procedure, the transfer of ownership, sanctions or responsibility for quality.
Why Incoterms is needed
Without a common language, the phrase "price with delivery" means something different to each party. The seller thinks delivery is to the port, the buyer thinks it is to its warehouse. Incoterms removes this fork: the parties name the term and the place, and after that every line of costs gets an owner.
The rules solve three tasks. The first is to distribute costs: loading, export formalities, freight, insurance, unloading, import procedures. The second is to fix the point at which risk passes. The third is to set who prepares which documents: transport, insurance, customs.
An important property: in group C terms, costs and risk pass at different points. Under CIF the seller pays the freight and insurance to the port of destination, but the risk passes as early as loading on board. If the vessel sinks en route, the buyer will pay extra, even though the carriage invoice has already been paid by the seller. This is not a mistake of the rules but their logic, and it is worth keeping in mind in negotiations.
What Incoterms does not regulate: the price of the goods, the currency and the settlement procedure, the transfer of ownership, acceptance by quality, warranties, penalties, applicable law and dispute resolution. All of that is the contract. If the contract specifies only the basis and everything else is "as usual", a dispute is almost inevitable.
One more boundary: the rules are updated, so the parties specify not just the term but the term together with the edition. The current edition is called Incoterms 2020, and in an order or specification it is worth naming it directly: "CIF, Incoterms 2020".
A separate note on documents. The basis determines who prepares the transport and insurance documents and in whose name they are issued. Under group C terms the seller pays for the carriage, but the documents are often needed by the buyer to collect the cargo at the port of destination. If this point is not discussed, the cargo may arrive and there will be no one to collect it.
All 11 terms in a table
The main table — who is responsible for what. The "risk" column shows the moment after which the buyer bears the losses under the general rule.
| Term | Decoding | Transport | Who pays for carriage | Where risk passes | Export and import |
|---|---|---|---|---|---|
| EXW | Ex Works, self-pickup from the warehouse | Any | Buyer | At the seller's warehouse, before loading | Both arranged by the buyer |
| FCA | Free Carrier | Any | Buyer | On handing to the buyer's carrier | Export — seller, import — buyer |
| FAS | Free Alongside Ship | Sea and inland waters | Buyer | On placing alongside the ship | Export — seller, import — buyer |
| FOB | Free On Board | Sea and inland waters | Buyer | On loading on board | Export — seller, import — buyer |
| CFR | Cost and Freight | Sea and inland waters | Seller up to the port of destination | On loading on board | Export — seller, import — buyer |
| CIF | Cost, Insurance and Freight | Sea and inland waters | Seller, including insurance | On loading on board | Export — seller, import — buyer |
| CPT | Carriage Paid To | Any | Seller up to the place of destination | On handing to the first carrier | Export — seller, import — buyer |
| CIP | Carriage and Insurance Paid To | Any | Seller, including insurance | On handing to the first carrier | Export — seller, import — buyer |
| DAP | Delivered At Place | Any | Seller up to the place of destination | At the place of destination, before unloading | Export — seller, import — buyer |
| DPU | Delivered at Place Unloaded | Any | Seller up to the place of destination | After unloading at the place of destination | Export — seller, import — buyer |
| DDP | Delivered Duty Paid | Any | Seller up to the place of destination | At the place of destination, before unloading | Both arranged by the seller |
All eleven terms are divided into three groups — by where the seller's responsibility ends and who pays for the main carriage.
| Group | Terms | Where risk passes | Who pays for the main carriage |
|---|---|---|---|
| Shipment terms | EXW, FCA, FAS, FOB | In the seller's country, at the start of the route | Buyer |
| Terms with carriage paid | CFR, CIF, CPT, CIP | In the seller's country, at the start of the route | Seller |
| Delivery terms | DAP, DPU, DDP | In the buyer's country, at the end of the route | Seller |
Separately, check which terms are applicable to your transport at all.
| Sea and inland waterways only | Any mode of transport, including road and rail |
|---|---|
| FAS, FOB, CFR, CIF | EXW, FCA, CPT, CIP, DAP, DPU, DDP |
If the cargo travels by lorry or by rail, the sea terms do not fit. Applying them to road carriage is the most common cause of a dispute about who is responsible for the cargo at the terminal.
How to read the groups in practice. Shipment terms are convenient when the buyer has strong logistics: it chooses the carrier itself, insures the cargo itself and gets a price without a delivery markup. Delivery terms are convenient when the buyer needs a ready result "to the warehouse" and is prepared to pay for it, but is not prepared to deal with carriage and import procedures.
Group C terms are a compromise, and they are the easiest to get wrong. The seller takes on the freight and insurance, the buyer takes the risk from the moment of shipment. This means that if the cargo is damaged en route, the buyer pays for the loss but files the transport claim against the carrier, not the seller. If such an arrangement does not suit you, take a group D term, where the risk up to the place of destination remains with the seller.
How to choose a basis
The choice runs through five questions, and they must be answered in this order.
- Which transport. Sea — all eleven terms are available. Road, rail, air — only seven.
- Who can organise the carriage. If the buyer has its own contract with a shipping line or a carrier, it takes the freight on itself.
- Who is prepared to bear the risk. Group C terms are paid by the seller, but the risk remains with the buyer from the moment of shipment. Group D terms transfer both the costs and the risk to the seller almost to the end of the route.
- Who can arrange the export and import. Under EXW the buyer arranges the export in a foreign country — this is rarely convenient. Under DDP the seller arranges the import in a foreign country — this also requires resources.
- Where the handover point is needed. A term without an exact place does not work: "FOB" and "FOB, port of shipment" are different obligations.
A working hint is in the table. It does not replace the contract, but it helps to quickly cut off terms that definitely do not suit you.
| Situation | What will fit | Why |
|---|---|---|
| The buyer carries it itself, has its own carrier | FCA, EXW | The buyer takes the carriage and the risk from the start of the route |
| The buyer controls the freight, does not want to arrange the export | FOB | Export on the seller, freight on the buyer |
| The seller organises delivery and insurance | CIF, CIP | The price includes carriage and insurance cover |
| Delivery to the buyer's address is needed | DAP, DPU, DDP | The seller is responsible up to the place of destination |
| Container shipment by sea | FCA, CPT, CIP | The cargo is handed to the terminal long before loading on board |
| By sea, freight on the seller, without insurance from it | CFR | Carriage included, risk on the buyer from loading |
| Domestic delivery within the country | EXW, FCA, DAP | Customs procedures are not involved |
The common mistakes in choosing look like this. People take FOB for a container, although the container reaches the terminal before loading and the risk hangs in uncertainty. They take EXW in an international transaction and get a buyer that has to arrange the export in the seller's country. They take CIF thinking that the risk passes at the port of destination. They take DDP without the ability to arrange the import. And almost always they forget to specify the exact place and the edition of the rules.
There is also the opposite mistake — choosing a basis out of habit without reviewing it for the new transaction. The route, the carrier and the buyer's country change, but the basis remains from a past contract. Check it every time: between "FOB, port of shipment" and "FOB, port of shipment, Incoterms 2020" on paper the difference is a few words, but in practice it is the scope of obligations and the point at which risk passes.
What to write in an exchange order
On the exchange the delivery basis and the mode of transport are set in the order before matching and are transferred into the trade without renegotiation. This means that the wording of the basis is not a detail but a condition that cannot be corrected later in correspondence.
Write three elements: the term, the edition, the exact place. Not "CIF" but "CIF, Incoterms 2020, port of destination". Not "DAP" but "DAP, Incoterms 2020, warehouse address". If the place is not named, the parties will count the end of the route differently.
Keep in mind the order's limits: one commodity, one currency, one unit of quantity. The delivery points of counter orders must overlap, otherwise there will be no matching. The shipment week is an ISO week, Monday–Sunday, and it must match exactly; an unmatched order expires on the Monday of its shipment week.
What the basis does not decide on the platform. It does not replace the specification: the grade, size, surface and standard are described separately. It does not describe the settlement procedure or the acceptance of documents. It does not cancel the deposit: on matching, the deposit is paid by both parties, it is held and returned in full after the document round is accepted. The deadlines are also fixed: 24 hours to confirm the trade and 5 days to exchange and accept documents, the first count running from matching.
A practical tip: agree the basis with logistics before submitting the order. If under the term you accept the cargo at your warehouse, check who actually unloads the lorry and pays for the downtime. Incoterms resolves these questions down to the level of "who pays", and the parties add the specific working arrangements to the contract as a separate clause.
Frequently asked questions
What is Incoterms 2020
It is a set of international rules that distribute between the seller and the buyer the costs, risks and obligations for the delivery of goods. The parties choose one of the eleven terms and specify it together with the exact place. The rules are updated, so the edition is named directly.
How many terms are in Incoterms 2020
Eleven: EXW, FCA, FAS, FOB, CFR, CIF, CPT, CIP, DAP, DPU, DDP. Four of them — FAS, FOB, CFR, CIF — apply only to sea and inland waterway carriage, the remaining seven suit any mode of transport.
How Incoterms 2020 differs from the previous edition
The wording of the rules is revised periodically: the obligations of the parties, the level of insurance cover and the procedure for arranging documents are refined. The practical conclusion is one: in the contract and in the order, name the edition so that the parties apply the same text.
Who insures the cargo under CIF and CIP
Under CIF the cargo insurance is arranged by the seller, and the cover there is basic. Under CIP the seller also arranges the insurance, but the cover is broader. In both cases the insurance does not change the point at which risk passes: under the sea terms the risk passes on loading on board, under CPT and CIP on handing to the first carrier.
Can FOB be applied to road carriage
No. FOB describes loading on board a ship, and with delivery by lorry the moment "on board" never occurs. For road carriage FCA, CPT or CIP are used. Replacing FOB with FCA under the same distribution of costs is common practice.
How DPU differs from DAP
Under DAP the seller delivers the cargo to the agreed place and hands it over unloaded, and the risk passes before unloading. Under DPU the seller delivers and unloads, and the risk passes after unloading. The difference is one operation, but it determines who pays for the crane, the loader and the downtime.
What is included in DDP
Under DDP the seller is responsible for delivery to the place of destination and for the import formalities, including payments. This is the maximum scope of the seller's obligations. The term is taken only if the seller really can arrange the import in the buyer's country.
Is Incoterms obligatory for a trade
No, it is a voluntary set. But if the parties have not applied it, they will have to describe separately who pays for the carriage, insurance and customs procedures and where the risk passes. In practice a contract without a basis is more expensive: it leaves more room for differing interpretations.
What to do next
- FOB: what it means and where the seller's responsibility ends — an analysis of the sea term.
- CIF: price with delivery and insurance — what is included in the price and how the insurance works.
- EXW: self-pickup from the seller's warehouse — the minimum obligations of the seller.
- How the exchange works — how the basis is transferred from the order into the trade.
- Open an account — registration is free, specify the basis and the mode of transport in the order.