Incoterms explained

What Incoterms are and why they matter

Incoterms, short for International Commercial Terms, are a set of standardised trade rules published by the International Chamber of Commerce. They define who does what in a shipment between a seller and a buyer: who arranges transport, who pays for it, who handles export and import formalities, and at which precise point the risk of loss or damage passes from one party to the other. The current version is Incoterms 2020, and each rule is expressed as a three-letter code such as EXW, FOB or DAP.

For a small business or shipper in France, Incoterms matter because they remove ambiguity from a contract. A single line in a purchase order, for example "DAP Lyon, Incoterms 2020", tells both sides exactly how far the seller's obligations extend and where the buyer takes over. Without an agreed term, disputes arise when goods are damaged in transit or when an unexpected customs bill appears, because neither party accepted responsibility in writing.

It is important to understand what Incoterms do not cover. They do not transfer ownership of the goods, they do not set the price, and they do not replace a sales contract or an insurance policy. They also say nothing about payment terms or what happens if one party breaches the agreement. Incoterms are one building block of a trade deal, sitting alongside the commercial invoice, the transport contract and, where relevant, a letter of credit.

How Incoterms divide costs, risk and responsibility

Every Incoterm answers three separate questions, and it helps to keep them apart in your mind. The first is cost: who pays for each leg of the journey, from loading at the origin to final delivery, plus export and import charges. The second is risk: at what physical point does responsibility for loss or damage shift from seller to buyer. The third is responsibility for tasks: who books the carrier, who clears customs, and who unloads.

A common misunderstanding is to assume that cost and risk always transfer at the same place. Under most terms they do, but not always. The transfer point is what really matters if goods are damaged. If risk has already passed to the buyer, the buyer bears the loss even if the seller organised the transport. This is why reading the exact delivery point in a term is essential.

Think of the journey as a chain of steps: loading at the seller's premises, carriage to the port or terminal, export clearance, main international transport, import clearance, delivery to the buyer's address and final unloading. Each Incoterm draws a line across this chain. Everything before the line is the seller's job and expense; everything after it belongs to the buyer. The eleven Incoterms simply move that line to different positions along the route.

The main Incoterms every shipper should know

There are eleven Incoterms in the 2020 edition, but a handful cover the vast majority of real shipments. EXW, or Ex Works, places the maximum burden on the buyer: the seller simply makes the goods available at their own premises, and the buyer arranges everything else, including loading and export clearance. It is simple for the seller but risky for an inexperienced buyer.

FCA, Free Carrier, is more balanced and increasingly recommended. The seller delivers the goods, cleared for export, to a carrier nominated by the buyer at an agreed place. FOB, Free On Board, is a classic sea-freight term where the seller loads the goods onto the vessel. CIF, Cost Insurance and Freight, adds that the seller pays freight and a minimum insurance to the destination port, though risk still passes at the origin port.

On the delivery side, DAP, Delivered At Place, means the seller carries the goods all the way to a named destination, ready for the buyer to unload, but the buyer handles import clearance. DPU, Delivered at Place Unloaded, goes one step further by requiring the seller to unload. DDP, Delivered Duty Paid, is the most seller-heavy term: the seller delivers, clears import and pays all duties and taxes. Choosing between these depends on which party has the expertise and network at each end.

Incoterms for any transport mode vs sea and inland waterway

Incoterms 2020 splits the eleven rules into two families, and picking from the correct family avoids serious errors. The first family works for any mode of transport, including road, rail, air, sea and multimodal combinations. It contains seven terms: EXW, FCA, CPT, CIP, DAP, DPU and DDP. These are the right choice for most modern shipments, particularly containerised cargo and anything moving by truck or plane.

The second family applies only to sea and inland waterway transport. It has four terms: FAS, FOB, CFR and CIF. These rules describe the moment goods cross the ship's rail or are placed alongside the vessel, so they only make sense for bulk cargo or non-containerised goods loaded directly onto a ship.

A frequent mistake is to use FOB or CIF for containers. When goods travel in a container, they are handed over at a terminal well before they reach the ship, so risk under a maritime term does not match reality. For containerised freight, the equivalent "any mode" terms FCA and CIP are more accurate and better protect both parties. When in doubt, if the cargo is not loaded loose onto a vessel, choose from the seven multimodal terms.

Who pays for insurance, customs and delivery under each term

Insurance obligations differ sharply between terms. Only two Incoterms require the seller to buy cargo insurance: CIF and CIP. Under CIF the seller must provide only minimum cover, while CIP now requires a higher level of insurance under the 2020 rules. For all other terms, insurance is optional and each party is free to arrange its own cover for the portion of the journey where it bears the risk. Even when no term forces insurance, it is wise to insure high-value goods.

Customs responsibility follows the delivery line. Export clearance is usually the seller's task in every term except EXW, where the buyer must handle it. Import clearance and the payment of duties and VAT are the buyer's responsibility in almost all terms, the single exception being DDP, where the seller takes on import clearance and pays those charges. For a French business importing from outside the EU, this distinction directly affects who deals with customs and who pays import VAT.

Delivery and unloading complete the picture. Under DPU the seller must unload at destination; under DAP the buyer unloads. The table below summarises these responsibilities for the most widely used terms so you can compare them at a glance.

How to choose the right Incoterm for your shipment

Start by assessing which party has the stronger logistics capability at each end. If you are a French buyer importing from a supplier abroad and you have a reliable freight forwarder, terms like FCA or CPT let you control the main transport and often reduce costs. If you would rather the seller manage everything to your door, DAP or DDP shift that work to them, though the price will reflect it.

Consider your experience with customs. A newcomer to importing should avoid EXW, because arranging export clearance in the seller's country is difficult from abroad. Similarly, a seller unfamiliar with a foreign market should be cautious about DDP, since they become responsible for import duties and VAT in a country whose rules they may not know.

Also weigh the value and fragility of the goods, your cash flow and your appetite for risk. High-value shipments justify insured terms or your own robust policy. Finally, always write the term in full with the named place and the year, for example "CIP Marseille Incoterms 2020". A term without a precise location invites disputes, because the delivery and risk-transfer point becomes unclear.

Common Incoterms mistakes and how to avoid them

The most frequent error is using a maritime term such as FOB or CIF for container or air freight. Match the term to the transport mode, and default to the multimodal family for anything that is not loaded loose onto a ship. A second common mistake is omitting the named place or the year, which leaves the contract open to interpretation.

Another pitfall is assuming that the party paying for transport also bears the risk during it. Under CIF and CPT, for instance, the seller pays freight but risk passes much earlier, so buyers must arrange their own insurance from that point. Failing to grasp this leaves goods effectively uninsured during a long voyage.

Businesses also underestimate DDP. A seller who agrees to DDP without understanding the destination country's import rules can face registration requirements, unexpected VAT liabilities and delays. Conversely, buyers who accept EXW sometimes discover they cannot legally handle export formalities in the seller's country. Finally, remember that Incoterms are not a substitute for a full contract; they must be paired with clear payment, warranty and dispute clauses. Reviewing your chosen term with a forwarder or customs adviser before signing prevents most of these problems.

Example

Cost and responsibility split for commonly used Incoterms 2020

FAQ

Do Incoterms transfer ownership of the goods? No. Incoterms define who arranges and pays for transport, who handles customs and where risk passes. Ownership and title transfer are governed by your sales contract and applicable law, not by the Incoterm.

Which Incoterms require the seller to arrange insurance? Only CIF and CIP oblige the seller to buy cargo insurance. CIF requires minimum cover, while CIP under the 2020 rules requires a higher level. For all other terms insurance is optional, so each party should insure the leg where it bears the risk.

Can I use FOB or CIF for a container shipment? It is not recommended. FOB and CIF are designed for goods loaded loose onto a vessel. Containers are handed over at a terminal before reaching the ship, so risk does not match reality. Use the multimodal equivalents FCA and CIP instead.

Under DDP, who pays import VAT and duties in France? Under DDP the seller is responsible for import clearance and pays all duties and import taxes at destination. Sellers should confirm they can meet the destination country's requirements before agreeing to this term, as it carries significant obligations.

Why must I always include a named place with the Incoterm? The named place fixes exactly where delivery occurs and, in most cases, where risk passes. Writing "DAP" alone is ambiguous, whereas "DAP Lyon Incoterms 2020" is clear. Always state the term, the place and the edition year in your contract.

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