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If you import goods, the Incoterm on your purchase order decides more than you might think. It determines which part of the journey you pay for, the moment the goods become your risk, who handles export and import formalities, and therefore what your forwarder should quote, and to whom.
Incoterms® are standard trade rules published by the International Chamber of Commerce (ICC). The current edition, Incoterms® 2020, contains eleven rules. Each is a three-letter code followed by a named place, for example "FCA Shenzhen warehouse" or "DAP Hamburg".
What Incoterms do, and do not, cover
Incoterms allocate costs, risk and tasks (such as export clearance) between seller and buyer. They do not decide when ownership of the goods passes, how or when you pay the supplier, or what happens if the contract is breached. Those belong in the sales contract.
They also do not choose a carrier or set a price. They tell you, as the importer, which costs you need a quote for.
The two families of rules
The eleven rules fall into two groups.
Rules for any mode of transport (sea, air, road, rail or a combination): EXW, FCA, CPT, CIP, DAP, DPU and DDP.
Rules for sea and inland waterway only: FAS, FOB, CFR and CIF.
A common mistake is to use a sea-only rule, typically FOB, for containerised or air cargo. With FOB, risk passes when goods are on board the vessel, but in container shipping the seller hands the container to the terminal days earlier, at a point they no longer control. For containers, FCA is usually the better choice.
The rules, one by one
EXW: Ex Works
The seller makes the goods available at its premises. You arrange and pay for everything else: loading, export clearance, transport, import. It looks cheap but places export formalities on you, in a country where you may not be the legal exporter. Use with care.
FCA: Free Carrier
The seller delivers the goods, cleared for export, to the carrier you nominate at the named place, typically their premises or your forwarder's warehouse. Risk passes on delivery. For most importers buying containerised or air cargo, FCA is the cleanest rule.
CPT: Carriage Paid To
The seller pays for transport to the named destination, but risk passes to you as soon as the goods are handed to the first carrier. You carry the risk for a journey the seller arranged. Make sure you have insurance in place.
CIP: Carriage and Insurance Paid To
As CPT, but the seller must also buy cargo insurance for your benefit. Under Incoterms® 2020, CIP requires all-risks cover (Institute Cargo Clauses A), the broadest standard level.
DAP: Delivered at Place
The seller delivers to the named place, for example your warehouse, ready for unloading. You handle import clearance and pay duties and taxes. Popular, because it is simple for the buyer while keeping import formalities in your control.
DPU: Delivered at Place Unloaded
As DAP, but the seller also unloads. It replaced DAT (Delivered at Terminal) in the 2020 edition and can be used for any place, not only a terminal.
DDP: Delivered Duty Paid
The seller delivers, cleared for import, with duties and taxes paid. Maximum obligation for the seller. For the buyer it is convenient, but the seller is acting as importer of record in your country, which is not always possible or desirable, particularly for VAT recovery.
FAS: Free Alongside Ship
Sea only. The seller places the goods alongside the vessel at the port of loading. Used mainly for bulk and break-bulk cargo.
FOB: Free on Board
Sea only. The seller loads the goods on board the vessel at the named port; you pay ocean freight and everything after. Widely used, and well suited to bulk cargo. For containers, consider FCA instead.
CFR: Cost and Freight
Sea only. The seller pays ocean freight to the destination port, but risk passes to you once the goods are on board at origin.
CIF: Cost, Insurance and Freight
Sea only. As CFR, plus the seller buys insurance. Note the difference from CIP: CIF requires only minimum cover (Institute Cargo Clauses C), which excludes many common risks. Check what you are actually getting.
Which rule should an importer choose?
There is no single right answer, but a few principles help.
- Control the main leg if you can. Buying on FCA (or FOB for bulk) lets you choose the forwarder, the carrier and the routing, and see the freight cost clearly rather than having it built into the product price.
- Match the rule to the mode. Use the "any mode" rules for containers and air freight.
- Keep import formalities with you unless the seller is genuinely set up to act as importer in your country. DAP is often a sensible middle ground.
- Know where your risk begins, and insure from that point. With CPT and CFR in particular, risk passes long before the goods arrive.
How this affects your freight quote
When you ask a forwarder for a quote, tell them the Incoterm and named place. On FCA from a supplier's factory, a quote should cover collection onwards. On FOB, from the port of loading. On DAP, you may only need a quote for import clearance and duties, because the seller is paying for transport.
If you are not sure which Incoterm applies, choose "Not sure" on our quote form and we will help you work it out from your purchase order.
{{TODO: review by a qualified person; confirm examples reflect the trades Cargo Captain serves}}Incoterms® is a registered trademark of the International Chamber of Commerce. This article is a general guide and not legal advice; for the full rules, refer to the ICC publication.