Incoterms 2020 Explained: All 11 Rules, Cost and Risk Transfer

Incoterms are the short three letter rules that decide who does what in an international sale. They set out who arranges carriage, who clears customs on each side, who carries the cost at each stage, and, most importantly, the exact point at which risk passes from seller to buyer. The current edition is Incoterms 2020, published by the International Chamber of Commerce.

We teach these rules to procurement and shipping teams across the Gulf, and the same confusion comes up in almost every session. So this guide sets out all 11 rules, what each one actually commits you to, and the traps that cost companies money.

What Incoterms decide, and what they do not

An Incoterm settles four things: who arranges and pays for carriage, who handles export and import formalities, where delivery happens, and where risk transfers. That is a narrow but crucial scope.

What an Incoterm does not do matters just as much. It does not transfer title or ownership. It does not set the price or the payment terms. It does not say what happens if the goods are defective. It is not a contract of carriage, and it is not insurance. Those sit in the sale contract, the transport contract and the policy. Treating an Incoterm as though it covers them is the single most common error we see.

One distinction underpins everything else. The point where cost transfers and the point where risk transfers are not always the same point. Under CIF, for example, the seller pays freight and insurance all the way to the destination port, but risk passes to the buyer much earlier, when the goods are loaded at origin. A buyer who assumes the seller carries risk for as long as the seller carries cost is exposed without knowing it.

The two families

The 11 rules split into two groups, and picking from the wrong group is a frequent and avoidable mistake.

Seven rules for any mode of transport. EXW, FCA, CPT, CIP, DAP, DPU and DDP. These work for air, road, rail, sea or any combination, including containers.

Four rules for sea and inland waterway only. FAS, FOB, CFR and CIF. These were written for bulk cargo loaded across a ship's rail. They assume the seller can place goods on a named vessel.

Containerized cargo is where this goes wrong. Goods handed to a carrier at a container yard are out of the seller's control long before they reach the ship, yet under FOB risk stays with the seller until loading. That gap belongs to nobody in practice and is argued about after the fact. For containers, FCA is the correct choice, and the ICC says so plainly.

The 11 rules at a glance

Any mode of transport:

• EXW, Ex Works. Minimum seller obligation. Goods are made available at the seller's premises. The buyer handles everything from there, including export clearance.
• FCA, Free Carrier. The seller clears for export and hands goods to a carrier named by the buyer. The most flexible rule and the right default for containers.
• CPT, Carriage Paid To. The seller pays carriage to the named destination, but risk passes when goods are handed to the first carrier.
• CIP, Carriage and Insurance Paid To. As CPT, plus the seller buys insurance. Under Incoterms 2020 that cover must be at the all risks level.
• DAP, Delivered at Place. The seller delivers ready for unloading at the named place. The buyer clears for import.
• DPU, Delivered at Place Unloaded. The only rule that requires the seller to unload. Replaced DAT in the 2020 edition.
• DDP, Delivered Duty Paid. Maximum seller obligation. The seller clears for import and pays duty and tax.

Sea and inland waterway only:

• FAS, Free Alongside Ship. The seller delivers alongside the vessel at the named port.
• FOB, Free on Board. Risk passes when goods are on board the vessel.
• CFR, Cost and Freight. The seller pays freight to the destination port. Risk passes on loading at origin.
• CIF, Cost, Insurance and Freight. As CFR plus insurance, at the minimum cover level unless the parties agree more.

Where risk actually passes

Group the rules by risk point and they become far easier to hold in your head.

Risk passes at origin under EXW, FCA, CPT, CIP, FAS, FOB, CFR and CIF. Eight of the eleven. In every one of these the buyer carries the goods for the main journey, whoever is paying for it.

Risk passes at destination under DAP, DPU and DDP. Only these three keep the seller on risk through the main carriage. They are the delivered rules, and they are the ones that genuinely shift exposure onto the seller.

If you remember nothing else, remember that paying the freight and carrying the risk are separate questions. CPT, CIP, CFR and CIF all have the seller paying to move goods that are already at the buyer's risk.

The mistakes that cost money

Using FOB for containers. Covered above, and still the most frequent error in Gulf trade documentation.

Agreeing EXW without thinking about export clearance. Under EXW the buyer is responsible for export formalities in the seller's country, which a foreign buyer often cannot legally complete. FCA solves this and costs the seller very little.

Accepting DDP as a seller without checking import rules. DDP puts the seller on the hook for import duty and tax in a country where it may not be registered. In several markets a nonresident cannot recover import VAT at all.

Naming a country instead of a place. Every rule needs a named place, and the more precise the better. DAP Dubai is weaker than DAP followed by the full delivery address.

Assuming CIF insurance is generous. CIF requires only minimum cover. If you want all risks under a sea rule, say so in the contract or choose CIP instead.

How to choose

Work through four questions. Is the shipment containerized, and therefore in the seven rule family? Who is better placed to arrange carriage on each leg? Who can lawfully clear customs at each end? And where do you actually want risk to sit, given what your insurance covers?

In practice most Gulf importers are well served by FCA or CIP on the way in, and most exporters by FCA or CPT on the way out. The delivered rules suit sellers who want to quote a landed price and have the local presence to support it.

If you would like to work through this with your own shipping documents, our Mastering Incoterms 2020 course covers all eleven rules with worked examples. Teams handling freight day to day often pair it with the Certified Shipping and Freight Forwarding Professional program.

Related reading: what Incoterms mean in plain terms, what changed in the 2020 edition, and how to choose the right rule for a given shipment.

Frequently asked questions

How many Incoterms are there in 2020?

There are 11 rules. Seven apply to any mode of transport and four apply only to sea and inland waterway transport.

Do Incoterms transfer ownership of the goods?

No. Incoterms cover delivery, cost and risk. Title and ownership are set by the sale contract and by the law that governs it.

Which Incoterm should we use for container shipments?

FCA is the correct choice for containers. FOB, CFR and CIF assume goods are loaded onto a vessel, which leaves a gap in risk cover for containerized cargo handed over at a terminal.

Is the seller always responsible until the goods arrive?

No. Under eight of the eleven rules risk passes at origin. Only DAP, DPU and DDP keep the seller on risk through the main carriage.

Does CIF include full insurance cover?

CIF requires only minimum cover. If you need all risks protection, either agree a higher level in the contract or use CIP, which requires the higher level by default.