Incoterms 2020 Explained: All 11 Rules in Plain English

Incoterms are the three-letter terms — FOB, CIF, EXW, DDP — that appear next to prices in international trade. They are published by the International Chamber of Commerce (ICC) and define who does what between seller and buyer: who arranges transport, who pays which costs, who handles customs, and at what point the risk of loss or damage passes from seller to buyer.

The current version is Incoterms 2020, which contains 11 rules. Using them correctly prevents many of the most common export disputes.

What Incoterms Do — and Don't — Cover

Incoterms cover:

• Delivery: where and when the seller delivers the goods
• Transfer of risk: when responsibility for loss or damage passes to the buyer
• Costs: which party pays for transport, loading, insurance, and customs
• Tasks: who arranges transport, insurance, export and import clearance

Incoterms do not cover:

• Transfer of ownership (title)
• Payment terms
• Price
• What happens if a party breaches the contract

Those belong in your sales contract.

Always Name the Place

An Incoterm without a named place is incomplete. Write "FOB Karachi", "FCA Sialkot (seller's warehouse)", or "CIF Hamburg" — and add "Incoterms 2020" so there is no confusion about which version applies.

The Two Groups

Incoterms 2020 splits the 11 rules into two groups.

Rules for Any Mode of Transport

These work for sea, air, road, rail, and multimodal shipments, including containers.

• EXW – Ex Works: the seller makes goods available at their own premises. The buyer handles everything else, including loading and export clearance. Minimum obligation for the seller.
• FCA – Free Carrier: the seller delivers goods, cleared for export, to the carrier nominated by the buyer at a named place — for example the seller's premises or a forwarder's warehouse. Risk transfers at that point.
• CPT – Carriage Paid To: the seller pays for transport to a named destination, but risk transfers when goods are handed to the first carrier.
• CIP – Carriage and Insurance Paid To: like CPT, but the seller also buys insurance. Under Incoterms 2020, CIP requires a high level of cover — Institute Cargo Clauses (A) or similar.
• DAP – Delivered at Place: the seller delivers goods to a named destination, ready for unloading. The buyer handles import clearance and duties.
• DPU – Delivered at Place Unloaded: the seller delivers goods and unloads them at the named destination. DPU replaced the older DAT rule in Incoterms 2020.
• DDP – Delivered Duty Paid: the seller delivers goods to the named destination, cleared for import with duties and taxes paid. Maximum obligation for the seller. See DDP shipping guide.

Rules for Sea and Inland Waterway Transport Only

• FAS – Free Alongside Ship: the seller delivers goods alongside the vessel at the named port of shipment. Common for bulk cargo.
• FOB – Free on Board: the seller delivers goods on board the vessel nominated by the buyer at the named port of shipment. Risk transfers once goods are on board.
• CFR – Cost and Freight: the seller pays sea freight to the named destination port, but risk transfers once goods are on board at the port of shipment.
• CIF – Cost, Insurance and Freight: like CFR, but the seller also buys insurance. Under Incoterms 2020, CIF requires minimum cover — Institute Cargo Clauses (C) or similar — unless the parties agree more.

Summary Table

The "C" Rule Trap

Under CPT, CIP, CFR, and CIF, the seller pays for transport to the destination, but risk passes at origin. Many new exporters assume that because they paid the freight, they are responsible until arrival. They are not — the buyer bears the risk during the main voyage. That is why insurance matters under these terms. See cargo insurance guide.

What Changed in Incoterms 2020

Compared with Incoterms 2010, the main changes were:

• DAT became DPU, reflecting that the destination does not need to be a terminal
• Different insurance levels: CIP now requires higher cover (ICC A), while CIF remains at minimum cover (ICC C)
• FCA and on-board bills of lading: parties can agree that the buyer's carrier issues an on-board bill of lading to the seller — helpful for letters of credit
• Own transport allowed under FCA, DAP, DPU, and DDP
• Security-related costs are allocated more clearly

How to Choose the Right Incoterm

• New exporter, sea freight, want simplicity: FOB or FCA — you handle what you know, the buyer handles international freight.
• Buyer wants delivered prices: CFR, CIF, CPT, or CIP — but get firm freight quotes first. See FOB vs CIF.
• Buyer wants everything handled: DAP or DDP — but only if you understand the destination's clearance and taxes.
• Buyer collects from your factory: FCA is usually better than EXW, because export clearance in Pakistan is best handled by the seller. See EXW vs FCA.

Incoterms and Letters of Credit

Your Incoterm affects the documents required under a letter of credit. For example, a CIF LC will require an insurance document, while an FOB LC will not. Make sure the LC terms match the Incoterm in your contract. See letter of credit explained.

Frequently Asked Questions

How many Incoterms are there in 2020?

There are 11 Incoterms 2020 rules: EXW, FCA, CPT, CIP, DAP, DPU, and DDP for any mode of transport, and FAS, FOB, CFR, and CIF for sea and inland waterway transport.

What is the most common Incoterm for exporters?

FOB and FCA are very common for exporters because they keep international freight on the buyer's side. CIF and CFR are also common when buyers want prices including freight.

Do Incoterms transfer ownership of goods?

No. Incoterms deal with delivery, risk, costs, and tasks. Ownership transfer and payment are governed by the sales contract.

What replaced DAT in Incoterms 2020?

DPU (Delivered at Place Unloaded) replaced DAT, allowing delivery and unloading at any named place, not just a terminal.