Incoterms (International Commercial Terms), published by the ICC (International Chamber of Commerce, Paris), define who pays for what and who bears the risk at each stage of an export shipment. The current version is Incoterms 2020, in force until the next revision. There are 11 terms, and the single most common mistake exporters make is treating them as simply "who pays the freight" — in reality, cost obligation and risk transfer are two separate questions, and they don't always shift at the same point in the journey.
The journey has distinct zones
Goods move: exporter's warehouse → agreed inland point → port of loading → high seas → port of discharge → agreed place/importer's warehouse. Each Incoterm fixes a specific point in this journey where the seller's cost obligation ends and a separate (sometimes different) point where risk passes to the buyer.
The 11 terms, grouped by where they apply
E-term (any mode of transport)
- EXW (Ex Works): Both cost and risk transfer to the buyer at the seller's own gate/warehouse. The seller's obligation is minimal — goods just need to be made available. The buyer arranges and pays for everything from that point on, including export clearance in the seller's own country, which surprises a lot of first-time buyers.
F-terms (seller delivers to a carrier chosen by the buyer, any mode)
- FCA (Free Carrier): Both cost and risk transfer the moment goods are loaded onto the first carrier (usually a truck) at an agreed point in the exporter's country — before the goods even reach the port.
- FAS (Free Alongside Ship): Sea/inland-waterway only. Seller's obligation ends once goods are placed alongside the vessel at the port of loading (not yet loaded on board). Risk transfers at the same point.
- FOB (Free On Board): Sea/inland-waterway only. Seller's obligation and risk both transfer once goods are actually loaded on board the vessel. This is the most commonly used term in general export practice.
C-terms (seller arranges and pays main transport, but risk transfers earlier — this is the one people get wrong most often)
- CFR (Cost and Freight): Seller pays for loading on board plus the ocean freight to the destination port. But risk transfers to the buyer as soon as goods are on board at the *origin* port — the seller is paying for a leg of the journey they're no longer bearing the risk for.
- CIF (Cost, Insurance, and Freight): Same as CFR, plus the seller also arranges and pays for marine insurance covering the buyer's risk from the port of loading onward. Risk still transfers at the origin port loading point, same as CFR — the seller is buying insurance to cover a risk that is legally already the buyer's.
- CPT (Carriage Paid To): Any mode. Seller pays freight to the named destination, but risk transfers when goods are handed to the first carrier in the seller's own country — even earlier than the C-terms above.
- CIP (Carriage and Insurance Paid To): Any mode. Same as CPT, plus the seller must also arrange insurance — and under Incoterms 2020, CIP requires the higher-tier "all risks" insurance coverage (ICC Clause A) by default, versus CIF's minimum-coverage default (ICC Clause C). This is a meaningful upgrade in buyer protection between the two terms and frequently misunderstood as identical.
D-terms (seller bears cost and risk all the way to a destination point — the safest terms for the buyer, priced accordingly)
- DAP (Delivered at Place): Seller bears cost and risk until goods reach the agreed place in the buyer's country, but the buyer is responsible for unloading.
- DPU (Delivered at Place Unloaded): Same as DAP, except the seller is also responsible for unloading at the destination — the only Incoterm where the seller's risk explicitly extends through the unloading step.
- DDP (Delivered Duty Paid): The seller's maximum obligation — cost and risk all the way to the buyer's warehouse, including clearing the goods through the *importing* country's customs and paying any import duties. A true "warehouse to warehouse" deal from the seller's side.
Practical takeaways
- Quote using the correct Incoterm and be explicit about it in every Proforma Invoice and commercial invoice — a price without a stated Incoterm is not a complete price.
- Under CIF/CIP specifically, don't assume "minimum insurance is fine" — confirm with the buyer whether they expect the CIF-default minimum (ICC Clause C) or want you to step up to broader coverage; banks financing the deal may also have their own minimum requirement, commonly at least 110% of the invoice value insured.
- FOB and FCA are the terms most exporters should default to when starting out — cost and risk transfer together, at a clear, easy-to-verify point, which avoids the C-term trap of paying for a leg of transport you're no longer at risk for.