Incoterms 2020 Explained for Freight Forwarders

Incoterms show up in every freight quote, every commercial invoice, and every purchase order that crosses a border. They are three-letter codes that determine who pays for what, who bears the risk, and at what point responsibility transfers from seller to buyer. Get them wrong and you end up covering costs that should be the other party's problem, or worse, leaving cargo uninsured in transit because both sides assumed the other had it covered.

This guide covers all 11 Incoterms 2020 with practical explanations focused on what freight forwarders need to know: which costs you are responsible for quoting, where risk transfers, and which terms you will encounter most often on your trade lanes.

What Are Incoterms and Why Do They Matter for Freight Forwarders?

Incoterms (International Commercial Terms) are standardized trade terms published by the International Chamber of Commerce (ICC). The current version, Incoterms 2020, has been in effect since January 1, 2020.

They define three things:

1. Cost allocation between buyer and seller (who pays for freight, insurance, customs, etc.)
2. Risk transfer point (where the seller's responsibility for loss or damage ends)
3. Documentary obligations (who arranges transport, who provides insurance certificates, etc.)

What Incoterms do NOT define:

• Transfer of ownership/title (that is governed by the sales contract)
• Payment terms
• Applicable law or dispute resolution

For freight forwarders, Incoterms directly determine:

• Which cost components you need to include in a quote
• Whether you are acting on behalf of the seller, the buyer, or both
• What documents you need to arrange
• Whether cargo insurance is required or optional

The 11 Incoterms 2020: Complete Reference

Incoterms 2020 includes 11 terms, divided into two groups:

• Any mode of transport (7 terms): EXW, FCA, CPT, CIP, DAP, DPU, DDP
• Sea and inland waterway only (4 terms): FAS, FOB, CFR, CIF

Any Mode of Transport

EXW (Ex Works)

Seller's responsibility: Make the goods available at their premises (factory, warehouse). That is it.

Buyer's responsibility: Everything else. Loading, export clearance, freight, insurance, import clearance, delivery.

Risk transfers at: Seller's premises, when goods are made available.

Practical notes for forwarders:

• You are almost certainly working for the buyer under EXW
• The buyer bears all costs and risks from the seller's door onward
• Rarely practical for international trade because the buyer must handle export clearance in a foreign country
• More commonly used for domestic transactions or when the buyer has a strong local presence

Common on: Domestic transactions, some intra-EU trade. Uncommon for LATAM-US trade.

FCA (Free Carrier)

Seller's responsibility: Deliver goods to the carrier or named place, cleared for export.

Buyer's responsibility: Main carriage (freight), insurance, import clearance, and delivery from the named place onward.

Risk transfers at: When goods are handed to the carrier at the named place.

Practical notes for forwarders:

• FCA is the ICC's recommended replacement for FOB when using containers
• With FCA, a new option in Incoterms 2020 allows the buyer to instruct the carrier to issue a bill of lading with an on-board notation to the seller, which is useful for letter of credit transactions
• The named place matters enormously. "FCA seller's warehouse" means the seller loads. "FCA port terminal" means the seller delivers to the terminal.

Common on: Container shipments, air freight, multimodal transport. Growing usage globally.

CPT (Carriage Paid To)

Seller's responsibility: Pay freight to the named destination. Export clearance.

Buyer's responsibility: Risk from the moment goods are handed to the first carrier. Import clearance. Unloading at destination.

Risk transfers at: When goods are handed to the first carrier (which may be before the main carriage begins).

Key distinction: The seller pays the freight but does NOT bear the risk during transit. This is the critical detail that catches people off guard.

CIP (Carriage and Insurance Paid To)

Seller's responsibility: Same as CPT, plus the seller must obtain cargo insurance.

Buyer's responsibility: Same as CPT (risk during transit, import clearance).

Insurance requirement: Under Incoterms 2020, CIP requires "all risks" coverage (Institute Cargo Clauses A or equivalent). This is a change from Incoterms 2010, which only required minimum coverage.

Practical notes for forwarders:

• If you are quoting CIP, include the insurance premium in your cost stack
• Confirm the insured value: standard practice is 110% of CIF/CIP value
• The upgraded insurance requirement under Incoterms 2020 makes CIP more expensive than under the previous version

DAP (Delivered at Place)

Seller's responsibility: Deliver goods to the named destination, ready for unloading. All costs and risks up to that point, except import clearance.

Buyer's responsibility: Import customs clearance, duties, taxes, and unloading.

Risk transfers at: When goods arrive at the named destination, ready for unloading.

Practical notes for forwarders:

• DAP is common for door-to-door international shipments where the seller handles everything except import formalities
• The "named place" is usually the buyer's warehouse or a specified delivery address
• The seller's forwarder manages almost the entire logistics chain

DPU (Delivered at Place Unloaded)

Seller's responsibility: Deliver goods to the named destination AND unload them. All costs and risks up to that point, except import clearance.

Buyer's responsibility: Import customs clearance, duties, taxes.

Risk transfers at: When goods are unloaded at the named destination.

Practical notes for forwarders:

• DPU replaced DAT (Delivered at Terminal) from Incoterms 2010
• The key difference from DAP: the seller is responsible for unloading
• Less commonly used than DAP because the seller bears unloading risk at a location they may not control

DDP (Delivered Duty Paid)

Seller's responsibility: Everything. Delivery to the buyer's door, all costs, all risks, including import customs clearance, duties, and taxes.

Buyer's responsibility: Receiving the goods. That is it.

Risk transfers at: Buyer's named destination after delivery.

Practical notes for forwarders:

• Maximum seller obligation. You are managing the entire supply chain.
• The seller must be able to handle import clearance in the destination country, which requires either a local presence or a reliable customs broker partner
• Common in e-commerce and when sellers want to offer landed-cost pricing
• Watch out: the seller is responsible for import VAT/duties, which can be substantial

Sea and Inland Waterway Transport Only

These four terms should ONLY be used for ocean and inland waterway freight. Using them for container shipments is technically discouraged by the ICC (FCA is preferred) but remains extremely common in practice.

FAS (Free Alongside Ship)

Seller's responsibility: Deliver goods alongside the vessel at the port of shipment. Export clearance.

Buyer's responsibility: Loading onto the vessel, freight, insurance, import clearance.

Risk transfers at: When goods are placed alongside the vessel.

Common on: Bulk cargo, project cargo. Uncommon for containerized freight.

FOB (Free On Board)

Seller's responsibility: Deliver goods on board the vessel at the port of shipment. Export clearance.

Buyer's responsibility: Freight from the port of loading, insurance, import clearance, delivery.

Risk transfers at: When goods are placed on board the vessel at the port of loading.

Practical notes for forwarders:

• FOB is the most commonly used Incoterm globally, and by far the most common in US import transactions
• For US imports: "FOB Shanghai" means the seller's price includes everything up to and including loading the cargo onto the vessel in Shanghai
• Technically, FOB should only apply to non-containerized cargo. For containers, FCA is more appropriate because the seller typically delivers to the terminal, not onto the vessel itself. In practice, "FOB" is used for containerized cargo constantly.
• When quoting for a US importer buying FOB, you are quoting everything from the loading port onward: freight, destination handling, customs clearance, and delivery

CFR (Cost and Freight)

Seller's responsibility: Pay freight to the destination port. Export clearance. Loading.

Buyer's responsibility: Risk during transit (despite seller paying freight). Insurance. Import clearance. Delivery from port.

Risk transfers at: When goods are placed on board the vessel at the port of loading (same as FOB).

Key distinction: Like CPT, the cost and risk transfer points are different. The seller pays the freight but does not bear the transit risk. This creates an insurance gap that both parties need to be aware of.

CIF (Cost, Insurance, and Freight)

Seller's responsibility: Pay freight and insurance to the destination port. Export clearance. Loading.

Buyer's responsibility: Risk during transit (despite seller paying freight and insurance). Import clearance. Delivery from port.

Risk transfers at: When goods are placed on board the vessel at the port of loading.

Insurance requirement: Under Incoterms 2020, CIF only requires minimum coverage (Institute Cargo Clauses C). This is less coverage than CIP, which requires all-risks coverage. This asymmetry between CIF and CIP is deliberate but often misunderstood.

Practical notes for forwarders:

• CIF is the second most common Incoterm in international trade after FOB
• Common for LATAM commodity exports (coffee, minerals, agricultural products)
• The insurance under CIF is minimum coverage. Buyers who want full protection should arrange their own additional insurance or negotiate CIP/CIF with enhanced coverage in the contract
• For customs valuation purposes, many countries use the CIF value as the basis for duty calculation

Incoterms Comparison: Risk and Cost Transfer Points

How Incoterms Affect Your Quotations and Operations

The Incoterm on a deal directly determines the scope of your quote. Quoting the wrong scope loses you money or loses you the deal.

Quoting by Incoterm

If the buyer purchases FOB: Your quote (to the buyer) covers: ocean/air freight, destination handling, import clearance, duties (if applicable), and delivery. You do NOT include origin costs.

If the buyer purchases CIF: You do NOT include freight or insurance in your quote to the buyer (the seller is paying those). Your quote covers: destination handling, import clearance, duties, and delivery.

If the buyer purchases DDP: The seller's forwarder quotes the entire chain. If you are the seller's forwarder, you quote everything: origin handling, freight, insurance, destination handling, import clearance, duties, and delivery.

If the buyer purchases EXW: The buyer's forwarder quotes the entire chain. If you are the buyer's forwarder, you quote everything from the seller's warehouse onward.

Understanding this scoping is essential. For a deeper look at building freight quotes, see our step-by-step quoting guide.

Common Mistakes with Incoterms

1. Using FOB for containerized shipments. Technically, FOB applies to goods placed on board the vessel, which does not precisely describe containerized cargo delivered to a terminal. FCA is more appropriate. However, FOB is so deeply entrenched in trade practice that this distinction is widely ignored. Just be aware of it.

2. Assuming CIF includes adequate insurance. CIF only requires Institute Cargo Clauses C (minimum coverage), which excludes many common risks. If the cargo is valuable or fragile, the buyer should arrange additional coverage.

3. Confusing cost payment with risk bearing. Under CPT, CFR, CIP, and CIF, the seller pays freight but the buyer bears transit risk. This means if cargo is damaged in transit, the buyer absorbs the loss (unless insured). Both parties must understand this split.

4. Not specifying the named place precisely. "FCA Miami" is vague. "FCA Miami International Airport, Cargo Area Building 700" is precise. The named place determines where costs and risks transfer, so ambiguity creates disputes.

5. Using DDP without understanding tax implications. The seller under DDP must pay import duties and taxes in the destination country. For exports to countries with high tariffs or complex tax systems, DDP can be significantly more expensive than the seller anticipated.

FAQ

What is the difference between FOB and CIF?

Under FOB, the seller delivers goods on board the vessel. The buyer pays for and arranges freight and insurance from the loading port onward. Under CIF, the seller pays for freight and minimum insurance to the destination port. However, risk transfers at the same point for both (loading port), so under CIF the buyer bears transit risk despite the seller paying for freight. The practical difference is who arranges and pays for ocean freight and insurance.

Which Incoterm is most commonly used in the Americas?

FOB is the most common for US import transactions. CIF is prevalent for Latin American commodity exports. FCA is growing in usage for containerized cargo and is technically more appropriate than FOB for container shipments, though adoption lags behind. For LATAM-US trade specifically, FOB and CIF account for the majority of transactions.

When will Incoterms be updated after 2020?

The ICC typically revises Incoterms every 10 years. Incoterms 2020 took effect January 1, 2020, so the next revision would be expected around 2030. However, parties can use any version of Incoterms they agree upon. Always specify which version governs the transaction (e.g., "FOB Shanghai, Incoterms 2020").

Which Incoterm is best for a first-time importer?

For first-time importers without logistics expertise, DAP or DDP are the safest choices because the seller handles most or all logistics. The tradeoff is cost: the seller builds their logistics costs (and margin) into the price. As importers gain experience, moving to FOB or FCA gives them more control over costs by choosing their own forwarder and carriers. A good freight forwarder helps clients make this transition.

Do Incoterms determine who pays customs duties?

Only DDP specifies that the seller pays import duties and taxes. Under all other Incoterms, the buyer is responsible for import clearance, including duties and taxes. Export duties and clearance costs are always the seller's responsibility (except under EXW, where the buyer handles everything including export clearance).

Need to build quotes that correctly scope costs based on Incoterms? NuevaFlo's quoting tools handle Incoterm-based cost scoping automatically, so you never quote the wrong set of charges. See how it works.

This guide reflects Incoterms 2020 as published by the International Chamber of Commerce. For the official text, refer to ICC Publication No. 723E. Always consult with trade compliance professionals for complex transactions.