Lesson 9: Incoterms Overview
Understanding Risk, Responsibility, Cost, and Delivery Points
(All 11 Incoterms 2020)
Author: Saman Memarpour
Introduction
Incoterms (International Commercial Terms) define how risk, costs, and responsibilities are divided between the buyer and the seller in international trade.
Every trader must know Incoterms because they determine:
- Who pays for transport
- Who arranges insurance
- Where risk transfers from seller to buyer
- Who handles customs clearance?
- Who pays for loading/unloading charges?
Mistakes in Incoterms lead to financial losses, disputes, shipment delays, and contract failures.
This lesson explains all 11 Incoterms 2020 in clear, real-world terms for commodity trading.
The 11 Incoterms 2020
Incoterms are divided into two groups:
A. Incoterms for Any Mode of Transport (7 terms)
- EXW – Ex Works
- FCA – Free Carrier
- CPT – Carriage Paid To
- CIP – Carriage and Insurance Paid To
- DAP – Delivered at Place
- DPU – Delivered at Place Unloaded
- DDP – Delivered Duty Paid
B. Incoterms for Sea & Inland Waterway Only (4 terms)
- FAS – Free Alongside Ship
- FOB – Free on Board
- CFR – Cost and Freight
- CIF – Cost, Insurance and Freight
Let’s break them down one by one.
A. Incoterms for ANY Mode of Transport
1.EXW – Ex Works (Seller’s Warehouse)
- Risk transfers: At the seller’s premises.
- Seller pays: Nothing except making goods available.
- Buyer pays: Everything.
Used when:
- Buyer wants complete control of logistics.
- Local/domestic shipments.
Disadvantage:
- Buyer bears maximum risk.
2. FCA – Free Carrier (Seller Delivers to Buyer’s Carrier)
- Risk transfers: When the seller hands goods to the buyer’s carrier.
- Seller pays: Export clearance.
- Buyer pays: Main transport, insurance, and import clearance.
Used for:
- Containers (often better than FOB).
- Most modern logistics chains.
3. CPT – Carriage Paid To (Freight Paid by Seller)
- Risk transfers: When goods are handed to the first carrier.
- Seller pays: Freight to destination.
- Buyer pays: Risk during transport after the first carrier.
Important point:
- Cost and risk transfer at DIFFERENT places.
4. CIP – Carriage and Insurance Paid To
Same as CPT, but the seller provides insurance.
Used when:
- Buyer wants insured delivery without handling the insurance process.
Note:
- CIP requires higher insurance coverage than CIF.
5. DAP – Delivered at Place (Destination)
- Risk transfers: When goods arrive at the buyer’s destination, ready for unloading.
- Seller pays: All transport to the buyer’s city.
- Buyer pays: Import clearance & duties.
Used for:
- Road deliveries
- Container logistics
- E-commerce cross-border shipments
6. DPU – Delivered at Place Unloaded
- Only the Incoterm in which the seller must unload the goods.
- Risk transfers: After goods are unloaded at the destination.
- Seller pays: Transport + unloading.
Used for:
- Projects
- Machinery shipments
- Warehouse deliveries
7. DDP – Delivered Duty Paid
- Seller handles EVERYTHING, including import tax.
- The buyer simply receives goods.
Seller pays:
- Transport
- Insurance
- Export clearance
- Import clearance
- Import duties
- Delivery to the final point
Used for:
- Finished goods, high-value shipments
- Buyers with import restrictions
Disadvantage:
- High risk for the seller.
B. Sea & Inland Waterway Incoterms (Bulk Cargo, Fertilizer, Commodities)
8. FAS – Free Alongside Ship
- Risk transfers: When goods are placed alongside the vessel.
- Seller pays: Export clearance.
- Buyer pays: Loading, freight, insurance, import.
Used for:
- Bulk cargo at specific ports
- Government-to-government shipments
9. FOB – Free On Board
- Risk transfers: When goods are loaded ON the vessel.
- Seller pays: Loading, export clearance.
- Buyer pays: Freight, insurance, import.
Used for:
- Bulk cargo (urea, grains, ores, coal, sugar)
- Commodities shipped by vessel
Important:
- FOB is NOT recommended for containers — use FCA instead.
- CFR – Cost and Freight
- Risk transfers: Once goods are loaded on the ship.
- Seller pays: Freight to destination.
- Buyer pays: Risk during voyage + insurance.
Used for:
- Bulk fertilizers from the Middle East, North Africa, and Russia
- Shipments where the buyer wants the freight cost included, but handles their own insurance.
10. CIF – Cost, Insurance and Freight
Same as CFR, but the seller provides marine insurance.
Seller pays:
- Freight
- Insurance
- Export costs
Risk transfers:
- Only when goods are loaded on the ship.
Used for:
- Bulk commodities
- Government tenders
- Buyers needing minimum insurance
Risk Transfer Summary Table
| Incoterm | Who Bears Risk? | When Risk Transfers |
|---|---|---|
| EXW | Buyer | Seller’s premises |
| FCA | Buyer | Goods delivered to the first carrier |
| CPT | Buyer | First carrier handover |
| CIP | Buyer | First carrier handover (seller provides insurance) |
| DAP | Buyer | Arrival at destination (before unloading) |
| DPU | Buyer | After unloading at the destination |
| DDP | Buyer | Until final delivery & import clearance |
| FAS | Buyer | Alongside ship |
| FOB | Buyer | Goods loaded on the ship |
| CFR | Buyer | Goods loaded on the ship |
| CIF | Buyer | Goods loaded on board the vessel (seller provides insurance) |
Choosing the Right Incoterm as a Trader
Best for Buyers:
✔ CIF (insurance included)
✔ CIP
✔ DDP (seller handles everything)
Best for Sellers:
✔ FOB
✔ FCA
✔ EXW
Balanced Options:
✔ CFR
✔ CPT
✔ DAP
Professional Tips for Traders
1. Never mix payment methods and Incoterms incorrectly
Example:
❌ CIF + TT advance = risky for seller
✔ CIF + LC = normal
✔ FOB + TT 30/70 = common
2. Use the correct Incoterms for containers.
- FCA, CPT, CIP, DAP, DPU
- NOT FOB.
3. Choose Incoterms based on control.
More control = more responsibility.
4. Incoterms do NOT define ownership.
They define risk and cost, not legal ownership, unless the contract states otherwise.
5. Always specify Incoterms with the place.
Example:
✔ FOB Jebel Ali Port
✔ CIF Mombasa Port
✔ DAP Lagos Warehouse
Without a place, the Incoterm is incomplete and legally weak.
Conclusion
Incoterms determine the financial and operational structure of a trading deal.
Mastering them protects you from unnecessary risks, strengthens your negotiation power, and ensures professional communication with suppliers, buyers, and logistics partners.
You now understand all 11 Incoterms — an essential foundation for real-world trading.
What Comes Next?
In the following lessons, you will learn:
