Incoterms: the rules that decide who pays and who carries the risk

Read the rule and the place together

An ICC Academy guide to the rules says each one clarifies, among other things, the exact place and point at which the goods are delivered, and risk passes from seller to buyer^[2], and which costs each side bears. A shipping term on a quote has two halves: the three-letter rule and a named place, such as "FOB" plus a port. The place does different work depending on the rule. Under the E and F rules it is the place of delivery: under FOB, for example, the seller delivers once the goods are loaded onto the vessel at the named port of shipment^[3]. Under DAP and DDP, ‘delivery’ and ‘destination’ refer to the same concept^[4]. Under the C rules (CFR, CIF, CPT and CIP) the place written after the rule is the named place of destination, not the place of delivery^[5], so a C-rule price quoted to your port does not mean the seller carries the risk that far.

Write the version after the place, as in "FOB, named port, Incoterms 2020". The International Trade Administration's guidance is that the parties need to clearly specify the chosen version of Incoterms being used^[6].

The same guidance lists what the rules leave out: they do not reference the method nor timing of payment^[6], and they do not settle when title, or ownership of the goods, passes from the seller to the buyer^[6]. Those belong in your purchase order or terms of sale, not in the three letters.

All eleven rules at a glance

Incoterms 2020 groups its rules into seven for any mode(s) of transport^[6] and four rules for sea and inland waterway transport^[6]. The column on the right is the point where the seller has delivered and the risk of loss or damage becomes yours.

In Incoterms 2020, DAT was renamed DPU (Delivered at Place Unloaded)^[11]. A quote that still says DAT is working from the old edition, so ask the supplier to restate it.

The sections below follow one illustrative order through FOB, FCA, CIP, DAP and DDP; EXW, FOB and CIF also have their own entries. Each example uses the same illustrative costs, so you can see how the landed cost per unit comes out when the seller's price covers more or less of the journey.

FOB: delivered on board at the port of shipment

Under FOB the seller delivers once the goods are loaded onto the vessel at the named port of shipment^[3], and every cost after that point is yours: the ocean freight, the insurance, the import entry and the duty. The entry on FOB covers the port charges an FOB price should include, why goods handed over at a container terminal suit FCA better, and what US customs values on an FOB order.

An FOB quote landed in the US

Line	Amount
FOB price, 2,000 units at $4.20	$8,400
Ocean freight and insurance you book	$930
Duty at 10% (assumed) of the FOB price	$840
Port, customs fees, broker and delivery at destination	$510
Landed cost	$10,680
Landed cost per unit	$5.34

Illustrative figures, not a quote. Real prices depend on the spec, quantity and factory.

FCA: the seller loads, you take the main carriage

Under FCA at the seller's premises, the seller delivers by loading the goods onto the buyer's collecting vehicle^[7]. So the seller does the loading, which is one practical difference from EXW. If the named place is somewhere else, such as your forwarder's warehouse, delivery happens when the goods arrive there on the seller's transport, ready for unloading. FCA works for any mode, and an ICC Academy guide calls it the appropriate rule when goods are transported in containers or pallets and multiple modes of transportation are used^[3].

An FCA quote landed in the US

Line	Amount
FCA price at the factory, 2,000 units at $4.05	$8,100
Trucking to the port and terminal charges you book	$310
Ocean freight and insurance you book	$930
Duty at 10% (assumed) of the FCA price	$810
Port, customs fees, broker and delivery at destination	$510
Landed cost	$10,660
Landed cost per unit	$5.33

Illustrative figures, not a quote. Real prices depend on the spec, quantity and factory.

CIP: carriage and insurance paid, risk passed early

CIP is the any-mode counterpart of CIF. The seller pays the carriage to the named destination, but delivers when the goods have been handed over to the carrier hired by the seller^[8], so the risk is yours for the whole voyage. The insurance must cover at least 110% of the contract price^[5], and since Incoterms 2020 the default is cover that meets Institute Cargo Clauses (A)^[11] or similar clauses, a wider level of cover than the minimum under CIF. The parties can agree lower cover: that level applies unless otherwise agreed^[5], so check what the policy actually covers.

CPT, Carriage Paid To, works like CIP without the insurance. The seller hands the goods to its carrier at origin, where the risk passes to you, and pays the carriage to the named destination, which an ICC Academy guide describes as the place to which seller must arrange and pay for transport^[5]. Under CPT the seller is not obligated to provide insurance for the goods^[5], so arrange cargo insurance yourself for the whole journey.

A CIP quote landed in the US

Line	Amount
CIP price to the US port, 2,000 units	$9,330
Freight and insurance inside that price, shown on the invoice	$930
Value for US duty (price minus international freight and insurance)	$8,400
Duty at 10% (assumed)	$840
Port, customs fees, broker and delivery at destination	$510
Landed cost	$10,680
Landed cost per unit	$5.34

Illustrative figures, not a quote. Real prices depend on the spec, quantity and factory.

DAP: delivered to your door, duty still yours

Under DAP the seller delivers when the goods are at buyer's disposal at the agreed destination, still loaded on the arriving vehicle^[4], so the goods travel at the seller's risk until they reach you. The buyer must manage and pay for all import clearance formalities^[4]: you, or a customs broker you hire, file the entry and pay the duty. DPU works the same way, except that the seller also unloads the goods.

A DAP quote landed in the US

Line	Amount
DAP price to your warehouse, 2,000 units	$9,630
Freight and insurance to the US port inside that price, shown on the invoice	$930
Delivery from the port to your warehouse inside that price, shown on the invoice	$300
Value for US duty (price minus both)	$8,400
Duty at 10% (assumed)	$840
Customs entry, fees and broker you pay	$210
Landed cost	$10,680
Landed cost per unit	$5.34

Illustrative figures, not a quote. Real prices depend on the spec, quantity and factory.

DDP: one price with the duty inside

Under DDP the seller takes on maximum responsibility for risks and costs^[4]. The seller delivers when the goods are at the buyer's disposal at the agreed point in the designated destination, ready for unloading from the arriving vehicle^[4], and pays the import duty and taxes. A DDP price is the nearest thing to a landed cost printed on a quote, but it folds freight, duty and the seller's allowance for carrying them into one number. Ask for those as separate lines, or you cannot tell whether the price is fair.

A DDP quote compared with the others

Line	Amount
DDP price to your warehouse, 2,000 units at $5.45	$10,900
Anything you add	$0
Landed cost per unit	$5.45
Landed cost per unit under the FOB, CIP and DAP examples above	$5.34

Illustrative figures, not a quote. Real prices depend on the spec, quantity and factory.

Why the rule changes your duty bill

For goods entering the United States, the value that duty is charged on excludes the cost of international freight and insurance^[12]. It also leaves out transportation after importation, if identified separately^[13], which is why the DAP example deducts the delivery leg from the port. A C-rule or D-rule price includes that freight, so it should come off before the duty is worked out, which only works if the seller shows it as a separate line. That deduction is the first step when you work out import duty and landed cost from a quote.

Choosing a rule for an overseas order

• You have a freight forwarder: ask for FCA, or FOB for loose cargo loaded directly onto the ship. You control the main carriage and see its cost.
• You want one number to your door: add freight, duty and fees to an FOB or FCA price, or, if a seller quotes DAP or DDP, ask for freight and duty as separate lines.
• Your goods ship in a container: prefer FCA over FOB, and, if a seller quotes a C rule, CIP over CIF, so the risk passes where the factory actually hands the goods over.
• You are comparing suppliers: put every quote on the same basis, landed cost per unit to your warehouse, before you compare. A lower unit price on EXW terms can cost more landed than a higher one on FOB terms, and a small MOQ spreads the fixed costs over fewer units.

When manufacturers quote you, ask each one to name its Incoterms rule and the named place, so you can see which of these costs sit inside its price and which are yours. To start every quote on the same basis, write the rule and named place you want into your request for quotes.