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

Read the rule and the place together

The ICC's introduction to the rules says they describe who does what, where the seller delivers and the risk passes, and which party pays which costs^[1]. 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. For every rule except the C rules, the named place is where the goods are delivered and the risk passes^[1]. Under the D rules it is both the place of delivery and the destination^[1]. Under the C rules (CFR, CIF, CPT and CIP) it is the destination the seller must pay carriage to, which is not the place of delivery^[1], 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 ICC's own guidance is that leaving the year out could cause problems^[1].

The rules also stay silent on payment terms, remedies for breach, or whether there is a contract at all^[1], and on when ownership of the goods passes^[1]. 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 7 for any mode of transport and 4 for sea and inland waterway transport^[1]. 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)^[4]. 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 and CIF 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 on board 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 catch is containers. When goods are handed to a carrier at a container terminal before they go on board, the ICC says the parties should consider FCA rather than FOB^[3], because FOB assumes the seller delivers on board, not at the terminal gate.

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 goods are delivered once loaded on the buyer's transport at the seller's premises^[2]. 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, which makes it the safer choice for containerised goods.

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 on handover to the carrier the seller contracted, with insurance bought by the seller^[2], so the risk is yours for the whole voyage. Unless the contract says otherwise, the insurance must cover at least 110% of the contract price^[2], and since Incoterms 2020 the default is cover that meets Institute Cargo Clauses (A)^[4] or similar clauses, a wider level of cover than the minimum under CIF. It is still open to the parties to agree on a lower level of cover^[2], so check what the policy actually covers.

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 on the arriving transport, ready for unloading, at the named destination^[2], so the goods travel at the seller's risk until they reach you. The seller has no obligation to clear the goods for import or pay import duty^[2]: you, or a customs broker you hire, still file the entry and pay the duty. DPU works the same way, except that the seller also unloads the goods.

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

DDP places the maximum level of obligation on the seller of all 11 rules^[2]. The seller delivers at the named destination, cleared for import, ready for unloading^[2], 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.

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^[5]. It also leaves out transportation after importation, if identified separately^[6], 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: ask for DAP or DDP, and ask for freight and duty as separate lines.
• Your goods ship in a container: prefer FCA over FOB, and 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.

Every quote we send names its Incoterms rule and the named place, so you can see which of these costs sit inside our price and which are yours.