Incoterms: who pays for what
An Incoterm is three letters in a contract that settle two questions: who pays each leg of the journey, and at what point the risk of loss passes from seller to buyer. They are not payment terms and they do not decide who owns the goods.
Below, the general rule first, then a table of all eleven and each rule in turn, in the order of how much the seller takes on — from EXW, where the seller does almost nothing, to DDP, where the seller does everything including the duty.
Incoterms
The standard three-letter terms that decide who pays for transport and insurance, where the risk passes from seller to buyer, and who handles export and import clearance.
What they actually settle
Three things, and they do not always move together: who bears the cost, at which point the risk of loss transfers, and which party is responsible for clearance on each side.
They do not settle payment terms, ownership, or what happens if the goods are wrong. Those belong in the contract.
Always name the place
An Incoterm without a named location is incomplete. “FOB” means nothing on its own; “FOB Shanghai” means something. Disputes usually start with a term quoted without its place.
All eleven rules on one table
| Rule | Seller pays transport up to | Risk passes | Export | Import |
|---|---|---|---|---|
| EXW | nothing — buyer collects | at the seller’s premises | Buyer | Buyer |
| FCA | the named place | at handover to the carrier | Seller | Buyer |
| FAS | alongside the ship | alongside the ship | Seller | Buyer |
| FOB | on board | on board | Seller | Buyer |
| CFR | the destination port | on board | Seller | Buyer |
| CIF | the destination port, insured | on board | Seller | Buyer |
| CPT | the named destination | at the first carrier | Seller | Buyer |
| CIP | the named destination, insured | at the first carrier | Seller | Buyer |
| DAP | the named destination | at the destination, not unloaded | Seller | Buyer |
| DPU | the destination, unloaded | after unloading | Seller | Buyer |
| DDP | the destination, duty paid | at the destination, not unloaded | Seller | Seller |
Four of them are for sea and inland waterway only: FAS, FOB, CFR and CIF. Using FOB for a container is the most common mistake in this table — a container is handed to a terminal days before it is loaded, and FCA is the rule written for that.
Editions, and the rules that no longer exist
Incoterms are rewritten about once a decade: 2000, 2010, 2020. The edition in force is Incoterms 2020, and the older ones do not expire — a contract that says “Incoterms 2010” is governed by the 2010 text. That is why the edition belongs in the quote next to the place: “FCA Rotterdam, Incoterms 2020”.
DDU (Delivered Duty Unpaid) was dropped in 2010. Its modern equivalent is DAP: delivered to the named place, import duties and taxes on the buyer. A supplier quoting DDU today almost always means DAP.
DAF, DES and DEQ disappeared in the same revision. DAF and DES became DAP, DEQ became DAT — and DAT itself was renamed DPU in 2020, when “terminal” was widened to any place where the goods can be unloaded.
The pairs people actually choose between
Nobody picks one rule out of eleven. The real question is always a pair, and in each pair one thing differs — not five.
| Pair | What actually differs | Which one |
|---|---|---|
| EXW / FCA | Under FCA the seller clears the goods for export and loads them. Under EXW it does neither, and a foreign buyer often cannot lodge the export declaration in the seller’s country at all. | FCA, unless you have your own presence at the seller’s end. |
| FCA / FOB | FOB is written for goods loaded on a vessel, and risk passes on board. A container is handed to a terminal days before that happens. | FCA for containers, FOB for bulk and breakbulk. |
| FOB / CIF | The risk point is identical — on board. CIF adds the seller’s freight and insurance to the destination port, and that freight then sits inside the customs value. | FOB to control the freight and see the real customs value; CIF for convenience on small shipments. |
| CFR / CIF | Insurance, and nothing else. CIF is CFR plus cover — the minimum required by the rule. | CIF, unless your own policy already covers the sea leg. |
| CPT / CIP | The same difference, for any mode of transport. Since 2020 CIP requires all-risks cover, while CIF still requires only the minimum. | CIP for valuable goods; CPT if you insure the leg yourself. |
| DAP / DDP | Who clears the import and pays duty and import VAT. | DAP in almost every B2B case: under DDP the seller pays import VAT it usually cannot reclaim. |
| DAP / DPU | Who unloads. DPU is the only rule of the eleven under which the seller must. | DPU only where the named place actually has unloading equipment. |
The pair that costs real money is the last but one. What it means for a price and for a VAT return is a longer story: DDP or DAP, in detail.
EXW (Ex Works)
The seller makes the goods available at their own premises and does nothing else. You arrange collection, export clearance, freight, import and delivery — and carry the risk from the factory gate.
Cheap on the invoice, awkward in practice
EXW gives the lowest-looking quote because the supplier has priced nothing but the goods. The catch is export clearance: it must be done in the seller’s country, usually by someone established there, which is difficult to arrange from abroad.
For containers from Asia, FOB is normally the better default even though the quoted price is higher.
FCA (Free Carrier)
The seller delivers the goods, cleared for export, to a carrier you nominate at a named place. Risk passes at handover, not at the ship’s rail.
Why it matters for containers
FOB was written for goods loaded over a ship’s rail. Containers are handed over at a terminal days before loading, which leaves a gap where the goods are neither the seller’s risk nor properly yours.
FCA closes that gap by transferring risk at handover. It is the correct term for containerised freight, even though FOB is still used loosely for it.
FAS (free alongside ship)
The seller delivers by placing the goods alongside the vessel at the named port, cleared for export. Risk passes there, before anything is loaded.
When it is the right term
Written for cargo that is craned aboard as it is: timber, grain, machinery that fits in no container. For containerised freight it is the wrong choice, because a container is handed to a terminal, not laid beside a ship. That is what FCA is for.
FOB (Free On Board)
The seller delivers the goods on board the vessel at the named port and handles export clearance. From that point the freight, insurance and risk are yours.
Why it is the sensible default
The supplier deals with their own country’s export formalities, which they can do and you cannot, while you keep control of the freight — including the ability to shop for a better rate and to see the real customs value.
FOB applies to sea and inland waterway transport. For containers handed to a carrier at a terminal rather than loaded on a vessel, FCA is technically the correct term, though FOB is used loosely in practice.
CFR (cost and freight)
The seller pays freight to the named destination port, but risk passes to the buyer once the goods are on board at origin.
The gap that catches people
Cost and risk part company here. The seller’s invoice covers the sea leg, yet from the moment the goods are aboard, a loss at sea is the buyer’s loss. Nothing in CFR obliges the seller to insure that leg — that is CIF.
CIF (cost, insurance and freight)
The value of the goods plus insurance and freight up to the point of entry into the EU. This is normally the customs value — the figure duty is calculated on.
Why it surprises people
Because duty is charged on the freight as well as the goods. A shipment with expensive freight pays more duty than an identical one with cheap freight, even though the goods are the same.
Transport inside the EU after clearance is not part of the customs value and attracts no duty.
CPT (carriage paid to)
The seller pays carriage to the named destination, but risk passes to the buyer at the handover to the first carrier.
Risk moves earlier than the money
A buyer reading “carriage paid to Warsaw” assumes the seller carries the goods to Warsaw. In risk terms the seller’s part ends at the first carrier, possibly at a depot in China. Damage in between is the buyer’s — on a leg the buyer has already been charged for.
CIP (carriage and insurance paid to)
CPT plus insurance, and since 2020 that insurance must be all-risks cover, not the minimum.
The 2020 change worth knowing
Incoterms 2020 split the insurance requirement: CIF still asks only for minimum cover (Institute Cargo Clauses C), CIP for the widest (Clauses A). Two rules that used to demand the same policy no longer do, and contracts copied from an old template say the wrong thing.
DAP (Delivered At Place)
The seller delivers to the named destination ready for unloading, but import clearance, duty and VAT are yours. The middle ground between FCA and DDP.
Why it is often the better choice than DDP
You keep the customs entry in your own name, which means you see the declared value and can reclaim the import VAT — the deduction that DDP so often costs you.
The trade-off is that you must be able to clear the goods. If you have an EORI number and a broker, that is not a burden; if you have neither, it is.
DPU (delivered at place unloaded)
The seller delivers to the named place and unloads. Risk passes only after unloading — the single Incoterm that requires it.
Why the name changed
Until 2020 this was DAT, delivered at terminal. The place no longer has to be a terminal: a yard, a warehouse or a building site will do. Agree DPU only where unloading equipment exists — the obligation is the seller’s, and a site without a forklift makes it expensive.
DDP (Delivered Duty Paid)
The seller delivers to your address with all duties and import charges paid. The most convenient term on paper, and the one most likely to cost you money you cannot see.
The hidden cost
You often never see the customs entry, and if the declaration was not made in your name you may be unable to reclaim the import VAT. That deduction is usually worth more than the convenience.
If the customs value was declared optimistically, the liability can still come back to you as the actual importer — with the penalty attached.
When it is reasonable
For small samples, one-off shipments, and cases where you genuinely cannot handle clearance. For recurring commercial imports it is rarely the better choice once the VAT arithmetic is done.