What Are Incoterms and Why Do They Matter?
Incoterms (International Commercial Terms) are a set of 11 standardised rules that define exactly who is responsible for what in a cross-border sale: who arranges transport, who pays for freight and insurance, who handles customs clearance, and critically, at what point risk transfers from seller to buyer.
Without agreed Incoterms, a dispute over a damaged or lost shipment can become a legal argument about responsibilities that were never clearly defined. With them, both parties know precisely where their obligations begin and end.
Incoterms do not cover payment terms, ownership transfer, or liability for breach of contract. They cover delivery, risk, cost, and transport responsibility only. They should always be referenced alongside a specific named place - for example, "FOB Shanghai Incoterms® 2020" - to be legally precise. For US importers, Incoterms sit alongside your commercial invoice and pro forma invoice as one of the foundational documents of any cross-border transaction.
The Two Categories: Multimodal vs Sea and Inland Waterway Only
The 11 Incoterms divide into two groups based on mode of transport.
Seven terms apply to any mode of transport (road, rail, air, sea, or a combination): EXW, FCA, CPT, CIP, DAP, DPU, and DDP. These are the correct terms for containerised shipments, multimodal logistics, and most modern international trade.
Four terms apply exclusively to sea and inland waterway transport: FAS, FOB, CFR, and CIF. These are designed for bulk cargo, commodities, and non-containerised sea freight where the seller physically loads goods onto a vessel.
One of the most common errors in international trade is using FOB for containerised shipments. For containers, FCA is almost always the correct term - FOB assumes goods can be loaded directly onto a vessel, which is not how container logistics work.
The 7 Multimodal Incoterms (Any Mode of Transport)
EXW - Ex Works
The seller makes goods available at their own premises (factory, warehouse, or other named place). The buyer bears all costs and risks from that point forward: arranging collection, export clearance, freight, insurance, and import duties. EXW represents the minimum obligation for the seller. It is rarely appropriate for international trade because export clearance typically requires the exporter's involvement - in practice, FCA is a better alternative for most EXW situations.
FCA - Free Carrier
The seller delivers goods to a named carrier or another nominated party at a specified place. If that place is the seller's premises, the seller is responsible for loading. If it is elsewhere, the seller delivers without unloading. Risk transfers to the buyer when goods are handed to the carrier. FCA is the correct term for containerised shipments and is the preferred alternative to FOB for most modern sea freight.
CPT - Carriage Paid To
The seller contracts and pays for carriage to a named destination. However, risk transfers from seller to buyer at the point of handover to the first carrier - not at the destination. The buyer bears the risk during transit even though the seller has paid for freight. This split between cost and risk is the key characteristic of CPT and must be understood clearly before using it.
CIP - Carriage and Insurance Paid To
CIP works like CPT with one important addition: the seller is required to obtain cargo insurance on behalf of the buyer. Under Incoterms 2020, CIP requires a significantly higher level of insurance coverage (Institute Cargo Clauses A, or "all risks") than CIF. Risk still transfers at the first carrier - the insurance covers the buyer's risk during transit. CIP is the recommended term when insurance is required for multimodal or containerised shipments.
DAP - Delivered at Place
The seller delivers goods to a named place at destination, ready for unloading. The buyer handles unloading and import clearance. Risk transfers at the named destination. DAP is a straightforward term for door-to-door delivery where the buyer will handle customs on arrival - it is widely used in eCommerce and B2B trade where buyers have established import operations.
DPU - Delivered at Place Unloaded
DPU (formerly DAT - Delivered at Terminal) requires the seller to deliver goods unloaded at a named place. It is the only Incoterm under which the seller is responsible for unloading. The named place can be a terminal, warehouse, or any other agreed location. Risk transfers once goods are unloaded. DPU is appropriate when the seller has the means to handle unloading at the destination and the parties agree that this responsibility should rest with the seller.
DDP - Delivered Duty Paid
The seller bears maximum responsibility: delivering goods to the named destination, cleared for import, with all duties and taxes paid. The buyer simply receives the goods. DDP is the highest obligation for any seller. It requires the seller to be registered for VAT or import duties in the buyer's country - which is often complex or impractical for foreign exporters. Where full DDP is not feasible, DAP is generally the practical alternative.
The 4 Sea and Inland Waterway Incoterms
FAS - Free Alongside Ship
The seller delivers goods alongside the named vessel at the port of shipment. Risk transfers when goods are placed alongside the ship (on the quay or a lighter). The buyer handles loading, freight, insurance, and import clearance. FAS is used for bulk commodities and breakbulk cargo - not for containerised goods.
FOB - Free On Board
The seller loads goods on board the named vessel at the port of shipment. Risk transfers once goods are on board. The buyer pays freight, insurance, and import duties from that point. FOB is one of the most widely used and most widely misused Incoterms. For containerised shipments, the risk transfers at a point (on board the vessel) that the seller typically cannot control - FCA to the container freight station is the correct alternative. FOB should be used for bulk cargo, commodities, and non-containerised sea freight only.
CFR - Cost and Freight
The seller contracts and pays for freight to the named port of destination. Risk, however, transfers when goods are loaded on board the vessel at the port of origin - the same point as FOB. The buyer bears the risk during transit despite the seller having paid for freight. CFR is used for bulk and commodity sea freight where the seller arranges carriage but risk transfers at loading.
CIF - Cost, Insurance and Freight
CIF adds an insurance obligation to CFR: the seller must obtain minimum cargo insurance (Institute Cargo Clauses C) covering the buyer's risk during transit. Note that Incoterms 2020 requires only minimum coverage under CIF - for higher-value goods or goods requiring comprehensive cover, CIP (multimodal) with Clause A coverage is preferable. CIF is widely used in commodity trade and bulk sea freight.
How to Choose the Right Incoterm for Your Shipment
The right Incoterm depends on four questions: what mode of transport is being used, how much control each party wants over logistics, who has better access to freight and insurance markets, and how much risk each party is willing to carry.
A general principle: the further along the delivery chain the seller takes responsibility, the simpler the process for the buyer - but the more the seller must price that responsibility into the deal. For most US importers, FOB or FCA at the port of origin is a common starting point - it gives the importer control over their freight forwarder and insurance while the overseas seller handles export clearance. Understanding how your chosen Incoterm affects payment timing also matters for vendor financing and purchase order financing structures - risk transfer points determine when capital needs to be available.
A note on stating Incoterms correctly in contracts: always write the three-letter code, the named place, and the version year. "FOB Shanghai Incoterms® 2020" is legally precise. "FOB China" is not.
Common Incoterms Mistakes US Importers and Exporters Make
Using FOB for containerised shipments. As noted above, FOB assumes physical loading of cargo onto a vessel - it does not align with how containers are handled at modern ports. Use FCA to the named container freight station or carrier instead.
Not naming a specific place. An Incoterm without a named place is legally incomplete. "CIF Incoterms® 2020" means nothing without a destination port. "CIF Los Angeles Incoterms® 2020" is correct.
Confusing cost and risk. Under CPT, CFR, and CIP, the seller pays for freight to the destination but risk transfers at the point of handover to the first carrier. Many buyers assume the seller bears the risk until the goods arrive - they do not.
Choosing EXW to minimise seller obligations. EXW appears simple but creates complications in practice: export clearance typically requires the exporter's active involvement, which conflicts with a pure EXW arrangement where the buyer handles everything from the seller's door. FCA is almost always a cleaner alternative.
Not specifying the Incoterms version. A contract that references "FOB" without specifying the year could theoretically be interpreted under Incoterms 2010 or 2020, which have meaningful differences. Always include "Incoterms® 2020" in the reference.
A Note From Drip Capital
At Drip Capital, we work with US importers and exporters who navigate the full complexity of cross-border trade: documentation, payment terms, supplier relationships, and the cash flow gaps that sit between procurement and payment.
Understanding Incoterms is one piece of that picture. Knowing when your risk transfers, who owes what at each stage, and how that maps to your commercial invoice and vendor financing structure is the foundation of a well-managed import or export operation.
If you are a small or mid-size business involved in cross-border trade and want to learn more about how Drip Capital supports businesses like yours, visit us at dripcapital.com.
Frequently Asked Questions
Are there Incoterms 2026?
No. The ICC has not published an Incoterms 2026 update. The current official version is Incoterms 2020, which remains in force for all contracts and shipments in 2026. The next revision is expected around 2030. All contracts signed in 2026 should reference "Incoterms® 2020."
How many Incoterms are there in 2026?
There are 11 Incoterms currently in force: EXW, FCA, CPT, CIP, DAP, DPU, DDP (multimodal) and FAS, FOB, CFR, CIF (sea and inland waterway only). All 11 are from Incoterms 2020.
What is the difference between FOB and FCA?
Both terms transfer risk to the buyer at the port of origin - but FOB requires goods to be on board the vessel, while FCA transfers risk when goods are handed to the carrier at a named place. For containerised shipments, FCA is correct - FOB is not, because the shipper loses physical control of goods before they are placed on board at a container port.
What is the difference between CIF and CIP?
Both require the seller to arrange and pay for insurance. The key differences are mode of transport and coverage level: CIF is for sea freight only and requires minimum Clause C insurance - CIP is for any mode of transport and requires Clause A ("all risks") coverage. For high-value or sensitive goods, CIP offers significantly better protection.
Which Incoterm is best for US importers?
There is no single correct answer - it depends on the shipment. FOB or FCA at the port of origin is common for US importers who want control over their freight forwarder and insurance. DAP or DDP gives the importer less to manage but typically costs more because the seller prices their logistics margin into the deal. For cross-border trade involving supplier financing, understanding how Incoterms interact with your vendor financing and purchase order financing structure is worth discussing with your lender before finalising terms.
Do Incoterms determine who pays import duties?
Yes, in most cases. Under DDP, the seller pays all import duties and taxes. Under all other terms, the buyer handles import clearance and pays duties. The only partial exception is DPU and DAP, where the seller delivers to the destination but the buyer handles customs and duty payment.
Can older versions of Incoterms still be used?
Yes. Parties may agree to use Incoterms 2010 or earlier versions in their contracts - the version must be explicitly stated. In practice, Incoterms 2020 is the standard for new contracts. Incoterms 2010 and 2020 are largely similar, with the most notable change being the replacement of DAT with DPU and the insurance coverage upgrade under CIP.
