Incoterms are a standardized set of rules that define the sharing of delivery, risk, carriage, insurance, customs and costs between the buyer and the seller in international trade. They make clear where the goods are delivered, who pays the transport costs, at which point the risk passes to the buyer and which party bears the customs responsibility. When the right delivery rule is chosen in export and import transactions, the parties conclude a clearer contract and the logistics process runs more smoothly. In current practice there are 11 delivery rules, and they are grouped into two main categories according to the mode of transport.
Which Incoterms Are Valid Today?
The structure in force today is the Incoterms 2020 rules. From 1 January 2020 onwards, it is recommended that contracts explicitly reference the current rules. The terms are divided into two groups. The first group consists of rules that can be used with any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP. The second group consists of rules suited to sea and inland waterway transport: FAS, FOB, CFR and CIF. When choosing among the Incoterms delivery methods, the type of product, the transport route and the operational capabilities of the buyer and the seller should be considered together.
What Are the Incoterms?
The Incoterms delivery methods consist of 11 terms in total. Each term sets the boundary of risk and cost between the parties at a different point.
- The EXW delivery term is the delivery under which the seller makes the goods available to the buyer at their own premises.
- The FCA delivery term is the rule under which the seller hands the goods over to the designated carrier.
- The CPT delivery term is the structure in which the seller pays the carriage costs but the risk passes to the buyer at the first carrier.
- The CIP delivery term is similar to CPT, with the insurance taken out by the seller.
- The DAP delivery term is the delivery under which the seller brings the goods to the destination point.
- DPU is the rule under which the seller delivers the goods unloaded at the named place.
- The DDP delivery term is the structure carrying the broadest responsibility, under which the seller delivers with import duties included.
- FAS is the sea transport rule under which the goods are delivered alongside the ship.
- The FOB delivery term is the delivery under which the risk passes to the buyer once the goods are loaded on board the vessel.
- The CFR delivery term is the sea transport rule under which the seller pays the freight.
- The CIF delivery term is similar to CFR, with the insurance taken out by the seller.
Why Are the Incoterms Delivery Methods Important?
The Incoterms delivery methods clarify the duties of the parties in foreign trade. Writing only the product price in the contract is not enough. The point at which the goods will be delivered, who will bear the transport costs, who will take out the insurance and where the risk will transfer must all be clear. When the wrong delivery rule is chosen, the buyer may face unexpected taxes, freight or customs costs. The seller may also be held responsible for a process they do not control. A clear delivery rule allows the sales price to be calculated more accurately. For example, an EXW price and a DDP price are not the same, because under DDP the seller bears far more costs. Choosing the right term is of critical value for logistics planning, customer expectations and cost management.
Incoterms Groups by Mode of Transport
Delivery Terms Used with All Modes of Transport
The rules suited to all modes of transport can be used in road, air, rail, sea and combined transport operations. EXW, FCA, CPT, CIP, DAP, DPU and DDP fall within this scope. In export shipments that begin by truck, continue by ship and are then completed again by road, this group provides a more flexible structure. Among the Incoterms delivery methods, FCA is a frequently used, balanced option for multimodal transport. The seller handles the export formalities and the buyer takes on the main carriage. DAP and DDP, in turn, provide the buyer with an easier delivery experience. CIP can be considered for high-value products because it carries a mandatory insurance obligation. DPU is the only delivery rule under which the seller takes on the unloading responsibility. The renaming of the DAT term as DPU made it clearer that delivery can also take place, after unloading, at points other than a terminal.
Sea and Inland Waterway Delivery Terms
The delivery rules specific to sea and inland waterway transport are FAS, FOB, CFR and CIF. FAS works by delivering the goods alongside the ship. FOB is the structure in which the seller's responsibility is largely completed once the goods are loaded on board. Under CFR, the seller pays the freight and the risk passes to the buyer at the port of loading. CIF is CFR with an insurance obligation added. Among the Incoterms delivery methods, the sea transport rules produce more accurate results for bulk cargo, project cargo and classic vessel shipments. Using FOB for container shipments may not always be the right choice. After leaving the seller, the goods are usually delivered to the terminal rather than directly onto the ship. In that case, FCA can provide a clearer point of delivery.
Key Changes Introduced by Incoterms 2020
One of the best-known changes introduced by Incoterms 2020 is the renaming of the DAT term as DPU. DPU explains more clearly that delivery can take place after unloading not only at a terminal but also at another place designated by the parties. Within FCA, there is also a provision allowing the buyer, in sea transport, to instruct the carrier to issue a bill of lading with an on-board notation to the seller. On the insurance side, the distinction between CIP and CIF has become more pronounced. While a broader coverage expectation applies under the CIP rule, CIF continues to be used with a different scope within the sea transport structure. Incoterms 2020 also establishes a clearer framework regarding security requirements and the allocation of the related costs between the parties.
How Are Buyer and Seller Responsibilities Divided?
The choice of delivery rule changes the balance of responsibility between the buyer and the seller. EXW is one of the terms that gives the seller the lowest level of responsibility. The seller makes the goods available at their own premises. The buyer takes on transport, loading, export, insurance and import formalities. DDP, on the other hand, is the rule under which the seller carries the heaviest load. The seller manages extensive processes, including customs and taxes, so that the product reaches the address in the buyer's country. Those curious about the older practice in which the duties remained with the buyer can take a look at our article on the DDU delivery term. Intermediate rules such as FCA, CPT, CIP and DAP provide the parties with a more balanced division of duties. The seller takes on some transport and customs processes, while the buyer plans the rest. When choosing an Incoterm, the operational capability of the parties should be taken into account. Giving EXW to a buyer with weak customs knowledge can create problems in practice. Using DDP can also be risky if the seller has no tax registration in the buyer's country.
Transfer of Risk and Allocation of Costs
The most commonly confused issue among the Incoterms delivery methods is the distinction between risk and cost. Under some rules the seller pays the carriage costs, yet the risk passes to the buyer earlier. CPT and CIP are good examples of this. The seller pays the freight up to the named destination, but the risk passes to the buyer upon handover to the first carrier. Parties unaware of this distinction may develop the wrong expectations in the event of damage. Under the FOB, CFR and CIF rules, the risk passes to the buyer when the goods are loaded on board the vessel. Under DAP and DDP, the risk remains with the seller until the moment of delivery at the destination. The allocation of costs is decisive in price calculation. When the delivery rule changes, the quoted price changes as well. The same product reaches a different cost level under EXW, FCA, DAP or DDP conditions.
How Is the Right Delivery Term Chosen?
The right delivery term is chosen according to the type of product, the transport route, the experience of the parties and customer expectations. For small, low-risk transactions in which the buyer has strong transport capabilities, EXW or FCA can be considered. If the seller is expected to manage the transport organization, CPT, CIP or DAP can be evaluated. If the buyer expects easy door-to-door delivery, the DAP or DDP options can be prioritized. For high-value products, insurance should be considered separately. If the seller is expected to arrange the insurance, CIP or CIF may be suitable. For sea transport bulk cargo, FOB, CFR and CIF become more meaningful. In combined transport, FCA, CPT, CIP, DAP and DDP offer a more flexible solution. The place of delivery must be written clearly in the contract; a country or city name alone is not enough. A warehouse, terminal, port, factory or exact address must be specified.
How Should the Incoterms Delivery Methods Be Written in the Contract?
The delivery rule, the place of delivery and the rule year should appear together in the contract. Example usage can be as follows: FCA Istanbul Airport, Incoterms 2020. DAP Berlin Buyer's Warehouse, Incoterms 2020. FOB Izmir Port, Incoterms 2020. This form of writing makes clear which rule set the parties are relying on and where the point of delivery is.
The Incoterms delivery methods do not replace the payment terms. The payment model — cash in advance, letter of credit, cash against goods or cash against documents — must be determined separately. The delivery rule regulates the allocation of costs and risks. The payment date, document requirements, insurance coverage, unloading costs and the procedure to be applied in case of delay should be written as separate clauses in the contract.
Incoterms enable the parties in foreign trade to speak the same language. When the right term is chosen, logistics costs are calculated more precisely, the point of risk is understood, and the customs and delivery process proceeds in a more controlled manner. A well-prepared contract ensures not only that the product is sold, but also that it is delivered safely and in an orderly manner.
