Supply chain
Incoterms explained: who pays, who delivers and when risk moves
The seller can pay for the voyage while the buyer carries its cargo risk. Follow the delivery point before treating a freight-paid quote as a complete promise.
Incoterms are delivery rules that buyers and sellers can use in a goods contract to allocate tasks, costs and the risk of loss or damage. The International Chamber of Commerce, or ICC, publishes them. Its 2020 edition contains eleven rules.
One distinction deserves attention before comparing the abbreviations: paying for transport and carrying the cargo risk can follow different boundaries.
Under CIF, for example, the seller arranges freight to the named destination port, while cargo risk generally passes when the goods are on board the vessel at the shipment port. ICC explains that separation. A freight-paid quote does not, by itself, mean the seller bears risk until arrival.
Read the delivery point beside the destination
The delivery point is where the seller performs the delivery obligation under the chosen rule. The destination is where the goods are heading. Under the C rules, those places differ.
CIF means Cost, Insurance and Freight. It includes a seller obligation to arrange cargo insurance, but the buyer still needs to inspect the cover, exclusions and claims route. ICC's 2020 changes distinguish CIF's default cover from the higher default cover under CIP.
That difference matters when comparing quotes. “Insurance included” leaves several operating questions unanswered.
The eleven Incoterms in one view
Seven rules can cover any transport mode or a combination of modes. Four are for sea and inland waterway transport. The official ICC overview and HMRC's term list set out that grouping.
| Rule | Full name | Main feature to inspect |
|---|---|---|
| EXW | Ex Works | Availability at the named place; buyer handles collection and export arrangements |
| FCA | Free Carrier | Delivery to the buyer-nominated carrier at the agreed place and point |
| CPT | Carriage Paid To | Seller pays carriage; delivery and risk pass earlier than destination |
| CIP | Carriage and Insurance Paid To | CPT-type carriage arrangement with seller-provided insurance |
| DAP | Delivered at Place | Delivery at destination, ready for unloading |
| DPU | Delivered at Place Unloaded | Delivery at destination after seller unloading |
| DDP | Delivered Duty Paid | Destination delivery with seller import-clearance obligations |
| FAS | Free Alongside Ship | Sea/waterway: delivery alongside the nominated vessel |
| FOB | Free On Board | Sea/waterway: delivery on board the nominated vessel |
| CFR | Cost and Freight | Sea/waterway: seller pays freight; risk passes on board at shipment |
| CIF | Cost, Insurance and Freight | CFR-type arrangement with seller-provided insurance |
This is a reading aid, not the complete obligations for each rule. There is no official set of only six major rules that replaces the eleven. Choose from the actual transport arrangement and the responsibilities each party can perform.
EXW, DAP and DDP put different work on the buyer
With EXW, the seller makes the goods available at the named place; it does not have to load the collecting vehicle or perform export clearance. A buyer should check whether it can actually arrange that work.
DAP places delivery at the named destination, ready for unloading. The buyer handles import clearance. DDP adds seller responsibility for import clearance and applicable duties; the seller needs to be able to perform those obligations in the destination country.
DPU adds unloading to the seller's delivery obligation. ICC's 2020 explanation makes the DAP/DPU distinction explicit. A warehouse should know who supplies the unloading equipment before the truck arrives.
None is universally better. A party can accept a responsibility on paper and lack the access, capability or permissions needed to carry it out.
Put the quote boundary beside landed cost
The landed-cost example starts with €4,000 of products and adds €500 freight, €100 insurance, €160 assumed duty and €40 brokerage to reach €4,800 at the buyer's warehouse. Its product quote excludes those charges.
Keep that case's boundary clear when comparing another quote. If a supplier includes a freight charge in its price, adding the same charge again would double-count it. An Incoterm helps identify responsibilities; the invoices and stated price inclusions establish the amounts to compare.
Do not apply CIF to a whole door-to-door container journey merely because a ship appears somewhere along it. ICC advises checking the transport arrangement, including carrier handover before vessel loading. The transport-mode Note addresses the separate choice of route and service.
Write the rule, place and edition together
A useful contract entry states the chosen rule, precise named place or port, and edition, for example the pattern “DAP [agreed delivery point], Incoterms 2020.” Replace the bracketed text with the actual location and point.
Before approving the quote, confirm who books carriage, performs clearance, unloads, arranges required insurance and handles a delivery exception. Keep the risk-transfer point beside that record. Then compare costs on the same destination basis.
Sources and example notes
- ICC: Incoterms rules, purpose, eleven rules and current edition.
- ICC: the 2020 edition, insurance and unloading distinctions.
- ICC Academy: delivery and risk transfer, shipment, destination and C-rule boundaries.
- HMRC: Incoterms, transport grouping and public term descriptions. ICC's 2020 guidance supplies the insurance distinctions used here.
The €4,800 calculation reuses the fictional landed-cost case. It supplies no CIF quotation. The article summarises selected duties; check the full agreed rule and contract for an actual shipment.