Two businesses agree a price for a shipment. The seller thinks delivery means the goods leave the factory gate. The buyer thinks it means the goods arrive at their warehouse. Each reading is reasonable, and the gap only shows when something goes missing. Then the argument starts.
Incoterms exist to prevent that argument. This guide explains what they are, what each rule means and how to choose one for your export or import.
Incoterms meaning and definition
Incoterms is short for International Commercial Terms. They are a set of standard trade terms published by the International Chamber of Commerce. Each term is a three letter code, such as EXW or FOB, that tells both parties who does what in a sale of goods.
The current edition is Incoterms 2020. It contains 11 rules. The rules are revised about every ten years, and the 2020 edition added the rule DPU. When you use one in a contract, name the edition, for example "FOB Nhava Sheva, Incoterms 2020".
What Incoterms decide
- Where delivery happens. The point at which the seller has done their job.
- Where risk passes. From that point, loss or damage is the buyer's problem.
- Who pays for what. Freight, insurance, loading, unloading and duties.
- Who handles clearance. Export clearance in the origin country and import clearance at the destination.
What Incoterms do not decide
They do not set the price or the payment terms. They do not say when ownership of the goods transfers, and they do not cover what happens after a breach of contract. Those points belong in the sales contract.
The 11 Incoterms 2020 rules
The rules fall into two groups. Seven work for any mode of transport. Four are for sea and inland waterway only.
| Rule | Full name | Group |
|---|---|---|
| EXW | Ex Works | Any mode |
| FCA | Free Carrier | Any mode |
| CPT | Carriage Paid To | Any mode |
| CIP | Carriage and Insurance Paid To | Any mode |
| DAP | Delivered at Place | Any mode |
| DPU | Delivered at Place Unloaded | Any mode |
| DDP | Delivered Duty Paid | Any mode |
| FAS | Free Alongside Ship | Sea only |
| FOB | Free On Board | Sea only |
| CFR | Cost and Freight | Sea only |
| CIF | Cost, Insurance and Freight | Sea only |
The main rules explained
EXW: Ex Works
The seller makes the goods available at their own premises. The buyer arranges everything from there, including loading, export clearance, freight and insurance. It is the least work for the seller and the most for the buyer. It can be awkward when the buyer is abroad and cannot easily handle export formalities in the seller's country.
FCA: Free Carrier
The seller hands the goods, cleared for export, to the carrier the buyer names, at an agreed place. Risk passes at that handover. This rule suits containerised cargo, and it is often better than FOB for that reason.
FOB: Free On Board
The seller delivers the goods, cleared for export, on board the vessel at the named port. Risk passes once the goods are loaded. The buyer pays the main freight. FOB is popular in Indian trade, but it is meant for sea cargo that is loaded directly onto the ship.
CIF: Cost, Insurance and Freight
The seller arranges and pays for freight and insurance to the named port of destination. Risk still passes to the buyer once the goods are on board at the origin. The insurance is a minimum cover, so a buyer who wants wider protection should ask for it in the contract.
DAP and DPU
Under DAP, the seller delivers to the named place, ready for unloading, and the buyer unloads and clears imports. Under DPU, the seller also unloads. Both leave import duty and clearance with the buyer.
DDP: Delivered Duty Paid
The seller carries almost everything: freight, risk to the destination and import clearance with duties and taxes. It is the most work for the seller. Many Indian exporters avoid it unless they have a reliable partner in the destination country who can handle import clearance.
How to choose the right Incoterm
- Think about control. If you want to choose your forwarder and negotiate freight, ask for terms that leave transport with you. Buyers often prefer FOB or FCA for this reason.
- Think about risk. The later risk passes to the buyer, the more exposure the seller has. Make sure your insurance matches.
- Think about capability. A seller who cannot clear imports abroad should avoid DDP. A buyer who cannot manage export clearance should avoid EXW.
- Match the transport mode. Use FOB, CFR, CIF and FAS only for sea or inland waterway cargo. For containers and air, FCA, CPT, CIP, DAP, DPU or DDP fit better.
- Name the place precisely. "FOB Mumbai" is vague. "FOB Nhava Sheva" is clear.
- Compare landed cost. The same goods can look cheaper under one term and cost more once freight and charges are added. Our guide on how to calculate international freight charges helps you compare.
Incoterms and Indian customs
Under FOB or CFR terms, an Indian importer still has to account for freight and insurance. Customs adds them to the value when it assesses duty. This is why the Incoterm on your invoice matters beyond the sale: it changes how the declared value is built up.
Exporters should also match the Incoterm on the invoice with the one on the sales contract and bank documents. A mismatch can cause queries at the port or delays with payment.
Common Incoterms mistakes
- Using FOB for container cargo that is handed over at an inland depot
- Leaving out the named port or place
- Not stating "Incoterms 2020" in the contract
- Assuming an Incoterm decides who owns the goods
- Choosing EXW when the seller is the only one able to clear exports
- Agreeing DDP without checking import duty and tax rules at the destination
- Using different terms on the contract, invoice and bank documents
How IWCC supports your chosen term
Whatever Incoterm you agree, Interworld Cargo Care can handle the part that falls to you. Our door to door service covers pickup, freight, clearance and final delivery under one point of contact, which suits DAP and DDP style deliveries. For FOB and FCA shipments, our sea and air freight teams book space and our customs team handles clearance on either side. The firm has served importers and exporters since 1993.
Need help choosing the right term?
Tell us about your shipment and we will explain how each term affects cost, risk and paperwork. Get a free quote or call 098110 59654.