Incoterms® Introduction for Engineers

Incoterms®, a short for International Commercial Terms, are a set of eleven three-letter trade terms published by the International Chamber of Commerce (ICC) that define, in a standardized and internationally recognized way, the respective obligations of a seller and a buyer in a contract for the sale of goods. Their scope is narrow but critical: they settle where and when the seller’s obligation to deliver is fulfilled, at what point the risk of loss or damage passes from seller to buyer, which party pays for carriage, insurance, loading and unloading, and which party is responsible for export and import customs clearance.

For an engineer who occasionally issues a purchase order to an overseas supplier – a machine tool from Germany, a batch of custom castings from Vietnam, an instrumentation module from the United States – Incoterms are not an abstract legal nicety. They directly determine the final landed cost of the goods, who is exposed if a crate falls off a forklift in a foreign port, who has to deal with a customs broker at 6 a.m., and whether an unexpected import VAT bill arrives on your desk six weeks after the equipment does. Misreading a three-letter code on a quotation is one of the most common and most expensive mistakes in industrial procurement.

This guide is written specifically for occasional buyer engineers but not full-time trade specialists.

History of the Incoterms® Rules

The ICC first published Incoterms in 1936, in response to the same problem that makes them necessary today: traders in different countries used the same shorthand terms – “FOB”, “CIF” – to mean subtly different things depending on local custom and law. A single, voluntary, internationally agreed set of definitions reduced disputes and made contracts easier to negotiate across borders. The rules have been revised roughly once a decade ever since, each revision responding to changes in transport technology, containerization, electronic documentation and trade security requirements:

Timeline of revisions

Structure of the 2020 Rules: Two Groups of Eleven

Incoterms® 2020 comprises eleven rules, deliberately split into two groups according to the mode of transport they are designed for. Choosing a rule from the wrong group for your shipment is one of the most frequent and most consequential errors in international purchasing (see Chapter 10).

The “seller-obligation staircase”

A useful mental model, widely used in trade training, is to read the eleven rules as a staircase of increasing seller obligation and decreasing buyer obligation, from EXW (seller does the absolute minimum) to DDP (seller does almost everything):

Once the terms are agreed, route planning for the shipment is itself an optimization task, and the applications of travelling salesman problem include planning multi-stop transport. Traveling salesman problem applications in logistics help reduce the kilometers driven.

EXW  →  FCA  →  FAS  →  FOB  →  CFR  →  CIF  →  CPT  →  CIP  →  DAP  →  DPU  →  DDP

The Eleven Rules, One by One

This chapter gives a working definition of each rule, focused on what a technical buyer actually needs to check on a quotation or purchase order: where risk passes, who pays for what, and where the rule is easy to misuse.

EXW – Ex Works Group: any mode of transport Risk transfers to buyer: at the seller’s premises (or another named place), as soon as the goods are placed at the buyer’s disposal – before loading onto any collecting vehicle and before export clearance. Seller must: make the goods available, packaged, at the named place. The seller is not obliged to load the goods or to clear them for export, though the parties may agree otherwise. Buyer must: arrange collection, loading, export clearance, main carriage, insurance, import clearance and final delivery – effectively the entire logistics chain. Insurance: not required by the rule; entirely the buyer’s decision from the point of collection. Typical use: domestic-style transactions, or cross-border deals where the buyer has its own capable freight forwarder already operating in the seller’s country. Caution: EXW places export customs clearance on the buyer, but in many countries only a locally established entity (often the seller) can legally lodge an export declaration. In practice the seller frequently ends up doing the export formalities anyway, which blurs risk allocation and can create disputes if something goes wrong during that phase. For international purchases, FCA (seller’s premises) is usually the safer equivalent – it keeps the low-obligation profile for the seller while correctly placing export clearance back on the seller.	FCA – Free Carrier Group: any mode of transport Risk transfers to buyer: when the goods are handed over to the carrier (or other person, e.g. a freight forwarder) nominated by the buyer, at the named place – either loaded onto the buyer’s collecting vehicle at the seller’s premises, or made available on the seller’s arriving vehicle, not unloaded, at another named place. Seller must: clear the goods for export and deliver them to the nominated carrier at the named place, loading them if delivery happens at the seller’s own premises. Buyer must: arrange and pay for main carriage from the named place onward, arrange insurance if desired, and handle import clearance. Insurance: not required by the rule; the buyer bears transit risk from handover and should insure independently. Typical use: the recommended default rule for containerized and multimodal cargo of any kind, including the common case of a supplier handing goods to a forwarder’s truck at the factory gate. Caution: the 2020 edition added an option: buyer and seller can agree that the buyer’s carrier will issue an on-board bill of lading to the seller once the goods are loaded aboard the vessel. This matters when payment is by documentary letter of credit that requires an on-board bill of lading – previously that requirement pushed many exporters toward FOB even for container cargo, despite FOB being poorly suited to it. Always specify precisely which named place applies (seller’s premises vs. a terminal), since the seller’s loading obligation differs between the two.
FAS – Free Alongside Ship Group: sea and inland waterway transport only Risk transfers to buyer: when the goods are placed alongside the vessel nominated by the buyer (e.g. on the quay or on a barge) at the named port of shipment, before loading. Seller must: clear the goods for export and deliver them alongside the vessel. Buyer must: arrange loading onto the vessel, main carriage, insurance and import clearance. Insurance: Not required by the rule. Typical use: bulk and break-bulk cargo loaded by a ship’s own gear or shore cranes – grain, ore, timber, heavy fabricated items – rather than containers. Caution: not appropriate for containerized cargo, which is handed to a terminal rather than placed alongside a vessel; use FCA instead.	FOB – Free On Board Group: sea and inland waterway transport only Risk transfers to buyer: when the goods are loaded on board the vessel nominated by the buyer, at the named port of shipment. Seller must: clear the goods for export, deliver them to the port and load them on board. Buyer must: arrange and pay for main carriage, insurance and import clearance. Insurance: not required by the rule. Typical use: traditional bulk and break-bulk shipping. Still extremely common in commodity trading and, out of habit or letter-of-credit convention, in general container trade. Caution: the ICC explicitly advises against using FOB for containerized cargo: containers usually reach the terminal, and pass into the carrier’s custody, well before the vessel arrives, making an “on board” risk-transfer point impractical to police and a poor match for how the shipment actually moves. Use FCA for containers instead.
CFR – Cost and Freight Group: sea and inland waterway transport only Risk transfers to buyer: identical to FOB – when the goods are loaded on board the vessel at the port of shipment – even though the seller pays freight onward to the named port of destination. Seller must: clear the goods for export, load them on board, and contract and pay for carriage to the named port of destination. Buyer must: arrange insurance for the sea leg and handle import clearance at destination. Insurance: not required by the rule – the buyer bears transit risk from loading, despite the seller paying the freight, and should insure that leg independently. Typical use: bulk commodity sales where the buyer wants the seller to organize and prepay the ocean freight but is willing to accept transit risk itself. Caution: the classic illustration that cost and risk transfer are not the same thing: the seller keeps paying (for freight) well after the buyer has started bearing risk. Same container-suitability caveat as FOB.	CIF – Cost, Insurance and Freight Group: sea and inland waterway transport only Risk transfers to buyer: identical to FOB/CFR – on board at the port of shipment. Seller must: everything under CFR, plus procure marine cargo insurance for the buyer’s benefit against the sea-leg risk. Buyer must: handle import clearance at destination; may negotiate a higher insurance level than the default minimum. Insurance: required. The seller must buy cover of at least Institute Cargo Clauses (C) – a narrow, named-perils minimum – unless the parties agree otherwise. This minimum is unchanged from the 2010 edition. Typical use: the single most iconic Incoterms rule, deeply embedded in bulk commodity contracts and documentary letters of credit. Caution: the default insurance level is a minimum, not a recommendation – it excludes many everyday transit risks such as theft, rough handling or weather damage short of total loss. Buyers of anything other than low-value bulk commodities should explicitly negotiate broader cover (Clauses A) in the contract. Same container-suitability caveat as FOB.
CPT – Carriage Paid To Group: any mode of transport Risk transfers to buyer: when the goods are handed over to the first carrier contracted by the seller – not at the named place of destination, even though the seller pays freight all the way there. Seller must: clear the goods for export, contract and pay for carriage to the named place of destination, and comply with any security-related transport requirements en route. Buyer must: bear transit risk from the first carrier handover, arrange insurance if desired, and handle import clearance at destination. Insurance: not required by the rule. Typical use: multimodal or container shipments where the seller organizes and pays for the main transport but the buyer is willing to carry the transit risk. Caution: the gap between where cost ends (destination) and where risk transfers (first carrier, at or near origin) is the single most common source of confusion with this rule – read it together with the named place of destination stated in the contract, not just the rule’s cost coverage.	CIP – Carriage and Insurance Paid To Group: any mode of transport Risk transfers to buyer: identical to CPT – at the first carrier handover. Seller must: everything under CPT, plus procure cargo insurance for the buyer’s benefit covering the full transit. Buyer must: handle import clearance at destination. Insurance: required, and set higher than CIF: since the 2020 edition, the seller must buy cover of at least Institute Cargo Clauses (A) – broad “all risks” cover, subject to standard exclusions – reflecting that CIP is typically used for higher-value manufactured goods and equipment rather than bulk commodities. Typical use: the recommended multimodal, higher-cover equivalent of CIF – the rule most relevant to engineers importing machinery, instrumentation or finished equipment by any combination of transport modes. Caution: confirm the insured value basis (commonly invoice value plus 10%) and check whether any named additional risks (e.g. war, strikes) should be added; Clauses (A) is broad but not unconditional.
DAP – Delivered At Place Group: any mode of transport Risk transfers to buyer: when the goods are placed at the buyer’s disposal on the arriving means of transport, ready for unloading, at the named place of destination. Seller must: bear all costs and risks of bringing the goods to the named destination, including export clearance and main carriage, but not unloading. Buyer must: unload the goods and handle import clearance, duties and taxes. Insurance: not required by the rule. Typical use: door delivery where the seller controls logistics end-to-end but the buyer, as the local party, is better placed to clear imports and unload. Caution: the named place must be precise – a full address or identifiable point, not just a city – since it is both the risk-transfer point and the place the seller’s cost obligation ends.	DPU – Delivered at Place Unloaded Group: any mode of transport Risk transfers to buyer: after unloading, when the goods are placed at the buyer’s disposal at the named place of destination. Seller must: bear all costs and risks to the named destination and unload the goods there – the only Incoterms rule that requires the seller to unload. Buyer must: handle import clearance, duties and taxes. Insurance: not required by the rule. Typical use: project cargo and heavy equipment where the seller (or its logistics contractor) has the rigging or crane capability to unload safely at the destination – replaces the 2010 rule DAT and is no longer limited to a “terminal”; the named place can be any location. Caution: because the seller is responsible for unloading, confirm in advance who supplies unloading equipment and who is liable if unloading causes damage, especially for heavy or delicate machinery.
DDP – Delivered Duty Paid Group: any mode of transport Risk transfers to buyer: when the goods are placed at the buyer’s disposal, cleared for import, ready for unloading, at the named place of destination. Seller must: bear all costs and risks to the named destination, including export clearance, main carriage, and import clearance with all import duties and taxes (such as VAT) paid. Buyer must: unload the goods; otherwise, essentially nothing beyond taking delivery. Insurance: not required by the rule. Typical use: the maximum-obligation rule for the seller; attractive to buyers who want a single, fully landed, duty-paid price with no customs involvement. Caution: the seller must be able to act, legally and practically, as importer of record in the buyer’s country – not always possible without a local subsidiary, fiscal representative or VAT registration. Import VAT paid by a foreign seller is frequently not recoverable by anyone, which can become a hidden cost baked into the price. Confirm the supplier can genuinely perform DDP in your country before agreeing to it – see following chapters.

Full Comparison of the Eleven Rules

The two tables below give, rule by rule within each transport-mode group, the exact point at which risk passes from seller to buyer and whether the rule mandates cargo insurance. Chapter 6 covers the legal status of these obligations; Chapter 7 covers insurance in depth; Chapter 8 covers customs and duties. The full cost-and-responsibility matrix – who pays for packing, loading, carriage, insurance, import duty and unloading across all eleven rules – follows on the wide table in Table 5.3.

Group 1 – Any mode of transport

Group 2 – Sea and inland waterway transport only

Master cost-and-responsibility matrix

S = the seller’s obligation/cost.

B = the buyer’s obligation/cost.

B* = insurance is not mandated by the Incoterms rule itself for that term; the party bearing transit risk at that stage should arrange cargo insurance independently; only CIF and CIP require the seller to procure insurance for the buyer’s benefit (see dedicated chapter below).

This matrix is a commercial simplification of the eleven rules’ A/B obligations for quick reference; the ICC’s official rule text (see References chapter below) always governs in case of any conflict, and items such as terminal handling charges can still be shaped by the specific carriage contract or port tariff.

Legal Status and Contractual Integration

What the rules do and do not cover

Each Incoterms rule fixes exactly three things: the point of delivery (when the seller has performed its delivery obligation), the transfer of risk of loss or damage, and the allocation of costs between the parties, together with certain ancillary duties (packaging, notices, provision of documents, export/import formalities, and, since 2020, compliance with security-related transport requirements). They do not cover, and must be supplemented by the rest of the sales contract or purchase order terms:

• Transfer of ownership/title in the goods; governed by the sales contract and the applicable law, not by the Incoterms rule.
• Price, payment terms, currency and payment security (e.g. letters of credit).
• Remedies for late delivery, non-conforming goods, or breach of contract.
• The governing law and dispute-resolution forum (courts or arbitration).
• The terms of the actual contracts of carriage and insurance entered into by whichever party is responsible for arranging them; those are separate contracts with third parties (carriers, insurers), not the sale contract itself.

Risk Transfer and Insurance

Only two of the eleven rules, CIF and CIP, require the seller to purchase cargo insurance for the buyer’s benefit. Under the other nine rules, insurance is not addressed by the rule at all – each party is left to decide, commercially, whether to insure the portion of the journey during which it bears the risk. In practice, a prudent buyer insures its own risk period under EXW, FCA, FAS, FOB, CFR, CPT, DAP, DPU and DDP even though no Incoterms rule obliges anyone to do so.

Institute Cargo Clauses: the standard insurance tiers

Practical guidance

• For anything other than low-value bulk commodities, do not rely on the CIF default (Clauses C); negotiate Clauses (A) cover explicitly in the contract, and ask for a copy of the insurance certificate naming your organization as beneficiary.
• For CIP shipments, confirm the insured value basis (commonly invoice value plus 10%, a market convention, not an ICC rule) and whether any named additional perils (war, strikes) are included.
• Under any of the nine rules where insurance is not mandated, arrange your own cargo insurance for the period during which you bear risk. Again, do not assume it is “someone else’s problem” simply because that party is paying for freight.

Customs, Duties and Taxes

Whether a given party is legally capable of performing the customs role the rule assigns to it is a separate question that must be checked before the contract is signed, not after the goods are already in transit.

The DDP import-capability trap

DDP is the mirror image: the seller must be able to act as importer of record in the buyer’s country, which can require a local subsidiary, a fiscal representative, or a VAT/tax registration that many foreign sellers simply do not have. Where a seller quotes DDP without genuinely having this capability, the shipment can stall in customs, or the seller may quietly expect the buyer to handle import formalities anyway despite the quotation. Import VAT paid by a seller with no right to recover it locally also tends to be folded into the price as a hidden markup. Always ask a supplier quoting DDP how it will act as importer of record, and get written confirmation rather than assuming the quotation is deliverable as stated.

Duties, VAT and total landed cost

Under every rule except DDP, the buyer is the importer of record and is responsible for import duties, tariffs and import VAT (or equivalent consumption tax) in its own country, in addition to whatever price is agreed for the goods and transport. When comparing supplier quotations issued under different Incoterms rules, always normalize to an equivalent all-in landed cost basis before comparing price.

Practical Guidance for the Occasional Technical Buyer

Most engineers do not negotiate Incoterms daily, which is exactly why a small set of defaults and checks is more useful than trying to memorize every clause. This chapter gives scenario-based recommendations and a checklist to apply to any incoming quotation or outgoing purchase order.

Scenario-based defaults

• Collecting from the supplier’s factory, cross-border –> ask for FCA (seller’s premises) rather than EXW. You get the same low seller-obligation profile without the export-clearance ambiguity that EXW creates (§8.1).
• Importing finished machinery or equipment by sea or air, want the seller to arrange and insure carriage –> prefer CIP over CIF whenever the shipment could plausibly move by more than pure ocean transport (e.g. any container leg), and because CIP carries the higher Clauses (A) insurance floor appropriate to higher-value equipment.
• Want a single all-in, duty-paid price with no customs involvement –> DDP can work, but confirm in writing that the supplier can act as importer of record in your country (§8.2) and get a full landed-cost breakdown, not just a headline number.
• Heavy or oversized equipment needing special unloading (crane, rigging) at your site –> DPU, if the supplier or its logistics contractor genuinely has unloading capability at your location; otherwise DAP with unloading arranged separately on your side.
• Any containerized cargo –> avoid FAS, FOB, CFR and CIF; use FCA, CPT or CIP instead, regardless of what the supplier’s standard quotation defaults to.

A working checklist

• Is the rule appropriate for the actual mode of transport?
• Is the named place stated precisely enough to be unambiguous – a full address or identified point, not just a city?
• Is the edition year “Incoterms® 2020” stated? If a contract or framework agreement still says “Incoterms 2010” or earlier, check whether that was deliberate.
• Where does risk actually transfer, and does that match where your organization can practically accept and inspect the goods?
• Is insurance mandated (CIF/CIP) or does your organization need to arrange its own cover for the risk period it bears?
• Who is the importer of record, and does that party have the legal capacity (registration, fiscal representative) to perform that role in the destination country?
• Does your organization have the customs-broker relationship and logistics capability the rule assumes it has (relevant mainly for EXW, FCA and FAS, where the buyer takes on more of the chain)?
• Have you requested the document set that goes with the rule – commercial invoice referencing the Incoterms rule and named place, packing list, transport document (bill of lading/airway bill/CMR), certificate of origin, and insurance certificate where applicable?

Tips, Common Pitfalls and Misconceptions

• Comparing apples to oranges: comparing supplier quotations issued under different Incoterms rules without normalizing to the same landed-cost basis.
• Using ship-based rules for containers: specifying FOB, CFR or CIF for containerized cargo, when FCA, CPT or CIP would place the risk-transfer point where the goods actually change custody.
• Vague named places: writing “FCA Shanghai” instead of “FCA [Supplier], 123 Example Road, Pudong, Shanghai, Incoterms® 2020” – ambiguity about the named place is the most common trigger for disputes about where risk transferred.
• Omitting the edition year: leaving the contract silent on which edition applies, which matters because some 2010-and-earlier codes (DAF, DES, DEQ, DDU, DAT) no longer exist or have been redefined.
• Assuming Incoterms cover title, payment or remedies: they do not. A separate, complete purchase order or sales contract is always required.
• Treating DDP as “no work for the buyer”: some countries will not allow a foreign seller to import goods without a local fiscal representative or subsidiary; verify capability before relying on DDP.
• Under-insuring high-value cargo: relying on the CIF default minimum (Clauses C) for anything other than low-value bulk goods, leaving many everyday transit risks uncovered.
• Confusing who unloads: DAP leaves unloading to the buyer; DPU is the only rule where the seller unloads. Confirm which one your contract actually specifies before assuming unloading arrangements are in place.
• The EXW export-clearance trap: assuming the buyer can simply “handle export clearance” under EXW, when in many countries a foreign buyer cannot legally lodge that declaration at all.
• Ignoring compliance obligations that sit outside Incoterms: export controls (dual-use goods, sanctioned destinations), Authorised Economic Operator (AEO) status, and port/vessel security codes (e.g. ISPS) are not addressed by the Incoterms rule itself but can affect delivery timing and legality regardless of which rule is used.

Specific Transport Glossary

• Named place: the specific location stated after the Incoterms code (e.g. a factory address, port or terminal) that fixes where delivery, risk transfer and/or cost allocation occurs. Must be precise and unambiguous.
• Carrier: the party that physically transports the goods (a shipping line, airline, trucking company or their agent), under a separate contract of carriage from the sales contract.
• Freight forwarder: a logistics intermediary that arranges carriage, customs formalities and documentation on behalf of a buyer or seller, often acting as, or contracting with, the carrier.
• Institute Cargo Clauses (A/B/C): standard-form marine cargo insurance clauses defining the scope of cover, from broadest (A) to narrowest (C); see Chapter 7.
• Importer of record: the legal entity responsible, under the destination country’s customs law, for filing the import declaration and paying import duties and taxes.
• EORI number (EU) / equivalent registrations: an identifier required to act as an importer or exporter in many jurisdictions (the EU’s Economic Operators Registration and Identification number is one example); needed by whichever party is performing customs clearance.
• Fiscal representative: a locally registered agent that allows a foreign company to account for VAT/import tax in a country where it has no establishment – often required for a seller attempting DDP.
• Multimodal transport: carriage of goods using more than one mode of transport (e.g. truck, then ocean vessel, then truck) under a single contract of carriage.
• Documentary letter of credit (L/C): a bank-issued payment mechanism that pays the seller once it presents specified documents (commonly including an on-board bill of lading) – its document requirements can influence which Incoterms rule is practical, especially for FCA vs FOB.
• Bill of lading / airway bill / CMR: transport documents issued by the carrier for sea, air, and international road (CMR) carriage respectively, serving as evidence of the contract of carriage and, for a bill of lading, as a document of title.
• AEO (Authorised Economic Operator): a customs compliance certification that can speed clearance and reduce inspections; independent of, but relevant alongside, the Incoterms rule chosen.
• General average: a maritime law principle under which all parties with cargo on a vessel share the cost of a deliberate sacrifice (e.g. jettisoning cargo) made to save the voyage as a whole – a risk covered even under the narrowest Institute Cargo Clauses (C).

FAQ

References

This article is an independent explanatory reference, not a substitute for the official rule text. For binding contractual purposes, always consult the ICC’s official publication:

• International Chamber of Commerce – Incoterms® 2020 rules, ICC Publication No. 723E (effective 1 January 2020). iccwbo.org/business-solutions/incoterms-rules/incoterms-2020/
• International Chamber of Commerce – Incoterms® Rules History. iccwbo.org/business-solutions/incoterms-rules/incoterms-rules-history/
• ICC Academy – “Incoterms® 2020 vs 2010: What’s changed?” academy.iccwbo.org/incoterms/article/incoterms-2020-vs-2010-whats-changed/
• United Nations Convention on Contracts for the International Sale of Goods (CISG), 1980.
• Joint Cargo Committee (International Underwriting Association of London and Lloyd’s Market Association) – Institute Cargo Clauses (A), (B), (C), 1/1/2009. The “Institute” name is retained for these clauses by market convention; the original Institute of London Underwriters itself merged into the International Underwriting Association in 1998.

“Incoterms” is a registered trademark of the International Chamber of Commerce. This article is an independent educational summary and is not produced, reviewed or endorsed by the ICC.