Exploring Incoterms® 2020 Test

Course Overview

Incoterms® (International Commercial Terms) are globally recognised rules published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers in the sale of goods, particularly in relation to transport, risk, and costs.

This short course provides a practical introduction to Incoterms® 2020 and how to apply them in export transactions.

By the end of this course, you will be able to:

• Select appropriate Incoterms® for different transactions
• Understand the allocation of costs, risks, and responsibilities
• Avoid common contractual and logistical mistakes
• Apply Incoterms® consistently across trade documentation

  

1. Introduction to Incoterms®

Incoterms® (International Commercial Terms) are globally recognised rules published by the International Chamber of Commerce (ICC) that define the responsibilities of buyers and sellers in international trade. These rules simplify transactions and ensure clear agreements between buyers and sellers, making it easier to negotiate terms effectively.

They clarify:

• Who pays for transport, insurance, and duties
• Who handles documentation and customs
• When risk transfers from seller to buyer

First introduced in 1936, the rules are updated periodically to reflect changes in global trade. The current version, Incoterms® 2020, came into effect on 1 January 2020.

2. Why Incoterms Matter

Using the correct Incoterm® helps ensure:

• Clear allocation of costs and risks
• Fewer misunderstandings between parties
• More efficient shipping and logistics

Incoterms® are typically included in:

• Sales contracts
• Commercial invoices
• Shipping and transport documents

They do not cover ownership of goods or payment terms.

3. Key Changes in Incoterms® 2020

The 2020 revision introduced several important updates:

DPU replaces DAT

• “Delivered at Terminal (DAT)” is replaced by DPU (Delivered at Place Unloaded)
• Delivery can occur at any location, not only terminals

 

Insurance requirements updated (CIP)

• CIP now requires higher insurance cover (Clause A)
• CIF remains at minimum cover (Clause C)

 

Greater clarity on costs and responsibilities

• Clear allocation under structured obligations (A1–A10 / B1–B10)

 

Security requirements included

• Responsibilities for security-related obligations are now specified

 

Flexibility in transport arrangements

• Buyers or sellers may use their own transport

 

FCA and Bills of Lading

• FCA now accommodates “on-board” Bills of Lading for Letters of Credit

4. The 11 Incoterms® at a Glance

 

A. Rules for Any Mode of Transport

• EXW – Ex Works
• FCA – Free Carrier
• CPT – Carriage Paid To
• CIP – Carriage and Insurance Paid To
• DAP – Delivered at Place
• DPU – Delivered at Place Unloaded
• DDP – Delivered Duty Paid

 

B. Sea & Inland Waterway Only

• FAS – Free Alongside Ship
• FOB – Free On Board
• CFR – Cost and Freight
• CIF – Cost, Insurance and Freight

 

5. Understanding the Incoterms® Rules

This section provides a more practical explanation of each Incoterm®, including when it is typically used, key risks, and important considerations for exporters.

 

EXW (Ex Works)

The seller makes the goods available at their premises (e.g. factory or warehouse). The buyer is responsible for all aspects of transport, export clearance, and delivery.

When is it used?

• Domestic trade or where the buyer has strong logistics capability
• Situations where the buyer wants full control over shipping

Key considerations for exporters:

• The seller has minimal responsibility, but this can create practical issues
• In many countries, the buyer may not be legally able to complete export clearance

 

Pitfalls/tips:

• Often unsuitable for international trade
• Heavy reliance on seller cooperation for documentation
• Frequently replaced by FCA in export transactions

 

 

FCA (Free Carrier)

The seller delivers goods to a carrier or another party nominated by the buyer at a named place. The seller is responsible for export clearance.

When is it used?

• Widely used in international trade
• Recommended for containerised shipments

Key considerations for exporters:

• Flexible—can be used for any mode of transport
• Risk transfers once goods are handed to the carrier

 

Pitfalls/tips:

• Clearly define the exact delivery point (e.g. terminal, depot)
• Clarify who is responsible for loading at seller’s premises

 

2020 update:

• Allows issuance of a Bill of Lading with “on-board” notation, supporting Letters of Credit

 

 

FAS (Free Alongside Ship)

The seller delivers goods alongside the vessel at the named port. The buyer takes responsibility from that point onward.

When is it used?

• Bulk cargo, commodities, or oversized goods (non-containerised such as oil and grain)
• Maritime transport only

Key considerations for exporters:

• Seller handles export clearance
• Buyer arranges loading, freight, and insurance

 

Pitfalls/tips:

• Not suitable for container shipments
• Precise port and location must be clearly stated

 

 

FOB (Free On Board)

The seller delivers goods on board the vessel nominated by the buyer. Risk transfers once goods are loaded onto the vessel.

When is it used?

• Traditional maritime shipping (bulk or break-bulk cargo)

Key considerations for exporters:

• Seller covers export clearance and loading
• Buyer takes responsibility for freight, insurance, and onward transport

 

Pitfalls/tips:

• Commonly misused for container shipments (FCA is preferred)
• Can create disputes over terminal handling charges

 

 

CFR (Cost and Freight)

The seller pays for transport to the destination port, but risk transfers once goods are loaded onto the vessel.

When is it used?

• Sea freight where the seller can arrange competitive shipping rates

Key considerations for exporters:

• Seller pays freight but does not carry risk during transit

 

Pitfalls/tips:

• Buyers often misunderstand risk transfer timing
• No insurance included—buyer should arrange cover

 

 

CIF (Cost, Insurance and Freight)

Similar to CFR, but the seller must also provide insurance for the goods during transport.

When is it used?

• Maritime shipments where buyers prefer seller-managed insurance

Key considerations for exporters:

• Insurance is provided by the seller for the buyer’s benefit

 

Pitfalls/tips:

• Insurance is minimum cover only (may not reflect full cargo value)
• Seller controls insurance provider and terms
• Buyer may need additional insurance

 

2020 update:

• No change—remains at minimum cover (Clause C)

 

 

CPT (Carriage Paid To)

The seller pays for transport to a named destination, but risk transfers once goods are handed to the first carrier.

When is it used?

• Multimodal transport (road, rail, air, sea combinations)

Key considerations for exporters:

• Seller pays transport but risk transfers early

 

Pitfalls/tips:

• Buyers may incorrectly assume risk transfers at destination
• Buyer should arrange insurance

 

 

CIP (Carriage and Insurance Paid To)

Same as CPT, but the seller also provides insurance.

When is it used?

• High-value or manufactured goods
• Multimodal transport

Key considerations for exporters:

• Provides additional assurance to buyers through insurance

 

Pitfalls/tips:

• Risk still transfers early despite seller paying costs
• Ensure clarity on insurance coverage and beneficiary

 

2020 update:

• Insurance upgraded to higher cover (Clause A)

 

 

DAP (Delivered at Place)

The seller delivers goods to a named destination, ready for unloading. The buyer is responsible for unloading and import clearance.

When is it used?

• Door-to-door deliveries where seller manages most logistics

Key considerations for exporters:

• Seller carries risk until goods arrive at destination

 

Pitfalls/tips:

• Destination must be clearly defined
• Unloading costs and responsibilities should be agreed

 

 

DPU (Delivered at Place Unloaded)

The seller delivers and unloads goods at the named destination. The buyer handles import clearance.

When is it used?

• Projects or shipments requiring unloading at destination
• Situations where seller controls delivery process

Key considerations for exporters:

• Only Incoterm where seller is responsible for unloading

 

Pitfalls/tips:

• Seller bears risk during unloading
• Ensure capability and equipment at destination

 

2020 update:

• Replaces DAT (Delivered at Terminal)

 

 

DDP (Delivered Duty Paid)

The seller is responsible for all costs and risks, including import clearance, duties, and taxes.

When is it used?

• Full-service delivery where seller manages entire process

Key considerations for exporters:

• Maximum obligation and risk for the seller

 

Pitfalls/tips:

• Complex due to foreign customs regulations
• Risk of unexpected duties, taxes, and delays
• Often not recommended unless the seller has strong local expertise

6. Choosing the Right Incoterm®

When selecting an Incoterm, consider:

• Your experience with logistics
• Control over shipping arrangements
• Risk tolerance
• Relationship with your buyer/supplier

 

Typical guidance:

• New exporters → FCA or FOB
• Experienced importers → EXW or FCA
• Full-service delivery → DDP

 

Cost Responsibilities

Each Incoterm splits costs differently, including:

• Export packaging and loading
• Transport and freight
• Insurance
• Customs clearance
• Import duties and taxes

Choosing the wrong term can significantly impact your landed cost and profitability.

Key Concept: Transfer of Risk

The most important function of Incoterms is defining when risk transfers from seller to buyer.

Example:

• Under FCA, risk transfers when goods are handed to the carrier
• Under DAP, risk transfers at destination
• Under EXW, risk transfers almost immediately at pickup

This determines who is liable if goods are damaged or lost.

7. Practical Tips for Exporters

• Always state: Incoterm® + named place (e.g., “FOB Shanghai”)
• Ensure alignment with your sales contract and transport documents
• Align Incoterms® with contracts and payment terms
• Understand that Incoterms do not cover ownership or payment terms
• Avoid DDP unless familiar with destination-country regulations
• Work with reliable freight forwarders and customs brokers

8. Summary

Incoterms® 2020 provide a clear framework for international trade by defining:

• Responsibilities
• Costs
• Risk

Correct use helps reduce disputes, improve efficiency, and support better commercial decisions.

9. Quick Reference Guide (downloadable)