Why I read the Incoterm first
In the imports I followed, almost every supplier worked on EXW and one of them on FCA. In practice, that meant the freight was ours: quoting, approving and following the shipment from origin. That is where I understood that these three letters move the cost, the risk and the lead time of every purchase.
A sea freight example shows the confusion well. The cargo was loaded in China, the supplier paid the freight to Brazil and, halfway across the ocean, the cargo is lost. Who takes the loss? Many people answer "the supplier, because they paid the freight". If the Incoterm on the invoice is CFR, the loss belongs to the buyer.
Cost and risk do not always travel together. Under CFR and CIF the seller pays the freight to the destination port, but risk passes to the buyer when the cargo is placed on board, still at the port of origin.
What an Incoterm is
Incoterms are rules from the International Chamber of Commerce (ICC) that state, in three letters, how seller and buyer split three things:
- Cost: who pays each leg of transport, the insurance and the customs clearances.
- Risk: from which point a loss or damage becomes the buyer's problem.
- Tasks: who books the transport and who handles export and import formalities.
On the invoice it shows up as a code plus a place, for example CIF Santos, Incoterms 2020. The code is the rule. The place says where it applies. Without the place, the rule is incomplete.
What an Incoterm does not define: when ownership of the goods passes, the payment method and the price. Those belong in the sales contract.
The 11 terms in one table
The current version is from 2020. Seven terms work for any mode of transport and four are only for sea and inland waterway.
| Term | Mode | Main freight | Insurance | Where risk passes to the buyer |
|---|---|---|---|---|
| EXW Ex Works | Any | Buyer | No obligation | At the seller's premises, with the goods made available. The buyer loads and clears export. |
| FCA Free Carrier | Any | Buyer | No obligation | On delivery to the carrier named by the buyer, already cleared for export. |
| CPT Carriage Paid To | Any | Seller | No obligation | On delivery to the first carrier, at origin. |
| CIP Carriage and Insurance Paid To | Any | Seller | Seller, broad cover (clause A) | On delivery to the first carrier, at origin. |
| DAP Delivered at Place | Any | Seller | No obligation | At the named destination, ready for unloading. |
| DPU Delivered at Place Unloaded | Any | Seller | No obligation | At the named destination, already unloaded. |
| DDP Delivered Duty Paid | Any | Seller | No obligation | At destination, with import cleared and duties paid by the seller. |
| FAS Free Alongside Ship | Sea | Buyer | No obligation | Alongside the ship, at the port of loading. |
| FOB Free On Board | Sea | Buyer | No obligation | On board the ship, at the port of loading. |
| CFR Cost and Freight | Sea | Seller | No obligation | On board the ship, at the port of loading. |
| CIF Cost, Insurance and Freight | Sea | Seller | Seller, minimum cover (clause C) | On board the ship, at the port of loading. |
"No obligation" means the Incoterm does not require anyone to buy insurance. Whoever carries the risk on that leg usually does.
Simulator: where risk changes hands
Pick an Incoterm and see who pays each leg of the journey and at which point risk passes to the buyer.
An easy way to remember
Group them by the first letter. The further down the alphabet, the more obligation stays with the seller:
- E (EXW): the seller only makes the goods available.
- F (FCA, FAS, FOB): the seller hands the goods to transport. The main freight is on the buyer.
- C (CPT, CIP, CFR, CIF): the seller pays the main freight, but risk stays at origin. This is where the confusion lives.
- D (DAP, DPU, DDP): the seller delivers at destination and carries the risk all the way there.
The C-term trap
With the C terms there are two different points on the same journey:
- The risk point, which stays at origin (on board for CFR and CIF; at the first carrier for CPT and CIP).
- The cost point, which goes all the way to destination, because the seller paid the freight.
Back to the ship: under CFR Santos, the supplier paid the freight to Santos, but the cargo was already the buyer's risk from the moment it went on board in China. If the buyer did not insure it, they lose the cargo and still have to replenish the stock.
CIF is similar, with one difference: the seller must buy insurance on the buyer's behalf. But the required cover is the minimum one. For high-value cargo, it is worth looking at additional cover.
What it changes for planners
This was the part that interested me most, coming from planning. Incoterms look like a trade compliance topic, but they hit two numbers I use every day:
1. Landed cost
Under FOB, international freight and insurance go into your cost. Under CIF, they are already in the supplier's price. Comparing two quotes without looking at the Incoterm is comparing different things.
2. Lead time: where the supplier's lead time ends
The lead time a supplier quotes means something different depending on the Incoterm. Under EXW or FCA, their lead time ends when the goods are ready for pickup or handed to the carrier. Pickup, international freight, customs clearance and transport to the warehouse are steps you need to add and track. Under DAP, the supplier's lead time already runs to destination, but import clearance is still on you. With suppliers on EXW, I added pickup, freight, clearance and transport to the logistics provider on top of their lead time. Using the same lead time for suppliers on different Incoterms distorts the reorder point and the safety stock.
Example with fictional numbers
Same product, two suppliers:
| Supplier A (FCA Shanghai) | Supplier B (CIF Santos) | |
|---|---|---|
| Unit price | US$ 10.00 | US$ 11.20 |
| International freight and insurance | US$ 1.40 (you book it) | Included |
| Cost to the destination port | US$ 11.40 | US$ 11.20 |
| What you book and track | Freight, insurance, clearance and transport to the warehouse | Clearance and transport to the warehouse |
| Risk is yours from | Delivery to the carrier, in Shanghai | Loading on board, in Shanghai |
Supplier B looked more expensive on price alone. With the Incoterm in the math, it is cheaper all the way to Santos. Even so, under CIF the cargo is your risk from loading, and their insurance is the minimum.
What I check when an invoice arrives
- Does the Incoterm have a code, a place and a version? Example:
FCA Shanghai Airport, Incoterms 2020. - Does the term match the purchase order and the contract?
- Does the term fit the transport mode? FAS, FOB, CFR and CIF are only for sea and inland waterway. For air or containerized cargo, prefer FCA, CPT or CIP.
- Who bought the insurance, and what does it cover?
- Does the lead time in the system account for where your responsibility starts?
What I take from it
I read the Incoterm before the price. It tells me who pays each leg, from where the risk belongs to the buyer and where the lead time starts. If I had to teach just one thing to someone coming from planning, it would be this.
Source of the rules: Incoterms 2020, a publication of the International Chamber of Commerce (ICC). This text is a teaching summary and does not replace the contract or advice from a customs broker.