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Incoterms® 2020: how to choose the right term and avoid cost surprises

Documentation

The Incoterm you choose defines who pays what, who bears which risk and where the seller's responsibility ends. Choosing a term by habit, or because the supplier proposed it, is one of the most common ways to end up with unplanned costs at destination.

What Incoterms regulate (and what they do not)

Published by the International Chamber of Commerce (ICC), the Incoterms® 2020 are eleven rules that define the allocation of costs, risks and obligations between seller and buyer on delivery. They do not regulate transfer of title, payment terms or the consequences of breach. That belongs in the sales contract.

The eleven terms

For any mode of transport:

  • EXW: the seller makes the goods available at its premises; the buyer handles almost everything.
  • FCA: the seller hands over to the carrier named by the buyer, with export clearance on the seller.
  • CPT and CIP: the seller contracts the main carriage to destination; CIP includes insurance.
  • DAP, DPU and DDP: the seller delivers at destination. With DPU the goods are unloaded; with DDP the seller also bears import duties and taxes.

Sea and inland waterway only:

  • FAS, FOB, CFR and CIF.

What changed in 2020

  • DAT became DPU (Delivered at Place Unloaded): the place of destination can be any place, not just a terminal.
  • Insurance cover was clarified: CIP now requires maximum cover (Institute Cargo Clauses A), while CIF keeps minimum cover (clauses C).

The most frequent mistakes

  • Using FOB or CIF for containers. These terms were designed for cargo carried by ship and delivered on board. For containers, FCA, CPT or CIP are usually more suitable, because delivery happens at the terminal, not on board.
  • Not naming the place. An Incoterm only works with a named place (for example "FCA Shanghai" or "DAP Luanda"). Without it, it is unclear where risk passes.
  • Accepting DDP without checking. When the seller takes on clearance in the destination country, the operation rarely works well if it lacks local status or representation.
  • Forgetting insurance. Under EXW, FCA, FOB and other terms, insurance is for the buyer's account. If nobody buys it, the risk is uncovered.

Impact on customs value

The Incoterm also influences how customs value is calculated. In the European Union, for example, customs value includes transport and insurance costs up to the point of entry into the customs territory. This means the same purchase price can give different duty and VAT bases depending on the term. Confirm the method with your customs broker.

Three questions before you sign

  1. Who is better placed to contract transport and insurance at a good price: me or the supplier?
  2. At exactly what point do I want risk to pass to me?
  3. Am I clear on the destination costs (port, handling, clearance) that the term leaves with me?
This article is for information only and reflects the information available at the date of publication. Customs legislation and procedures change often: always confirm the current version with the competent authorities or your customs broker before making decisions.

Cover photo: Trougnouf, CC BY 4.0, Wikimedia Commons.

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