Incoterms® 2020 Overview and Comparison
1. Introduction
Incoterms® 2020 (International Commercial Terms) are the industry-standard rules published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers in international and domestic trade, specifically concerning:
- Delivery Point: Where the goods are handed over.
- Risk Transfer: When the risk of loss or damage shifts from seller to buyer.
- Cost Allocation: Who pays for transport, insurance, duties, and other fees.
- Formalities: Who handles customs clearance and documentation.
They came into effect on 1 January 2020, replacing the 2010 rules. Understanding these terms is critical for Australian importers and exporters to avoid unexpected costs and legal disputes.
note
Incoterms do not cover ownership (title) transfer or payment terms. These must be defined separately in your sales contract.
2. Detailed Term Explanations
Incoterms are divided into two categories based on the mode of transport.
Rules for Any Mode or Modes of Transport
(Suitable for road, rail, air, and sea, including containerised cargo)
EXW – Ex Works (Insert named place of delivery)
- Concept: Maximum obligation on the buyer. Seller simply makes goods available at their premises.
- Seller: Packs goods and makes them available.
- Buyer: Loading, all transport, export clearance, import clearance, duties.
- Risk Transfer: When goods are placed at the buyer's disposal at the named place.
- Note: Risky for cross-border trade as the buyer may struggle with export formalities in the seller's country.
FCA – Free Carrier (Insert named place of delivery)
- Concept: Very flexible. Seller delivers to the buyer's carrier.
- Seller: Export clearance + delivery to the carrier at the named place. (If named place is seller's premises, seller loads; otherwise, seller delivers ready for unloading).
- Buyer: Main carriage, import clearance, unloading at destination.
- Risk Transfer: When goods have been delivered to the carrier.
- 2020 Update: Allows buyer to instruct carrier to issue an on-board bill of lading to the seller (useful for Letter of Credit contexts).
CPT – Carriage Paid To (Insert named place of destination)
- Concept: Seller pays freight to destination, but risk transfers early.
- Seller: Export clearance + freight to destination.
- Buyer: Risk of loss/damage during transit, insurance (optional), import clearance, duties.
- Risk Transfer: When goods are handed over to the first carrier (not when they arrive at destination).
CIP – Carriage and Insurance Paid To (Insert named place of destination)
- Concept: Same as CPT, but seller must provide insurance.
- Seller: Export clearance + freight + Insurance to destination.
- Buyer: Import clearance, duties, unloading.
- Risk Transfer: When goods are handed over to the first carrier.
- 2020 Update: Seller must now provide a higher level of insurance cover (Institute Cargo Clauses (A) – "All Risks"), unless otherwise agreed.
DAP – Delivered At Place (Insert named place of destination)
- Concept: Seller delivers to doorstep, buyer unloads.
- Seller: Transport to named place, ready for unloading.
- Buyer: Unloading, import clearance, duties/taxes.
- Risk Transfer: When goods are ready for unloading at the named place.
DPU – Delivered at Place Unloaded (Insert named place of destination)
- Concept: Seller delivers and unloads.
- Seller: Transport to named place + unloading.
- Buyer: Import clearance, duties/taxes.
- Risk Transfer: When goods are unloaded at the named place.
- 2020 Update: Replaced the old DAT (Delivered at Terminal). Can be any place, not just a terminal.
DDP – Delivered Duty Paid (Insert named place of destination)
- Concept: Maximum obligation on the seller.
- Seller: Transport + import clearance + duties + taxes (e.g., GST) + delivery to destination.
- Buyer: Unloading only.
- Risk Transfer: When goods are placed at the buyer’s disposal at the named place.
- Note: Sellers should be cautious; they are responsible for import formalities in the buyer’s country (e.g., Australian GST/Customs).
Rules for Sea and Inland Waterway Transport
(Best for bulk cargo like grain, oil, ore. Avoid for containerised goods—use FCA/CPT/CIP instead)
FAS – Free Alongside Ship (Insert named port of shipment)
- Concept: Goods placed next to the ship (e.g., on the quay).
- Seller: Export clearance + delivery alongside the vessel.
- Buyer: Loading, main carriage, insurance, import.
- Risk Transfer: When goods are alongside the ship.
FOB – Free On Board (Insert named port of shipment)
- Concept: Assessing risk once goods are "on board".
- Seller: Export clearance + loading expenses.
- Buyer: Sea freight, insurance, import.
- Risk Transfer: When goods are on board the vessel.
CFR – Cost and Freight (Insert named port of destination)
- Concept: Seller pays freight, buyer takes risk.
- Seller: Export clearance + flux freight to destination port.
- Buyer: Risk (once loaded), insurance, import clearance, unloading.
- Risk Transfer: When goods are on board the vessel.
CIF – Cost, Insurance and Freight (Insert named port of destination)
- Concept: Same as CFR, plus seller insurance.
- Seller: Export clearance + freight + Insurance.
- Buyer: Import clearance, unloading.
- Risk Transfer: When goods are on board the vessel.
- Insurance: Seller only required to provide minimum cover (Institute Cargo Clauses (C)).
3. Comparative Overview
Risk vs. Cost Matrix
| Term | Mode | Seller Pays Freight To | Seller Pays Insurance? | Risk Transfers To Buyer | Import Clearance / Duties |
|---|---|---|---|---|---|
| EXW | Any | Nowhere (Buyer picks up) | No | At seller's premises | Buyer |
| FCA | Any | Named Place (Domestic) | No | At named place (to carrier) | Buyer |
| CPT | Any | Destination Port/Place | No | When given to 1st carrier | Buyer |
| CIP | Any | Destination Port/Place | Yes (Clause A) | When given to 1st carrier | Buyer |
| DAP | Any | Destination Place | No | At destination (ready to unload) | Buyer |
| DPU | Any | Destination Place | No | At destination (after unloading) | Buyer |
| DDP | Any | Destination Place | No | At destination | Seller |
| FAS | Sea | Alongside Ship | No | Alongside ship | Buyer |
| FOB | Sea | On Board Vessel | No | On board vessel | Buyer |
| CFR | Sea | Destination Port | No | On board vessel (port of origin) | Buyer |
| CIF | Sea | Destination Port | Yes (Clause C) | On board vessel (port of origin) | Buyer |
4. Decision Matrix (Import to Australia)
| If you want... | Recommended Term | Why? |
|---|---|---|
| Total Control | EXW or FCA | You control the logistics chain, choose the carrier, and manage costs. FCA is generally better than EXW as the seller handles export clearance. |
| Seller to handle Freight | CPT or DAP | Seller arranges transport. Use DAP if you want risk to stay with the seller until arrival. Use CPT if you are okay taking risk during transit. |
| Door-to-Door Service | DDP | "Hassle-free" for the buyer, but ensure the seller can legally handle Australian GST/Customs. |
| Sea Freight (Bulk) | FOB or CIF | Classic sea terms. Use FOB if you want to select the shipping line; CIF if you want the seller to manage it. |
tip
Container Shipments: Do not use FOB/CIF for containers. Risk transfers when the container is delivered to the terminal, not when loaded on the ship. Use FCA or CIP instead to align risk transfer with physical handover.
5. Summary
- Be Precise: Always specify the location (e.g., "FCA 123 Main St, Shanghai, Incoterms® 2020").
- Know the Mode: Use the right term for the transport mode (Sea vs. Any).
- Check Insurance: Understand the difference between Clause A (CIP) and Clause C (CIF) coverage.
- Clarify Costs: Ensure your contract explicitly lists any costs not covered by the Incoterm (e.g., specific terminal handling charges).
6. Resources
For official rules, training, and detailed guidance:
- International Chamber of Commerce (ICC) Australia – The official source for Incoterms® rules and publications.
- Australian Border Force (ABF) – Provides advice on customs values and import declarations concerning Incoterms.
- Freight Forwarder Guides: