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. The seller simply makes goods available at their premises.
- Seller: Packs goods and makes them available.
- Buyer: Loading, all transport, export clearance, import clearance, and 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: Highly flexible. The seller delivers goods to the buyer's nominated carrier.
- Seller: Export clearance and delivery to the carrier at the named place. (If the named place is the seller's premises, the seller loads; otherwise, the seller delivers ready for unloading.)
- Buyer: Main carriage, import clearance, and unloading at destination.
- Risk Transfer: When goods have been delivered to the carrier.
- 2020 Update: Allows the buyer to instruct the carrier to issue an on-board bill of lading to the seller (useful in Letter of Credit contexts).
CPT – Carriage Paid To (Insert named place of destination)
- Concept: The seller pays freight to the destination, but risk transfers early.
- Seller: Export clearance and freight to the destination.
- Buyer: Risk of loss or damage during transit, insurance (optional), import clearance, and duties.
- Risk Transfer: When goods are handed over to the first carrier (not when they arrive at the destination).
CIP – Carriage and Insurance Paid To (Insert named place of destination)
- Concept: Same as CPT, but the seller must also provide insurance.
- Seller: Export clearance, freight, and insurance to the destination.
- Buyer: Import clearance, duties, and unloading.
- Risk Transfer: When goods are handed over to the first carrier.
- 2020 Update: The 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: The seller delivers to the doorstep; the buyer unloads.
- Seller: Transport to the named place, ready for unloading.
- Buyer: Unloading, import clearance, and 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: The seller delivers and unloads.
- Seller: Transport to the named place and unloading.
- Buyer: Import clearance and duties/taxes.
- Risk Transfer: When goods are unloaded at the named place.
- 2020 Update: Replaced the former DAT (Delivered at Terminal). The named place can be any location, 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), and delivery to the destination.
- Buyer: Unloading only.
- Risk Transfer: When goods are placed at the buyer's disposal at the named place.
- Note: Sellers should exercise caution, as they are responsible for import formalities in the buyer's country (e.g., Australian GST and customs requirements).
Rules for Sea and Inland Waterway Transport
(Best suited for bulk cargo such as grain, oil, and ore. Avoid for containerised goods — use FCA, CPT, or CIP instead.)
FAS – Free Alongside Ship (Insert named port of shipment)
- Concept: Goods are placed next to the ship (e.g., on the quay).
- Seller: Export clearance and delivery alongside the vessel.
- Buyer: Loading, main carriage, insurance, and import clearance.
- Risk Transfer: When goods are placed alongside the ship.
FOB – Free On Board (Insert named port of shipment)
- Concept: Risk transfers once goods are loaded on board the vessel.
- Seller: Export clearance and loading expenses.
- Buyer: Sea freight, insurance, and import clearance.
- Risk Transfer: When goods are on board the vessel.
CFR – Cost and Freight (Insert named port of destination)
- Concept: The seller pays freight; the buyer bears the risk from loading.
- Seller: Export clearance and freight to the destination port.
- Buyer: Risk (once goods are loaded), insurance, import clearance, and 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 the seller provides insurance.
- Seller: Export clearance, freight, and insurance.
- Buyer: Import clearance and unloading.
- Risk Transfer: When goods are on board the vessel.
- Insurance: The seller is 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 preferable to EXW because the seller handles export clearance. |
| Seller to handle freight | CPT or DAP | The seller arranges transport. Use DAP if you want risk to remain with the seller until arrival. Use CPT if you are comfortable bearing risk during transit. |
| Door-to-door service | DDP | Hassle-free for the buyer, but ensure the seller can legally handle Australian GST and customs obligations. |
| Sea freight (bulk) | FOB or CIF | Classic sea terms. Use FOB if you want to select the shipping line; use CIF if you want the seller to arrange it. |
tip
Container Shipments: Do not use FOB or CIF for containers. Risk transfers when the container is delivered to the terminal, not when it is loaded onto the ship. Use FCA or CIP instead to align the risk transfer point with the physical handover.
5. Summary
- Be Precise: Always specify the location (e.g., "FCA 123 Main St, Shanghai, Incoterms® 2020").
- Know the Mode: Use the correct term for the transport mode (sea-only vs. any mode).
- Check Insurance: Understand the difference between Clause A (CIP) and Clause C (CIF) coverage levels.
- Clarify Costs: Ensure your contract explicitly addresses 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: