Incoterms 2020 – Explanation of Costs, Risks, and Obligations

What is an Incoterm?

Incoterms are the terms that specify who is responsible for arranging transportation, who covers the costs, and who bears the risk of damage or loss at different stages of the process. They provide clarity in international trade. Additionally, Incoterms are reviewed every 10 years and are internationally accessible. They are available in over 30 languages. The most recent version is from 2020, with the previous version being Incoterms 2010.

Beware! Incoterms do not, by themselves, constitute a sales contract.

What Are Incoterms 2020?

In 2020, 11 Incoterms were established, outlining the conditions and obligations for buyers and sellers. These are illustrated in the chart. The terms CFR, FOB, FAS, and CIF are specifically related to sea freight. The other seven terms apply to all other modes of transportation.

For the ICC (International Chamber of Commerce) Incoterms, the place of transfer is crucial. This refers to the point at which the goods are transferred between the buyer and seller, including the associated costs, risks, and obligations. This place could be a seaport, transport vehicle, storage facility, or border.

Incoterms 2020 for All Modes of Transport

EXW – Ex Works

Under the Incoterms 2020 – EXW, the seller has the fewest obligations. The seller simply makes the goods available at the agreed location, which is often their business premises, workshop, or warehouse. The buyer is responsible for the export and import, bearing all the risks and costs. EXW applies to all modes of transport.

This Incoterm is also known in the Netherlands as “Af fabriek.”

FCA – Free Carrier

The FCA Incoterm 2020 places a few more obligations on the seller compared to EXW. The seller delivers the goods to the (carrier of) the buyer at an agreed location. The seller covers the cost of transport to that location and transfers the risk once the goods are loaded.

The FCA Incoterm is known in the Netherlands as “Vrachtvrij tot Vervoerder”

CPT – Carriage Paid To

With the Incoterm 2020 CPT, the seller pays for the full transportation costs. However, the risk transfers once the first carrier takes possession of the goods. Because of this, for the CPT incoterm, the transfer point and the final destination of the goods are important.

The Terminal Handling Charges (THC) are not commonly included in the CPT price, so it’s important for the buyer to check this to prevent unexpected additional costs.

CPT is known in the Netherlands as “Vracht Betaald tot”

CIP – Carriage and Insurance Paid To

The Incoterm 2020 CIP is similar to CPT. However, the buyer pays for both transportation and insurance to the destination. The risk transfers when the goods are handed over to the first carrier. Nevertheless, the seller must arrange cargo insurance that covers the goods from handover until delivery.

CIP is known in the Netherlands as “Vracht en Verzekering betaald tot”

DAP – Delivered At Place

Under the Incoterm 2020 DAP, the seller bears all risks until the goods reach the agreed destination. The seller is responsible for transportation, costs, and the risk of loss or damage up to the point of delivery, excluding unloading.

DAP is known in the Netherlands as “Geleverd ter Bestemming”

DPU – Delivered At Place Unloaded

The Incoterm 2020 DPU is similar to DAP, but the seller is responsible not just until delivery but also for unloading the goods. This incoterm places more obligations on the seller.

DPU is known in the Netherlands as “Geleverd ter Bestemming en Gelost”

DDP – Delivered Duty Paid

The DDP Incoterm 2020 puts the most obligations on the seller. The seller handles and pays for transportation to the agreed destination, including customs clearance and any import duties. The seller also bears the risk until the goods are delivered to the buyer, not unloaded, at the destination.

DDP is known in the Netherlands as “Geleverd Rechten Betaald”

Incoterms 2020 for Sea Freight

FAS – Free Alongside Ship

Under the FAS Incoterm, the seller delivers the goods at the agreed shipping port and places them next to the booked ship. This usually means the goods are placed on the quay or on a barge next to the ship. After this point, the risk and costs transfer to the buyer, who is responsible for loading the ship.

FAS is known in the Netherlands as “Vrachtvrij Langszij Schip”

FOB – Free On Board

The seller loads the goods onto the agreed ship. After this, the buyer bears the risk and costs. According to the ICC Incoterms 2020, the goods are considered on board the ship once they cross the ship’s railing.

However, in cases where goods are already at the terminal and do not need to be transferred to the ship (e.g., containerized goods), FOB may not be suitable, and FCA might be a better option.

FOB is known in the Netherlands as “Vrachtvrij aan Boord”

CFR – Cost and Freight

The seller arranges and pays for the freight of the goods to the port of destination. However, the risk transfers once the goods are loaded onto the ship. According to the ICC Incoterms 2020, the goods are on board the vessel when they pass the ship’s railing.

As with the CPT Incoterm, the seller must check whether Terminal Handling Charges (THC) are included in the CFR price.

CFR is known in the Netherlands as “Kostprijs en Vracht.”

CIF – Cost, Insurance and Freight

Under CIF, the seller is responsible for arranging and paying for transportation and related costs up to the agreed port of destination. The seller also bears the risk of loss or damage until the goods are on board the ship. Additionally, the seller must arrange cargo insurance that covers the goods from the shipping port to the destination port.

CIF is not suitable for containerized goods that only need to be transported to the terminal. In such cases, the CIP Incoterm is more appropriate.

CIF is known in the Netherlands as “Kostprijs Verzekering en Vracht”

What Is the Most Commonly Used Incoterms?

The most suitable Incoterm depends on the specific circumstances. However, we notice that for road transport, EXW and DAP are most common. For sea freight, FOB and CIF are frequently used. We never recommend choosing any Incoterm without careful consideration. We prefer to analyze the situation with our clients to ensure we select the most appropriate incoterm for their specific needs. Want to know which Incoterm is best for you? Feel free to contact us!