What Are Incoterms?
Incoterms are a set of 11 trade rules that define, in an international sale of goods, who pays for transportation, who arranges insurance, who handles customs clearance, and at exactly what point risk passes from the seller to the buyer. They're published by the International Chamber of Commerce (ICC), and the current version is Incoterms 2020, in effect since January 1, 2020. They aren't a law or a contract on their own — they're a shared vocabulary both parties cite inside the sales contract so nobody has to argue later over who was supposed to pay the freight or who bore the loss if the goods were damaged in transit.
For any business importing raw materials, exporting finished goods, or simply getting quotes from an overseas supplier, understanding Incoterms avoids two costly mistakes: paying twice for the same service (freight that was already baked into the price, for example) or ending up with no insurance coverage right when it's needed most.
Incoterms 2020: What Changed from the Previous Version
The ICC updates Incoterms periodically to keep up with how international trade actually works. The 2020 revision replaced DAT (Delivered at Terminal) from Incoterms 2010 with DPU (Delivered at Place Unloaded), which extends delivery to any agreed place — not just a cargo terminal — as long as the seller unloads the goods there. The revision also adjusted the minimum insurance coverage required under CIP, and clarified that under maritime FCA, the seller can ask the carrier for a bill of lading with an "on board" notation before the vessel sails, something many letters of credit require.
Outside of those changes, the structure of 11 rules split into two groups stayed the same as in prior versions, so if your business already worked with Incoterms 2010, the learning curve is short.
The Incoterms 2020 Rules for Any Mode of Transport
This first group applies no matter how the goods travel — by sea, air, rail, truck, or a combination of several:
- EXW (Ex Works): the seller makes the goods available at its own premises. From that point, the buyer takes on all risk, freight, insurance, and, unless otherwise agreed, even export clearance.
- FCA (Free Carrier): the seller delivers the goods to the carrier named by the buyer, either at its own location or another agreed point, already cleared for export.
- CPT (Carriage Paid To): the seller pays freight to the agreed destination, but risk passes to the buyer as soon as the goods are handed to the first carrier.
- CIP (Carriage and Insurance Paid To): same as CPT, but the seller also has to arrange broad-coverage insurance in the buyer's favor.
- DAP (Delivered at Place): the seller carries risk and cost until the goods arrive at the named destination, ready to unload, without unloading them.
- DPU (Delivered at Place Unloaded): like DAP, but the seller is also responsible for unloading the goods at the agreed destination.
- DDP (Delivered Duty Paid): the seller takes on the most responsibility of all 11 rules — transportation, insurance, duties, and import taxes included — until the goods reach the agreed point.
The 4 Incoterms 2020 Rules Exclusive to Sea and Inland Waterway Transport
This second group only applies when goods move by ship, since the point where risk transfers is tied to a port or the ship's side:
- FAS (Free Alongside Ship): the seller delivers the goods alongside the vessel, at the agreed loading port's quay. From there, risk belongs to the buyer.
- FOB (Free on Board): the seller delivers and carries the risk until the goods are loaded on board the vessel at the port of shipment.
- CFR (Cost and Freight): the seller pays freight to the destination port, but risk transfers to the buyer as soon as the goods are loaded on the vessel at origin, same as FOB.
- CIF (Cost, Insurance and Freight): same as CFR, but the seller also has to arrange minimum insurance coverage in the buyer's favor.
The Most Common Incoterms in Mexican Trade
In Mexican import and export operations — especially with the United States, given the volume of overland trade across the northern border — the incoterms that show up most often on quotes and customs declarations tend to be FOB and CIF for ocean cargo moving through ports like Manzanillo, Veracruz, or Lázaro Cárdenas, and EXW or FCA for purchases from domestic or U.S. suppliers moving by truck. DDP shows up increasingly in cross-border e-commerce, where the seller takes on the full import process so the buyer receives the package without unexpected duty charges.
Air freight shipments, more common for high-value or time-sensitive goods, tend to use FCA or CPT instead, since airlines rarely fit neatly into the maritime-only rules.
Picking the right incoterm depends on how much control your business wants over transportation and customs clearance, and how comfortable your team is handling trade paperwork in the country of origin or destination.
Who Pays What, and When Risk Actually Transfers
The most common mistake when reading an incoterm is assuming "who pays the freight" and "who carries the risk" are the same question. They aren't. Under CFR and CIF, for instance, the seller pays ocean freight to the destination port, but the risk of the goods being lost or damaged at sea already belongs to the buyer from the moment they were loaded onto the vessel at origin. That's exactly why cargo insurance matters so much under those two rules: the buyer is covering a risk that's already theirs, even though the seller is still the one paying for freight. This distinction matters most for high-value cargo, where a gap in coverage during transit can turn a shipping delay into a much bigger financial loss.
As a general rule, the closer an incoterm's letter is to E or F (EXW, FCA, FAS, FOB), the more responsibility falls on the buyer early on. The closer it is to D (DAP, DPU, DDP), the more responsibility the seller keeps until the very end of the journey. The C incoterms (CPT, CIP, CFR, CIF) sit in between: the seller pays for transportation, but risk has already moved to the buyer before the goods reach their destination.
Common Mistakes When Choosing an Incoterm
A handful of mistakes come up again and again in cross-border trade:
- Picking EXW because it looks "cheapest," without calculating that the buyer will have to arrange export, freight, insurance, and import clearance separately, which sometimes ends up costing more than a well-negotiated FCA.
- Assuming CIF is "door-to-door" coverage, when in practice the minimum insurance CIF requires tends to be basic, and the buyer's risk starts long before the container reaches its warehouse.
- Not naming the exact place ("FOB port of Lázaro Cárdenas" instead of just "FOB Mexico"), which leads to disputes over exactly where risk transferred.
- Confusing the incoterm with the import declaration without checking that the declared customs regime matches who actually took on the paperwork. This usually ties back to managing broader documentation, like the bill of lading for the shipment.
- Choosing DDP without a tax or customs presence in the destination country, which can complicate the import process that this incoterm obligates the seller to handle.
How Businesses Automate Incoterm and Trade Document Management
Every operation under a different incoterm implies a different document flow: who issues the commercial invoice, who hires the freight forwarder or cargo agent, who uploads the insurance policy, and who follows up on the customs declaration. When a company handles dozens of shipments a month with different suppliers and different incoterms, tracking all of that by hand in spreadsheets is exactly where delivery dates get missed and freight that was already included in the price gets paid twice.
Automating that flow — from generating documentation to tracking alerts by shipment and supplier — cuts down on human error and frees up the trade team from repetitive tasks so it can focus on negotiating better terms. That holds whether your company works with a single logistics provider or combines several carriers depending on the route and the incoterm agreed with each supplier. It also makes it easier to catch a mismatch between the incoterm on the purchase order and the one the supplier actually ships under, before the paperwork reaches customs instead of after.
Frequently Asked Questions
What Are Incoterms, and What Does FOB Mean?
Incoterms are the 11 ICC rules that define who pays for transportation and insurance, who handles customs clearance, and at what point risk passes from seller to buyer. FOB (Free on Board) is one of them: the seller delivers and carries the risk until the goods are loaded on board the vessel at the agreed port of shipment; from there, risk and usually freight become the buyer's responsibility.
What's the difference between CIF and CFR?
Both include freight paid by the seller to the destination port, but CIF also requires the seller to arrange minimum insurance in the buyer's favor. In both cases, risk passes to the buyer once the goods are loaded on the vessel at origin, not once they arrive at destination.
Which incoterm is best if I want to pay the least upfront?
EXW usually has the lowest quoted price, since the seller only has to make the goods available at its own premises, but the buyer separately covers freight, insurance, export, and import. It's worth comparing total landed cost, not just the initial price of the goods.
Are Incoterms legally binding on their own?
They don't replace a contract — they're rules the parties incorporate by reference into the sales contract or purchase order. Their legal force depends on both parties explicitly citing them, for example "CIF Manzanillo, Incoterms 2020."
Is DDP the same as "delivered to your door"?
It's similar, but DDP also means the seller takes on duties and the import process in the destination country, not just final-mile transportation. It's the incoterm that puts the most responsibility on the seller.
If your trade team is still tracking shipments, incoterms, and documentation across separate spreadsheets, at AISDC we design process automation that centralizes those workflows, cuts down on data-entry errors, and flags a customs filing or a freight payment before it slips.