Incoterms Explained: Ultimate Guide for 2025

If there’s one thing that can sink a shipment faster than bad weather, it’s misunderstanding Incoterms. One wrong assumption about who pays for what, when risk transfers, or who handles customs clearance, and suddenly, you’re dealing with disputes that cost money and time.

Think of Incoterms as the ground rules for international trade—they tell us who pays for freight, who covers insurance paid, when risk transfers, and who handles import clearance. But here’s the catch: just because they’re standardized doesn’t mean they’re simple.

Let’s break it down and talk about how Incoterms rules actually work in practice.

What Are Incoterms in Shipping?

Incoterms, short for International Commercial Terms, are a set of rules that define the responsibilities of buyers and sellers in international trade. They dictate who arranges transportation, who covers costs, and where risk passes.

They were created in 1936 by the International Chamber of Commerce (ICC) to help standardize global trade. Before that, every sales contract was a mess of mismatched terms, and different countries had their own ways of defining buyer and seller obligations. It was chaos.

The goal? To make shipping contracts crystal clear so that there’s no misunderstanding about who does what. And while the basics have stayed the same, modern trade practices have led to updates over the years.

4 Categories of Incoterms

The 11 Incoterms are divided into four categories, based on the first letter of their abbreviation. Each category determines who handles transport, when risk transfers, and which costs each party is responsible for.

The four categories are:

• Category C (Main Carriage Paid)
• Category D (Arrival)
• Category E (Departure)
• Category F (Main Carriage Unpaid)

Each category outlines specific responsibilities for buyers and sellers in international trade. Let’s take a deeper look at these categories:

Category C: Seller Pays for Main Carriage, Buyer Takes Risk

In Category C, the seller bears the costs of getting goods to the port of departure and covering freight charges to the named place of destination. However, risk transfers to the buyer once the goods are loaded onto the transport vessel.

This means that while the seller covers the freight cost, the buyer assumes liability for any damage or delays once the shipment is underway.

The four Incoterms in Category C are:

• Cost and Freight (CFR)
• Cost, Insurance, and Freight (CIF)
• Carriage Paid To (CPT)
• Carriage and Insurance Paid To (CIP)

These terms are commonly used when the seller arranges shipping but does not take responsibility for the cargo once it departs.

Category D: Seller Delivers to a Specified Destination

Category D Incoterms focus on final delivery. Unlike Category C, where the buyer assumes risk earlier, in Category D, the seller remains responsible until the shipment reaches the agreed-upon place of destination.

These terms are used when the seller must ensure that goods arrive at a specific location, which can include ports, warehouses, or job sites.

The three Incoterms in Category D are:

• Delivered at Place Unloaded (DPU)
• Delivered at Place (DAP)
• Delivered Duty Paid (DDP)

DPU and DAP require the buyer to handle customs clearance, while DDP places the entire import process—including import duties—on the seller.

Category E: Buyer Takes Full Responsibility

Category E has only one Incoterm: EXW (Ex Works).

This is the most buyer-heavy term, as the seller’s responsibility ends once the goods are made available at their own premises or another agreed-upon location. The buyer is responsible for everything from export clearance to final delivery.

Because EXW shifts maximum responsibility to the buyer, it’s often used when the buyer has a strong logistics network and wants full control over shipping and import processes.

Category F: Buyer Arranges Main Carriage, Seller Prepares Goods

In Category F, the seller is responsible for delivering the goods to the buyer’s carrier at a designated location. Unlike Category C, the seller does not cover the main freight costs—the buyer arranges transportation from the port of departure onward.

These terms are commonly used when the buyer has a preferred shipping provider or when the importer wants more control over freight costs.

The three Incoterms in Category F are:

• Free Carrier (FCA)
• Free Alongside Ship (FAS)
• Free on Board (FOB)

With FCA, the seller delivers the goods to the first carrier. FAS requires the seller to place the goods alongside the vessel, and FOB transfers risk once the goods are loaded onto the ship.

Key Stages of the Shipping Process

Before diving into each Incoterm, let’s go over some key steps in the international shipment process. These steps define when and where responsibility transfers from the seller to the buyer.

• The Seller – The starting point where goods are prepared for shipment.
• The First Carrier – The transport company responsible for picking up the goods from the seller and moving them to the next location.
• Alongside Ship – The port where goods are delivered before being loaded onto a vessel.
• Loading Port – The stage where goods are physically loaded onto the ship.
• Transport – The main shipping phase, typically by sea and inland waterway transport or air.
• Destination Port – The arrival port in the buyer’s country, where goods are unloaded.
• Alongside Ship (Destination) – The location where goods await pickup from the final carrier.
• The Buyer (Delivery Location) – The place where the buyer’s carrier delivers the goods, often a warehouse or distribution center.
• The Buyer (Final Destination) – The place of destination, which could be the buyer’s business, store, or home.

While many Incoterms share similarities within their categories, each one has unique details that make it better suited for certain shipping scenarios.

The 11 Incoterms and How They Work

Now, let’s start with the Incoterm that places the most responsibility on the buyer and work our way to the ones that shift most responsibilities to the seller.

1. EXW – Ex Works (Category E)

EXW is the most buyer-heavy Incoterm, placing minimal responsibility on the seller. Under EXW, the seller’s only obligation is to prepare the goods and make them available at their premises. The buyer is responsible for arranging pickup, paying the first carrier, and handling export clearance. From the moment the goods are collected, the buyer assumes all risk and costs, including transport, customs clearance, and final delivery. EXW is ideal for buyers who want complete control over their logistics network and prefer to manage transportation and customs processes themselves.

2. FCA – Free Carrier (Category F)

FCA shifts slightly more responsibility to the seller compared to EXW. Under FCA, the seller delivers the goods to a first carrier at a designated location and is responsible for arranging transport to that point and covering export clearance. Once the first carrier takes possession, risk transfers to the buyer, who then handles the rest of the shipment. FCA is useful for buyers who want more control over international freight selection but prefer the seller to handle export logistics.

3. FAS – Free Alongside Ship (Category F)

Under FAS, the seller delivers the goods next to the vessel at the port of departure but does not load them onto the ship. The buyer is responsible for loading, main transport, and import clearance, making FAS a popular choice for bulk cargo shipments. This Incoterm allows buyers to fully control vessel booking, freight costs, and risk management from the moment the goods reach the port.

4. FOB – Free on Board (Category F)

FOB is one of the most widely used Incoterms in maritime trade because it clearly defines when responsibility shifts. Under FOB, the seller delivers the goods onto the ship at the port of departure, at which point risk transfers to the buyer. The buyer pays for ocean freight, unloading, and customs clearance. FOB provides a balanced distribution of responsibilities, ensuring sellers handle export duties and vessel loading while buyers manage freight costs and import clearance.

5. CFR – Cost and Freight (Category C)

CFR increases the seller’s responsibility beyond FOB, as they must cover freight costs to the destination port. However, risk still transfers to the buyer once the goods are loaded onto the vessel. This means that while the seller arranges and pays for main transport, the buyer assumes liability for damage or loss from the moment goods leave the port of origin. CFR is a good choice for sellers who want to manage freight costs but avoid post-shipment risk.6. CIF – Cost, Insurance, and Freight (Category C)

6. CIF – Cost, Insurance, and Freight (Category C)

CIF is nearly identical to CFR but includes one major difference—insurance coverage. Under CIF, the seller covers freight costs and provides insurance for the shipment, but risk still transfers to the buyer once the goods are loaded onto the vessel. This Incoterm is beneficial for buyers who want some risk protection but still control final delivery logistics. However, buyers should verify that the seller’s insurance policy aligns with their needs since minimum coverage requirements apply.

7. CPT – Carriage Paid To (Category C)

CPT extends seller responsibility beyond the loading port, requiring them to arrange and pay for transportation to a specific location chosen by the buyer. However, risk transfers earlier in the shipping process, typically when the goods are handed over to the carrier. This means that while the seller covers transport costs, the buyer assumes liability sooner, making CPT ideal for buyers who want predictable transportation costs but can manage import clearance and unloading themselves.

8. CIP – Carriage and Insurance Paid To (Category C)

CIP is similar to CPT, but the seller must also provide insurance coverage up to the delivery location. However, risk still transfers early in the process, meaning buyers should verify insurance details to ensure adequate protection. CIP is a good choice for high-value shipments where buyers prefer the seller to arrange transport and insurance while they handle customs and final delivery.

9. DPU – Delivered at Place Unloaded (Category D)

DPU (previously DAT – Delivered at Terminal) is the only Incoterm where the seller is responsible for unloading at the agreed-upon location. The seller covers all transportation costs and unloading at the destination, while the buyer handles import clearance and final transport. This term is ideal for buyers who need goods delivered directly to a specific facility without dealing with unloading logistics.10. DAP –

10. Delivered at Place (Category D)

DAP places almost all responsibility on the seller, except for unloading. The seller covers all transportation costs to the agreed-upon location, but the buyer is responsible for unloading and import clearance. This Incoterm is commonly used in international shipments where the seller manages logistics up to the final delivery location, but unloading is handled by the buyer’s warehouse team.

11. DDP – Delivered Duty Paid (Category D)

DDP is the most seller-heavy Incoterm, requiring the seller to cover all costs, including import duties, customs clearance, and final delivery. The buyer only handles unloading at the final destination. DDP is commonly used in e-commerce and consumer goods shipping, where buyers want a hassle-free delivery process without dealing with customs procedures. However, sellers should be aware that handling import duties can be complex, and additional costs may arise depending on the destination country’s regulations.

Whether you’re a vessel agent, importer, or logistics provider, understanding these Incoterms rules helps prevent costly misunderstandings, unexpected fees, and shipping delays.

2020 Incoterms vs. 2010 Incoterms: What Changed?

The changes in Incoterms 2020 were made to provide more clarity, align with real-world logistics, and reduce common disputes. If you’re still using Incoterms 2010, you might be working with outdated assumptions that could increase your liability or result in unexpected costs.

Here’s what’s different:

DAT (Delivered at Terminal) is Now DPU (Delivered at Place Unloaded)

Under Incoterms 2010, DAT (Delivered at Terminal) required unloading at a specified terminal (port, warehouse, or airport). In practice, many deliveries go directly to warehouses, job sites, or inland locations. The name was changed to DPU (Delivered at Place Unloaded) to remove the assumption that unloading must happen at a terminal.

This change ensures that the seller is responsible for unloading regardless of location and reduces confusion when goods are delivered somewhere other than a traditional freight terminal.

FCA Now Includes a Bill of Lading Option

FCA is widely used for containerized cargo, but under Incoterms 2010, sellers had trouble obtaining a Bill of Lading (BL) if they weren’t arranging transport. This created an issue for letters of credit, where banks require an onboard BL to process payment.

To fix this, Incoterms 2020 allows the buyer to request that the seller’s carrier issues a Bill of Lading before loading. This ensures smoother financing and documentation processes, making FCA more viable for international transactions.

Higher Insurance Requirements for CIP (Carriage and Insurance Paid To)

In Incoterms 2010, sellers using CIP (Carriage and Insurance Paid To) only needed to provide minimum insurance coverage (ICC Clause C). With global trade becoming more complex and high-value shipments increasing, Incoterms 2020 now requires ICC Clause A insurance, which offers broader protection.

The CIF (Cost, Insurance & Freight) term remains unchanged, still requiring only ICC Clause C coverage, since CIF is mostly used for bulk commodities where buyers often arrange their own insurance. The CIP update provides better risk coverage for high-value goods transported via containerized shipments.

More Transparency in Cost Responsibilities

One of the biggest sources of disputes in Incoterms 2010 was unclear cost breakdowns—especially related to terminal handling charges, freight costs, and inland transport fees.

Incoterms 2020 clarifies who is responsible for which costs at each stage of the shipment. This ensures that buyers and sellers are on the same page, reducing unexpected charges and improving contract transparency.

Flexibility for Buyer- and Seller-Owned Transport

Previously, Incoterms assumed that third-party carriers handled transport, but with more businesses using their own trucks or transport fleets, the rules needed an update.

Incoterms 2020 now explicitly allows buyer- or seller-owned transport under FCA, DAP, DPU, and DDP. This change aligns with modern supply chain practices where businesses increasingly handle their own inland logistics rather than relying on external freight providers.

Conclusion on Incoterms in Shipping

A shipment doesn’t just move from point A to point B—it passes through multiple hands, ports, and processes, each with its own set of responsibilities. When Incoterms aren’t clearly defined or properly applied, those responsibilities get blurred, leading to unexpected costs and finger-pointing when things go wrong.

With Base, vessel agents, importers, and logistics teams can manage shipments with confidence, knowing that responsibilities are set before the cargo even leaves the dock. Clear terms mean fewer disputes, smoother operations, and shipments that arrive on time and on budget. Learn more by contacting us today.

Key Takeaways

• Incoterms define who is responsible for shipping costs, risk transfer, and customs clearance—understanding them is essential for smooth international trade.
• Misusing Incoterms can lead to unexpected costs, shipment delays, and contract disputes.
• Incoterms 2020 updated key rules to improve clarity, including renaming DAT to DPU, adjusting FCA to include a Bill of Lading request, and increasing insurance requirements for CIP.
• Base helps vessel agents, importers, and logistics teams track responsibilities, apply the correct Incoterms, and avoid costly shipping mistakes.

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