Definition
Incoterms® rules are International Chamber of Commerce (ICC) rules that allocate delivery responsibilities, costs, and risk between seller and buyer. They do not determine transfer of ownership or replace the other terms of a sales contract.
This explanation addresses Incoterms® 2020. For VPP, the procurement question is whether the quotation and contract make the delivery point, transport responsibility, risk transfer, and remaining buyer costs explicit.
What Incoterms® rules do and do not decide
The selected rule helps establish obligations around delivery, carriage, costs, and relevant export or import formalities. Certain rules also place a specific insurance obligation on the seller.
Do not treat the three-letter term as the whole agreement. Payment terms, product specifications, acceptance, ownership, governing law, and dispute resolution require separate contractual treatment.
The contract should identify the selected rule, the precise named place or port as applicable, and the version of the rules. A city name alone may leave the actual handover point unclear.
VPP recommends having procurement and logistics review that wording together before the order is placed. Obtain qualified legal and customs advice where the transaction requires it.
The eleven Incoterms® 2020 rules
The rules fall into two transport-mode groups. Select from the appropriate group and then evaluate the actual delivery arrangement.
| Transport application | Rules |
|---|---|
| Any mode or combination of modes | EXW: Ex Works; FCA: Free Carrier; CPT: Carriage Paid To; CIP: Carriage and Insurance Paid To; DAP: Delivered at Place; DPU: Delivered at Place Unloaded; DDP: Delivered Duty Paid |
| Sea and inland waterway transport | FAS: Free Alongside Ship; FOB: Free On Board; CFR: Cost and Freight; CIF: Cost, Insurance and Freight |
Do not choose a maritime rule merely because one leg of a container's journey is by sea. VPP recommends checking whether the agreed delivery point is actually on board or alongside the vessel, or instead at a carrier's facility or another handover location.
For containerized or multimodal movements, FCA may better reflect the intended handover than FOB. The appropriate choice depends on the transaction, not on habit or which acronym appears in a supplier's standard quotation.
Paying freight is not the same as carrying transit risk
Under CFR and CIF, the seller pays specified carriage costs to the named destination port, but risk generally transfers when the goods are on board the vessel at shipment. Do not assume that seller-paid freight means the seller retains cargo risk until arrival.
CIF and CIP also have different default insurance requirements under Incoterms® 2020. CIF generally uses Institute Cargo Clauses (C) or similar cover, while CIP requires the broader Institute Cargo Clauses (A) or similar cover, subject to the parties' agreed arrangements.
VPP recommends checking coverage, exclusions, claims responsibilities, and the insured journey rather than relying on the word “insured.” The insurance arrangement and risk allocation should be understood together.
Example: Normalize two quotations before comparing price
Consider a hypothetical purchase of 1,000 identical components. One supplier quotes $50,000 FCA at its specified premises, while another quotes $55,500 DAP at the buyer's specified receiving facility, both under Incoterms® 2020.
Assume the following costs have been validated for the comparison. Under the FCA quotation, the seller's price includes its applicable export and delivery obligations; the buyer's additional carriage estimate begins at the agreed handover.
| Illustrative cost item | FCA quotation | DAP quotation |
|---|---|---|
| Supplier quotation | $50,000 | $55,500 |
| Additional buyer-arranged carriage | $5,000 | Included in quotation |
| Assumed import duties | $2,000 | $2,000 |
| Assumed import-clearance service cost | $300 | $300 |
| Assumed unloading cost | $500 | $500 |
| Total of modeled cost items | $57,800 | $58,300 |
The apparent $5,500 quotation gap narrows to $500 after these costs are aligned. That result does not establish the preferred award without reviewing service, risk, capacity, and the remaining commercial terms.
This simplified example excludes insurance, taxes other than the assumed duties, financing, and unmodeled charges. The equal duty amounts are hypothetical assumptions, not a statement that customs value or duty must be identical under different delivery terms.
Confirm actual classification, origin, customs valuation, tax treatment, and insurance before finalizing a landed-cost comparison. The example is educational, not a VPP client result or a customs calculation.
DAP, DPU, and DDP require careful distinction
Under DAP, the seller delivers at the agreed destination ready for unloading, while the buyer handles import clearance. The buyer generally bears unloading risk and cost, although unloading charges may already be included in the seller's carriage contract.
Under DPU, the seller's delivery obligation includes unloading at the agreed destination. Under DDP, the seller also assumes the import-clearance obligations, while delivery is generally ready for unloading.
Do not select DDP without confirming that the seller can legally and practically perform the required import obligations. Also review the rules' provisions concerning buyer failures and customs-related risk rather than treating the destination handover as an unconditional allocation of every possible event.
Frequently asked questions
- Do Incoterms® rules determine who owns the goods? No. Ownership and risk are separate concepts, and transfer of title must be addressed in the applicable contract.
- Does DAP mean all buyer costs are included? No. Import clearance, duties, unloading, and other costs must be assessed against the rule, the carriage arrangement, and the actual quotation.
- Are Incoterms® rules only for international sales? They can also be used for domestic sales. Select a rule and named place appropriate to the transaction rather than assuming cross-border customs obligations always apply.
Make delivery terms part of the sourcing decision
VPP connects supplier evaluation with transportation responsibilities, landed-cost analysis, and implementation requirements. Clarify the delivery arrangement before comparing quotations, and validate the commercial and operational implications before awarding business.
This article provides general operating guidance, not legal, tax, insurance, or customs advice. Incoterms® and the Incoterms® 2020 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above. The Incoterms® Rules are protected by copyright owned by ICC. Further information on the Incoterms® Rules is available from the ICC website.