Incoterms 2020 explained in plain English
Incoterms decide who pays, who carries the risk and where responsibility moves from the seller to the buyer. Get this wrong and your shipment can cost you more before it even leaves origin.
Why Incoterms matter
Every international shipment has a commercial handover point. That point decides who arranges freight, who pays for each leg and who carries the risk if something goes wrong.
The mistake many importers make is thinking the party that pays for the freight always carries the risk. That is not always true. Some Incoterms split cost and risk in different places.
TSI view: Do not choose an Incoterm after the supplier has quoted. It should be checked before the order is confirmed because it affects freight cost, insurance, customs responsibility, delivery control and landed cost.
The 11 Incoterms 2020 rules
Incoterms 2020 has 11 rules. Seven can be used for any mode of transport and four are for sea and inland waterway transport only.
| Rule | Full name | Best used for | Plain English meaning | Commercial watch point |
|---|---|---|---|---|
| EXW | Ex Works | Any mode | The seller makes the goods available at their premises. The buyer handles almost everything after that. | Risky for South African importers unless you have strong control at origin. |
| FCA | Free Carrier | Any mode | The seller clears the goods for export and hands them to the buyer’s nominated carrier. | Often cleaner than FOB for containerised cargo. |
| CPT | Carriage Paid To | Any mode | The seller pays carriage to the named destination but risk transfers earlier when goods are handed to the carrier. | You may carry risk on a journey the seller arranged. |
| CIP | Carriage and Insurance Paid To | Any mode | Similar to CPT but the seller must arrange insurance for the buyer. | Check cover level, insured value and claim process before shipping. |
| DAP | Delivered at Place | Any mode | The seller delivers to the named place but the buyer usually handles import clearance and unloading. | Clarify who handles destination charges, customs and unloading. |
| DPU | Delivered at Place Unloaded | Any mode | The seller delivers and unloads at the agreed place. | The unloading obligation must be realistic at the named destination. |
| DDP | Delivered Duty Paid | Any mode | The seller carries the highest level of responsibility, including import duties and taxes. | Often attractive to buyers but can create customs and VAT complications if handled badly. |
| FAS | Free Alongside Ship | Sea only | The seller delivers the goods alongside the vessel at the origin port. | Mostly used for bulk cargo, not normal containerised imports. |
| FOB | Free on Board | Sea only | The seller’s responsibility ends once the goods are loaded on board the vessel. | Commonly used but often misunderstood for container shipments. |
| CFR | Cost and Freight | Sea only | The seller pays freight to the destination port but risk transfers when the goods are loaded on board at origin. | Cost and risk do not move at the same point. |
| CIF | Cost, Insurance and Freight | Sea only | The seller pays freight and arranges insurance to the destination port but risk transfers at origin once loaded on board. | Do not assume CIF means the seller carries the risk all the way to South Africa. |
The issue that costs importers money
Who pays?
The Incoterm helps decide which party pays for origin handling, freight, insurance, destination charges and delivery.
Who is exposed?
Risk can transfer before the goods arrive. That means the buyer may carry the loss even while the seller is still paying for the freight.
Who manages?
The party with operational control is not always the party that carries the risk. That is where delays, insurance disputes and surprise charges start.
What TSI checks before you ship
TSI does not treat Incoterms as a paperwork issue. We treat them as a cost and risk decision. Before we quote, we look at the full shipment and check where the responsibility really sits.
This helps importers and exporters avoid unclear quotations, poor insurance decisions, duplicated charges and delivery promises that cannot be controlled.
- Which Incoterm is being used in the supplier quote.
- Where cost transfers from seller to buyer.
- Where risk transfers from seller to buyer.
- Whether insurance is required and who must arrange it.
- Who controls origin freight, main carriage and final delivery.
- Whether the term suits containerised cargo.
- Whether the landed cost has been calculated correctly.
Common Incoterm mistakes
Using FOB for containers without checking the handover
FOB is common in shipping language but it is not always the best fit for containerised cargo because the container is usually handed to a terminal before loading.
Accepting CIF and assuming everything is covered
CIF includes insurance but that does not mean the seller carries the risk all the way to destination. The insurance details still need to be checked.
Comparing quotes that are not like for like
A cheaper quote may exclude charges that another quote includes. The Incoterm must be understood before freight pricing is compared.
Quick guide for South African importers
| Situation | What to check | TSI recommendation |
|---|---|---|
| Your supplier quoted EXW | Who will load, export clear and manage origin transport? | Ask TSI to check the origin cost before accepting the quote. |
| Your supplier quoted FOB | Where does the seller’s responsibility actually end? | Confirm whether FCA is more suitable for the shipment. |
| Your supplier quoted CIF | What insurance is included and who controls the shipping line? | Do not compare CIF against a freight quote without checking destination costs. |
| Your supplier quoted DDP | Who is the importer of record and how will VAT and duty be handled? | Check the customs and tax implications before approving the order. |
Before you approve your next supplier quote, let TSI check the Incoterm.
Send us the supplier quote, commercial invoice or purchase order and we will tell you what the Incoterm means commercially, where the risk sits and whether the logistics cost is being compared properly.
Incoterms® is a registered trademark of the International Chamber of Commerce. This guide is for general logistics information and is not legal advice.