Quick answer
Incoterms are the International Chamber of Commerce's standard trade terms, and the 2020 edition has applied since 1 January 2020. They set out which costs and risks the seller and buyer each carry — freight, insurance, export and import clearance — and where risk passes. For Australian importers, the chosen term changes which costs sit in the supplier's price and which you must fund yourself.
Key points
- Incoterms 2020 has eleven rules; seven work for any mode of transport and four are for sea and inland waterway.
- The term decides who pays freight, insurance and clearance, and where risk passes to the buyer.
- FOB is common for importers who want control of freight; EXW puts almost everything on you.
- DDP looks simple but hides border costs inside the price and may affect who can claim import GST.
What do Incoterms actually decide?
Every import quote has a three-letter term after the price — FOB Shanghai, EXW factory, CIF Melbourne. That term is an Incoterms rule, published by the International Chamber of Commerce. The ICC’s current edition, Incoterms 2020, has been in force since 1 January 2020.
An Incoterm decides:
- where the seller delivers the goods
- who pays for each leg of transport, insurance and export and import clearance
- where risk passes from seller to buyer
It does not decide when you pay, how you pay, or when ownership passes. Those go in your contract.
What are the eleven Incoterms 2020 rules?
Any mode of transport
- 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 only
- FAS — Free Alongside Ship
- FOB — Free on Board
- CFR — Cost and Freight
- CIF — Cost, Insurance and Freight
Who pays what under the common terms?
| Term | Seller pays to… | Importer pays | Risk passes |
|---|---|---|---|
| EXW | Makes goods available at their premises | Loading, export clearance, all freight, insurance, import costs | At seller’s premises |
| FCA | Delivers to your carrier, export-cleared | Main freight, insurance, import costs | On delivery to carrier |
| FOB | Loads goods on board at origin port | Ocean freight, insurance, destination and import costs | Once on board at origin |
| CFR | Pays freight to destination port | Insurance, destination and import costs | Once on board at origin |
| CIF | Pays freight and minimum insurance to destination port | Destination and import costs | Once on board at origin |
| DAP | Delivers to named place, not unloaded | Unloading, import clearance, duty and GST | At named place |
| DDP | Delivers to named place, import-cleared, duties paid | Unloading | At named place |
Note the CFR and CIF quirk: the seller pays the freight to Australia, but the risk passes to you once the goods are loaded at origin. If something happens at sea, you’re the one who claims.
How do Incoterms change what I need to fund?
The more the seller covers, the higher their price — but the less you pay separately later. From a cash-flow view:
- EXW and FCA — the supplier’s price is lowest, but you fund export charges and all freight yourself, often before the goods have left the origin country.
- FOB — you fund ocean freight and insurance around shipment, then border costs on arrival.
- CFR and CIF — freight is inside the supplier’s price, so it’s funded through your deposit and balance, but destination charges, duty and GST still land on arrival.
- DDP — most costs are in the price, paid through deposit and balance. You’ll pay less at the border, but you’ve prepaid it to the supplier.
When you enter an order in the landed cost calculator, make sure you only include freight and insurance you’re paying yourself. If you’d like help funding whichever structure you’re on, start an enquiry — no credit check to ask.
Why be careful with DDP?
DDP sounds simplest: the seller handles everything and you just receive the goods. But:
- You can’t see how duty and GST were calculated, or whether a free trade agreement rate was used.
- The seller’s charges for managing import clearance may be higher than doing it yourself.
- For GST, the entity named as importer is generally the one entitled to claim the credit. If the seller is the importer of record, you may not be able to claim the import GST that’s built into your price.
For many established importers, FOB or FCA with their own forwarder and customs broker gives more control and transparency.
Does the Incoterm affect my letter of credit?
Yes. Letters of credit often require documents that depend on the term — an insurance certificate under CIF or CIP, for example, or a bill of lading showing freight prepaid under CFR. A mismatch between the term in the contract and the documents the credit asks for is a common source of discrepancies. See letters of credit explained.
Illustrative example
Illustrative only. An importer comparing two suppliers sees one quote at $41,000 FOB and another at $44,500 CIF Sydney. On paper the FOB quote is cheaper. Adding the importer’s own freight quote of $3,900 and insurance of $250, the FOB supplier’s goods cost $45,150 delivered to Sydney — more than the CIF quote. But under CIF, the importer has less control over the shipping line and the insurance is at the minimum level. Comparing on a like-for-like landed basis settles the decision.
Can I change Incoterms with an existing supplier?
Usually, yes — it’s a commercial negotiation like any other. Importers often start on CIF or CFR while they learn the ropes, then move to FOB or FCA once they have a forwarder and broker they trust and enough volume to negotiate freight. When you switch, ask the supplier to re-quote on the new term so you can compare landed cost properly, and update your purchase orders, any letter of credit and your insurance arrangements at the same time.
Choose the term, then fund the order
Getting the Incoterm right makes your landed cost honest; funding makes the order possible. If the numbers work but the cash is tight, see if you qualify with Trade Loan. The enquiry doesn’t involve a credit check, and your details stay with the person who handles them rather than going out to multiple lenders. Tell us accurately about the order and supplier terms so we can match you properly first time.
Frequently asked questions
What are Incoterms?
Incoterms are standard trade terms published by the International Chamber of Commerce. They define the obligations, costs and risks of the seller and buyer in delivering goods. The current edition, Incoterms 2020, took effect on 1 January 2020.
What's the difference between FOB and CIF?
Under FOB (free on board), the seller delivers goods onto the vessel at the named port of shipment and the buyer pays ocean freight and insurance. Under CIF (cost, insurance and freight), the seller pays freight and minimum insurance to the named destination port, but risk still passes to the buyer once goods are on board at origin.
Which Incoterm is best for an Australian importer?
It depends on your experience and volume. Many importers prefer FOB because they control freight through their own forwarder and can compare costs. Newer importers sometimes start with CIF or CFR for simplicity. There's no single best term.
Do Incoterms say when I have to pay the supplier?
No. Incoterms deal with delivery, costs and risk — not payment terms or ownership. Deposit, balance and payment method are agreed separately in your contract.
Should I use FOB for container shipments?
FOB and the other sea-only rules were designed around goods loaded on board a vessel. Containerised goods are usually handed over at a terminal days before loading, so many trade advisers suggest FCA instead. Plenty of traders still use FOB for containers — discuss the risk point with your forwarder.