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, issued by the International Chamber of Commerce. The ICC’s current edition, Incoterms 2020, took effect at the start of 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): you, the importer, arrange pickup from the supplier’s door and carry almost all the cost and risk
- FCA (Free Carrier): your supplier hands over to your chosen freight forwarder, often export-cleared
- CPT (Carriage Paid To): your supplier pays the freight, yet the risk becomes yours as soon as the first carrier takes the goods
- CIP (Carriage and Insurance Paid To): CPT with cargo insurance added by your supplier
- DAP (Delivered at Place): your supplier gets the goods to the agreed spot; unloading and import costs are yours
- DPU (Delivered at Place Unloaded): like DAP, but your supplier also takes them off the truck
- DDP (Delivered Duty Paid): your supplier covers everything, including Australian duty and GST
Only for sea and inland waterway freight
- FAS (Free Alongside Ship): goods are placed next to the ship at the loading port, and risk passes there
- FOB (Free on Board): risk passes once the seller has the goods loaded on board
- CFR (Cost and Freight): the seller pays sea freight to the destination port
- CIF (Cost, Insurance and Freight): as for CFR, plus the seller insures the goods
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 issued 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.