Incoterms 2020 explained: which of the 11 rules fits a sea order, and which fits air cargo?

Incoterms 2020 is the current edition of the eleven three-letter trade terms published by the International Chamber of Commerce (ICC), and the decision in front of you as an importer is which one of them goes on your order. Seven of the rules can be used for any mode of transport and four are for sea and inland waterway transport only, so the first cut is how the goods will travel. For a sea order from Sri Lanka, start with FOB, CFR and CIF, the three rules that the Export Development Board's export procedure guide describes from the seller's side.

What the Incoterms 2020 rules are, and where the term sits on your order

The International Chamber of Commerce describes the Incoterms rules as a set of eleven three-letter trade terms reflecting business-to-business practice in contracts for the sale and purchase of goods. Incoterms 2020 entered into force on 1 January 2020.

The export procedure guide published by Sri Lanka's Export Development Board (EDB) in 2020 says the exporter prepares a pro-forma invoice for the buyer, the offer document you approve before the order goes ahead. It states the product description, quantity, price, terms of payment, terms of delivery and packing and marking details.

The Incoterms rule is the "terms of delivery" entry. It stands beside the payment entry and does not replace it. Two quotes for the same goods cannot be compared until both are written on the same rule.

The Incoterms 2020 list: eleven rules in two groups

The United States government's trade.gov guide to the Incoterms rules sorts the eleven by transport mode.

Each full name is a short description of its rule: three any-mode rules begin with "Delivered", CIP and CIF carry the word "Insurance", and DDP carries "Duty Paid". The names give the outline only. The full division of tasks, cost and risk is in the ICC's own text.

The four rules for sea freight only

FAS, FOB, CFR and CIF are for sea and inland waterway transport only. If your goods will fly, none of the four belongs on the order, however familiar "FOB" looks on a price list.

Sri Lankan cargo leaves by both routes. Sri Lanka Customs processes export declarations at three offices: the Export Facilitation Centre for FCL cargo (a full container load) and, when necessary, LCL cargo (less than a container load); the Export Office at Customs Headquarters for LCL and air freight cargo; and the Air Cargo Export Office for all air freight, including perishables.

Samples are the usual air shipment: the EDB guide says trade samples are usually sent by airmail. A sample needs one of the seven any-mode rules even when the container order that follows it is quoted on a sea rule.

FOB, CFR and CIF: what the seller does under each

The EDB's export procedure guide sets out three of the sea rules as the exporter sees them. Under FOB, CFR and CIF the seller must clear the goods for export. Under CFR and CIF the seller pays the cost and freight to the named port of destination. Under CIF the seller must also procure marine insurance.

Read the table from your side of the sale. On an FOB quote, the seller duties named in the guide stop at export clearance, so plan the ocean freight and the cargo insurance yourself and confirm the handover point with your freight forwarder. On CFR, insurance is the open item. On CIF both are inside the price.

Export clearance has a precise meaning in Sri Lanka. The customs goods declaration is known as the CUSDEC, and under section 57 of the Customs Ordinance a declaration must be made to Customs for every export. Sri Lanka Customs says either a Customs House Agent or the exporter can be the declarant.

That gives you a test for any rule the EDB guide does not describe. EXW, for example, stands for Ex Works and is one of the seven any-mode rules. Before you accept a rule that is new to you, ask the supplier in writing who will be the declarant on the CUSDEC and who pays to bring the goods to the port or airport.

What changed in Incoterms 2020

Two changes are the ones a buyer is likely to run into, and both are on the ICC's page on Incoterms 2020.

First, a rule was renamed. The former Delivered at Terminal (DAT) rule was changed to Delivered at Place Unloaded (DPU). A template or purchase order form that still says DAT uses a name that is not among the current eleven.

Second, the two insurance rules were set apart. The ICC says the default insurance cover for CIF remains Institute Cargo Clauses (C), while CIP now requires a higher level of cover compliant with Institute Cargo Clauses (A).

Whenever insurance is the seller's task, ask which Institute Cargo Clauses the policy will be written on and have the answer typed on the pro-forma invoice. Write the edition as well: "Incoterms 2020" after the rule and the place tells both parties which list, and which insurance default, they are reading.

Which rules a small importer of Sri Lankan goods will meet

Sort the order by how it travels and by what you want the seller to handle.

• A container or part container by sea: FOB, CFR or CIF, the three rules in the EDB guide.
• Samples and small lots by air: one of the seven any-mode rules. Two of them say in their names whether insurance is part of the seller's task: CPT is Carriage Paid To, and CIP is Carriage and Insurance Paid To.
• Delivery to a named place: DAP, DPU and DDP all begin with "Delivered", and DDP adds "Duty Paid". Speak to your customs broker before you agree to a rule that touches import duty or clearance in your country.

The rule also changes the papers you receive. In the EDB guide's list of shipping documents submitted to the bank, the insurance policy appears only if the sale is on CIF. Our checklist of export documents from Sri Lanka takes each paper in turn.

A buyer taking several lines from the food and beverages category may receive samples by air and the main order by sea. That is two shipments and possibly two rules, so name the rule for each. For the wider sequence of a first order, see our guide on how to import from Sri Lanka.

How to write an Incoterms rule into your enquiry

1. Fix the mode of transport. Sea or inland waterway leaves all eleven rules open. Air leaves the seven any-mode rules.
2. Choose the rule by what you want inside the price. For a sea order that is export clearance only (FOB), clearance plus freight (CFR), or clearance, freight and marine insurance (CIF).
3. Name the place. The EDB guide speaks of the "named port of destination" under CFR and CIF. Write the port or place straight after the three letters.
4. Add the edition. Write "Incoterms 2020" after the place.
5. Settle insurance in words. If the seller procures it, state the Institute Cargo Clauses level.
6. Keep payment on its own line. The EDB lists the payment methods used in exports as advance payment, letters of credit, documentary collection, open account and consignment. None of these is an Incoterms rule.
7. Check the pro-forma invoice. Its terms of delivery should repeat your rule, place and edition exactly. The guide also says packages should carry the shipping marks and the port of destination.

Common mistakes buyers make with Incoterms

• Putting a sea rule on air cargo. FAS, FOB, CFR and CIF are for sea and inland waterway transport only.
• Leaving out the place. "CIF" with no port after it does not say where the seller's freight ends.
• Expecting an insurance policy on an FOB or CFR sale. In the EDB guide, only CIF obliges the seller to procure marine insurance.
• Treating CIF and CIP cover as the same. The CIF default is Institute Cargo Clauses (C). CIP requires cover compliant with Institute Cargo Clauses (A).
• Reading the delivery term as the payment term. A letter of credit or documentary collection is agreed separately from the Incoterms rule.
• Assuming the rule settles your import side. Duties, permits and inspections at your border come from your own authorities and they change, so confirm them with your customs broker before you order.

Frequently asked questions

Which Incoterms are for sea freight only?

FAS (Free Alongside Ship), FOB (Free on Board), CFR (Cost and Freight) and CIF (Cost Insurance and Freight) are for sea and inland waterway transport only. Air cargo goes on one of the seven any-mode rules.

What do FOB, CFR and CIF mean for the buyer?

In the Export Development Board's export procedure guide the seller clears the goods for export under all three, pays the cost and freight to the named port of destination under CFR and CIF, and must procure marine insurance under CIF.

What does EXW mean?

EXW stands for Ex Works and is one of the seven rules that can be used for any mode of transport. Before you accept an EXW quote, ask the supplier who will be the declarant on the Sri Lankan customs declaration and who pays to move the goods to the port or airport.

What changed in Incoterms 2020?

The former Delivered at Terminal (DAT) rule became Delivered at Place Unloaded (DPU). The default cover for CIF remains Institute Cargo Clauses (C), while CIP now requires cover compliant with Institute Cargo Clauses (A).

Does the Incoterms rule decide how I pay the supplier?

No, payment is a separate line. The pro-forma invoice in the Export Development Board's guide states the terms of payment and the terms of delivery as two different items.

Once the mode, the rule and the port are settled, write them on your enquiry together with the product and the quantity. You can pick the lines from our product catalogue and send the request through the how to order page; which delivery terms can be quoted for your shipment is a question to put there.

Key takeaways

• Incoterms 2020 has eleven rules: seven for any mode of transport and four for sea and inland waterway transport only.
• FAS, FOB, CFR and CIF are the sea rules; air cargo goes on an any-mode rule.
• In the EDB guide the seller clears export under FOB, CFR and CIF, pays freight under CFR and CIF, and procures marine insurance under CIF only.
• The 2020 edition changed DAT to DPU and gave CIF and CIP different insurance defaults: Institute Cargo Clauses (C) and (A).
• Write the rule, the named place and "Incoterms 2020" on the enquiry, and keep the payment method as a separate line.