18/05/2026
Understanding Incoterms Decision Tree.
Incoterms, an acronym for International Commercial Terms, is a set of rules that clarify the liabilities and responsibilities between an importer (buyer) and exporter (seller) on a sales contract. This clarification helps stakeholders determine the most appropriate terms to use based on:
1. The mode of transport
2. The delivery location
3. The desired allocation of risk
4. Cost between the seller and the buyer.
To apply Incoterms correctly, consider the mode of transport to be used by answering the following questions.
Question 1: Is the transport exclusively by sea or inland waterway (port-to-port)?
If yes: Use "Sea and Inland Waterway" rules, which include:
1. Cost, Insurance, and Freight (CIF)
2. Free on Board (FOB)
3. Cost and Freight (CFR)
4. Free Alongside Ship (FAS)
Correct Application
Select based on where the seller's responsibility ends. For example,
Does the buyer want to handle the loading onto the ship?
If yes, use Term: FAS (Free Alongside Ship) - Risk transfers when goods are placed alongside the vessel.
Does the seller load the goods onto the vessel, but the buyer pays the main freight?
If yes, use: FOB (Free On Board) - Risk transfers once goods are on board.
Does the seller pay for the freight to the destination port, but risk transfers at the origin? Does the seller also pay for insurance?
If yes, use: CIF (Cost, Insurance, and Freight).
If no, use: CFR (Cost and Freight).
Question 2: Is the transport for any mode of transport other than sea or inland waterway (air, rail, road, or multimodal)?
If yes, select based on the level of service and risk transfer point, which includes:
1. Ex Works (EXW)
2. Free Carrier (FCA)
3. Carriage and Insurance Paid (CIP)
4. Carriage Paid To (CPT)
5. Delivered at Place Unloaded (DPU)
6. Delivered at Place (DAP)
7. Delivered Duty Paid (DDP)
8. Delivered Duty Unpaid (DDU).
Minimum Obligation for Seller:
If the buyer picks up goods at the seller's premises, use term: EXW (Ex Works).
If the seller delivers to a named place/carrier (main freight not paid by seller):
Term: FCA (Free Carrier).
If the seller pays for main carriage to destination (risk transfers at origin): Does the seller also pay for insurance?
If yes, use: CIP (Carriage Insurance Paid).
If no, use: CPT (Carriage Paid To).
If the seller delivers to destination (risk transfers at destination):
Is the seller responsible for unloading the goods at the destination?
If yes: DPU (Delivered at Place Unloaded).
If no: DAP (Delivered at Place).
Is the seller responsible for import clearance and duties?
If yes, use: DDP (Delivered Duty Paid).
Key Note
When choosing a term, always specify the precise delivery point (e.g., "FCA 456 Logistics Way, Nigeria, Incoterms 2020").
The most common "Red Flag" is using sea-only terms (like FOB and CIF) for containerized cargo that is actually delivered to a carrier at an inland terminal; in those cases, CIP is almost always the more accurate and safer choice.
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