Under each Incoterms 2020 rule, who pays what, and where does the risk pass?

Formula, assumptions, and limits

Incoterms 2020 sets one point for each rule, the place where the seller delivers, and the ICC’s Introduction to the rules ties both the risk and, in broad terms, the costs to it: the costs before the delivery point are the seller’s, those after it the buyer’s. The four C rules are the exception the calculator draws apart, because there the seller pays the carriage beyond the point where the risk has already passed.

Formula

• $P_Y$: the price of the goods under rule $Y$.
• $E$: the goods at the seller’s premises, not loaded and not cleared for export: the EXW price.
• $a_i$: the cost of layer $i$ of the chain (loading, export clearance, pre-carriage, origin terminal, main carriage, destination terminal, on-carriage, unloading).
• $s_{Y,i}$: 1 when the seller pays layer $i$ under rule $Y$, 0 when the buyer does or the seller’s contract of carriage has not been shown to cover it.
• $k$: the cover as a share of the contract price, at least 1.10; $r$ the premium rate on the insured value. The same form gives CIP.
• $a_{\text{icl}}$: the import clearance fee; $d$ the duty rate; $V$ the customs value, the FOB value or the CIF value as the importing country sets it.
• $b_X$ and $g_X$: the intercept and slope of the price under the rule $X$ the reader’s price is quoted under, read off $P_X$ at $E = 0$ and $E = 1$; every price above is linear in $E$, so one division recovers it.

Derivation

The seller delivers at the point the rule’s A2 article names, and the risk passes there under A3 (Introduction, para 19).¹ A9 lists the costs, and in broad terms allocates “costs before the point of delivery to the seller and costs after that point to the buyer” (para 20).¹ Under CFR, CIF, CPT and CIP the named destination “is not and never becomes the place of delivery” (para 26), so the seller’s costs run past its delivery point to the destination.¹ The price under any rule is therefore the goods’ value at the seller’s premises plus every layer the seller pays under that rule.

Insurance is the one layer that depends on the price. Under CIF and CIP the seller insures for at least 110% of the price provided in the contract, and on a CIF sale that price is the CIF price, premium included.³ Writing the premium as $k\, r\, P_{\text{CIF}}$ and adding it to the other seller’s costs gives $P_{\text{CIF}} = \text{CFR} + k\, r\, P_{\text{CIF}}$, which solves to the division above. Under DDP the seller pays the import duty, a share of the customs value; the EU adds transport and insurance to the point of entry under Article 71(1)(e) of the Union Customs Code, while the US excludes them under 19 U.S.C. 1401a(b)(4)(A).^6,7

Assumptions

• The default Incoterms 2020 allocation applies; the sales contract changes none of it.
• One currency for every figure.
• Destination handling and unloading under CFR, CIF, CPT, CIP, DAP and DDP are left open unless the reader states what the seller’s contract of carriage covers.
• Neither party must insure under nine of the 11 rules, so no premium is counted under them; under the D rules a seller who insures adds its own premium.
• The DDP price includes the import duty but not import VAT, which an importer registered for VAT usually recovers.
• Under CIF and CIP a premium rate entered is the insurer’s rate on the insured value, not on the price.

Worked example

Maersk’s Shanghai to Los Angeles figures for one 40 ft dry container, from its sample corridor of 14 January 2026, its BAF and LSS notices for the first quarter of 2026 and its US destination handling tariff of 15 September 2025: origin charges CNY 1,622 (CNY 856 terminal handling, CNY 316 export service, CNY 450 documentation), which at the ECB reference rates of 28 October 2026 (USD 1.1133 and CNY 7.4217 to the euro) are USD 243.31; ocean freight USD 2,769 (basic freight USD 2,300, BAF USD 450, LSS USD 19, the two surcharges added to the sample freight as the ocean freight quote calculator adds them); and destination handling USD 855.^8,9,10,11,12 Take goods sold at USD 100,000 FOB Shanghai and a premium rate of 0.30%, a figure chosen for the example and not a market rate.

• EXW: 100,000.00 − 243.31 = USD 99,756.69.
• CFR: 100,000.00 + 2,769.00 = USD 102,769.00. The risk passes on board at Shanghai; the USD 855 destination handling turns on the seller’s contract of carriage.
• CIF: 102,769.00 ÷ (1 − 1.10 × 0.003) = 102,769.00 ÷ 0.9967 = USD 103,109.26. Insured value 1.10 × 103,109.26 = USD 113,420.19; premium 0.003 × 113,420.19 = USD 340.26, and 102,769.00 + 340.26 = 103,109.26.
• The shortcut, a premium of 0.0033 × 102,769.00 = USD 339.14 on the CFR price, comes out USD 1.12 below the exact premium, so the cover it buys falls short of 110% of the CIF price it produces.
• DDP to the buyer’s premises with USD 600 on-carriage, a USD 150 clearance fee and a 4% duty on the US FOB basis: 102,769.00 + 855.00 + 600.00 + 150.00 + 0.04 × 100,000.00 = USD 108,374.00, before any import VAT. The 4% rate is taken for the example, not from a tariff.

Edge cases and limits

• Costs larger than the price. A price below the seller’s own layers under its rule gives a negative EXW value; the calculator refuses it.
• A C rule’s open costs. With the contract of carriage not stated, the destination handling is shown on neither side and is left out of every price, so CFR and CPT can read lower than the seller’s real offer.
• FCA at the seller’s premises. The buyer then pays the pre-carriage and the risk passes once the goods are loaded on its vehicle; at a terminal the seller carries them there.
• CPT and CIP delivery. The calculator puts delivery at the handover to the first carrier, at the place the reader picks; the ICC’s Introduction (para 34) says legal systems may differ on this.¹
• Cover other than 110%. The parties may agree more cover, and any figure from 110% to 200% can be entered; below 110% the calculator refuses, since the CIF and CIP rules set that minimum.

Regulatory basis

The rules are Incoterms® 2020, ICC Publication 723E, in force from 1 January 2020; the ICC’s Introduction to Incoterms 2020 is printed with them, and its author notes that it does not form part of the rules themselves.¹ The ICC’s checklist (Publication 817E) and its Incoterms 2020 page restate the delivery points and the insurance levels.^2,3 The US International Trade Administration and HMRC publish the rule groups.^4,5 Customs value is set by the importing country: Articles 70 to 72 of Regulation (EU) No 952/2013 in the EU, 19 U.S.C. 1401a in the US.^6,7

Common errors

1. FOB, CFR or CIF for a container handed over at a terminal. The ICC advises FCA, CPT or CIP instead (Introduction, para 66; checklist pages 8 and 11).^1,2
2. CIF insurance read as all risks. The CIF minimum is Institute Cargo Clauses (C), a named-perils cover; Clauses (A) are required only under CIP (para 70).¹
3. The C-rule destination read as the risk point. Under CIF the risk passes on board at the port of shipment, not at the named port of destination (para 26).¹
4. The premium charged on the CFR price. The 110% is on the contract price, which under CIF includes the premium; the shortcut leaves the cover short.
5. An Incoterm taken to set the customs value. HMRC states that the rule does not restrict the valuation method; the EU and the US value on different bases.^5,6,7

Incoterms 2020 chart: delivery, risk and costs

The ICC groups the rules by mode: seven for any mode of transport and four for sea and inland waterway only (Introduction, para 42).¹ Under the E, F and D rules the seller’s costs end where the risk passes; under the four C rules they run on to the destination.

Under FCA the seller clears the goods for export; under EXW the buyer does, and under DDP the seller also clears them for import.^2,5

Insurance under CIF and CIP

Incoterms 2010 put both CIF and CIP on Institute Cargo Clauses (C). During the revision the case for Clauses (A), all risks subject to itemized exclusions, was put against the commodity traders’ case for keeping (C); the ICC kept (C) for CIF, the rule “much more likely to be used in the maritime commodity trades”, and moved CIP to (A) (Introduction, para 70).¹ Either party may agree other cover. The minimum sum is 110% of the contract price.³ The cargo insured value calculator takes the same algebra to the sum insured on a marine cargo policy.

Because the premium is part of the CIF price on which the cover is set, the price and the premium have to be solved together. On the worked example the exact solve gives a premium of USD 340.26; charging 0.33% on the CFR price gives USD 339.14, USD 1.12 less, and the cover then falls short of 110% of the resulting CIF price. The gap grows with the rate.

FOB, CFR and CIF for containers

The four sea rules suit goods the seller puts on board, or alongside, itself (Introduction, paras 43 and 44).¹ A container delivered to a terminal days before it is loaded leaves the seller at risk for goods it no longer controls, and the ICC’s checklist sends containerized and terminal deliveries to FCA, CPT or CIP.² Since 2020 an FCA seller who needs a bill of lading with an on-board notation for a letter of credit can have the buyer instruct its carrier to issue one (FCA A6 and B6, Introduction para 65).¹ The calculator marks a sea rule chosen with the goods handed over at a terminal.

Customs value: FOB or CIF

A price under one rule is not the customs value under another. The EU values on a CIF basis: Article 71(1)(e) of the Union Customs Code adds the cost of transport and insurance up to the place of entry, and Article 72 leaves out transport after entry and the import duties themselves.⁶ The US transaction value is the price “exclusive of any costs, charges, or expenses incurred for transportation, insurance, and related services incident to the international shipment”, an FOB basis, under 19 U.S.C. 1401a(b)(4)(A).⁷ On the worked example a 4% duty is USD 4,000.00 on the US basis and USD 4,110.76 on the EU basis, where the customs value is the CFR price of USD 102,769.00 with no insurance bought. The landed cost calculator applies each country’s own basis, with the fees and import VAT.

Where to find each input

• The rule and the named place: the sales contract or the pro forma invoice, written with the year, for example “FCA Shanghai terminal, Incoterms 2020”; the ICC asks for both (Introduction, paras 9 to 14).¹
• Origin terminal and main carriage: the carrier’s quote or tariff; the defaults are Maersk’s published figures for the Shanghai to Los Angeles sample corridor.^8,9,10
• Destination terminal: the carrier’s destination charges; Maersk’s US figure is USD 855 for a 40 ft dry box.¹¹
• Pre-carriage, on-carriage and clearance: the haulier’s and the customs broker’s quotes.
• Premium rate: the insurer’s or broker’s quotation, as a percentage of the insured value.
• Duty rate: the importing country’s tariff for the goods’ tariff line.