Every commodity contract carries a three-letter term that determines who bears risk, who pays freight, who arranges insurance, and at exactly what point liability transfers from seller to buyer.
Get it wrong, and a cargo loss in the middle of the Atlantic becomes your liability — not the seller's. An import customs delay can cost you demurrage on a vessel you didn't even know you were responsible for. A misunderstood price term can embed $80,000 of freight costs into a "delivered price" you assumed was a clean number.
INCOTERMS 2020 are not fine print. For procurement directors managing high-value commodity supply agreements, they are the commercial and legal architecture that defines every transaction. For the foundational procurement framework, see our commodity sourcing guide for industrial operations.
What Are INCOTERMS?
INCOTERMS (International Commercial Terms) are a standardized set of trade terms published by the International Chamber of Commerce (ICC). The current version — INCOTERMS 2020 — defines 11 delivery terms covering:
- Risk transfer: When does risk pass from seller to buyer?
- Cost responsibility: Who pays for freight, insurance, customs, and handling?
- Obligation: Who books the carrier, arranges inspection, and manages documentation?
INCOTERMS apply to the delivery of goods — not payment terms, not title transfer, not ownership. A contract can specify FOB pricing while using a separate payment mechanism (letter of credit, open account, documentary collection).
The 11 INCOTERMS 2020 at a Glance
INCOTERMS are divided into two groups:
Rules for 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
Rules for sea and inland waterway transport only:
- FAS — Free Alongside Ship
- FOB — Free on Board
- CFR — Cost and Freight
- CIF — Cost, Insurance and Freight
For bulk commodity procurement — crude oil, diesel, jet fuel, edible oils, grains — the most operationally relevant terms are FOB, CIF, DAP, and DDP.
FOB (Free on Board)
Definition: The seller delivers the goods when they are loaded on board the vessel nominated by the buyer at the named port of shipment. Risk transfers from seller to buyer at that point.
Who does what:
- Seller: Delivers goods to port, loads onto vessel, handles export clearance
- Buyer: Nominates and books the vessel, arranges marine insurance, handles freight and destination clearance
When to use FOB: FOB is the standard term for bulk commodity transactions where the buyer has an established relationship with a shipping company and can negotiate better freight rates independently. It gives buyers full control of the logistics chain from the moment cargo is loaded.
FOB risk in practice: Once the commodity crosses the ship's rail at the loading port, any damage, loss, or contamination is the buyer's problem. If your vessel is delayed and the cargo waits at the berth in extreme heat — costing you quality degradation — that is a buyer's risk under FOB.
Common FOB commodities at XRT Group:
- Crude oil (FOB tanker, specified loading port)
- Diesel EN590 (FOB refinery terminal)
- Edible oils (FOB vessel, origin port)
CIF (Cost, Insurance and Freight)
Definition: The seller pays for freight and insurance to the named destination port. Risk, however, transfers from seller to buyer at the loading port — the same point as FOB. The seller arranges and pays for transport and insurance, but the buyer bears risk during transit.
Who does what:
- Seller: Delivers goods to port, loads onto vessel, books freight, arranges minimum insurance coverage, handles export clearance
- Buyer: Handles import customs clearance and port duties at destination
CIF risk nuance: This is the most misunderstood aspect of CIF. Many buyers assume that because the seller arranged insurance and freight, they bear risk during transit. They do not. Under CIF, risk transfers at the loading port — identical to FOB. The insurance the seller arranges under CIF provides only minimum coverage (Institute Cargo Clauses C), which covers only the most catastrophic losses.
CIF buyer checklist:
- Verify the insurance coverage level — minimum CIC Clause C may be insufficient for high-value commodities
- Consider purchasing supplemental insurance at buyer's cost
- Confirm the carrier is reputable — you bear transit risk even though the seller booked the vessel
DAP (Delivered at Place)
Definition: The seller delivers the goods when they are placed at the buyer's disposal, ready for unloading, at the named place of destination. Risk transfers only when the goods arrive at the destination ready to be unloaded.
Who does what:
- Seller: Arranges all transport, freight, insurance to destination, handles export clearance
- Buyer: Handles import customs clearance, import duties, taxes, and unloading
When to use DAP: DAP is optimal when the buyer wants delivery certainty — knowing that goods will arrive at their warehouse, terminal, or storage facility — without taking on the complexity of managing import customs.
Key contractual detail: Define the "named place of destination" with maximum precision. "DAP — Houston" is insufficient. "DAP — [named terminal address], Houston TX 77002" eliminates ambiguity about unloading point and associated costs.
DDP (Delivered Duty Paid)
Definition: Maximum seller responsibility. The seller delivers the goods cleared for import, ready for unloading, at the named place of destination. The seller bears all costs and risks including import duties, taxes, and customs clearance.
DDP caution: DDP can create problems when the seller does not have established import compliance capability in the buyer's country. A seller who cannot clear customs efficiently in the destination country creates delays that defeat the purpose of DDP. Always verify the seller's import track record in your jurisdiction before structuring DDP contracts.
INCOTERMS Comparison: What Matters for Commodity Procurement
| Term | Risk Transfer Point | Buyer Books Freight | Seller Arranges Insurance | Import Clearance |
|---|---|---|---|---|
| FOB | Loading port | Yes | No | Buyer |
| CIF | Loading port | No | Yes (minimum) | Buyer |
| DAP | Destination (before unloading) | No | Yes | Buyer |
| DDP | Destination (before unloading) | No | Yes | Seller |
Critical INCOTERMS Issues in Energy Commodity Contracts
- Measurement at loading vs. destination: Crude oil is measured by volume at the loading terminal. The contract must specify which measurement governs the commercial settlement.
- Title transfer vs. risk transfer: INCOTERMS govern risk transfer, not title. In oil trading, title can transfer under different conditions than risk. The contract must address both separately.
- Demurrage: Under FOB, the buyer's vessel waiting beyond the agreed laytime creates demurrage costs. Define laytime and demurrage rates explicitly in every cargo contract.
- Force majeure at ports: Export restrictions, port closures, and terminal outages create force majeure situations that affect INCOTERMS obligations.
INCOTERMS and Letter of Credit Compliance
Letters of credit (LC) remain the dominant payment instrument in commodity trade. Banks issuing LCs require documents that conform precisely to the INCOTERMS term specified:
- FOB LC: Requires a clean on-board bill of lading showing loading at the specified port
- CIF LC: Requires bill of lading plus insurance certificate for minimum 110% of CIF value
- DAP/DDP LC: Requires delivery documentation confirming arrival at named place
A mismatch between the INCOTERMS in the commercial contract and the INCOTERMS in the LC terms creates documentary discrepancies that trigger LC rejection — stopping payment even when goods have been delivered.
Choosing the Right INCOTERM for Your Operation
| Scenario | Recommended Term |
|---|---|
| Established shipping relationships, want cost control | FOB |
| Buying from complex origin markets, need seller logistics | CIF |
| Want delivery certainty to your facility, manage own import | DAP |
| New to cross-border procurement, want simplicity | DDP |
| High-value cargo requiring maximum insurance | CIP (not CIF) |
| Bulk liquid commodities via tanker | FOB or CIF |
| Container agricultural commodities | FCA or CIF |
Frequently Asked Questions
Which INCOTERM is best for crude oil procurement?
FOB is the most common term for crude oil procurement by industrial buyers with established tanker relationships. CIF is appropriate when the buyer needs the seller to arrange vessel and insurance due to operational constraints at origin.
Does INCOTERMS 2020 differ from INCOTERMS 2010?
Yes. Key changes in 2020 include: FCA now allows for on-board bills of lading under LC transactions; DPU replaces DAT; CIP now requires higher insurance coverage (Clause A) while CIF retains minimum Clause C coverage; FCA, DAP, DPU, and DDP now explicitly allow buyer or seller-arranged transport.
Can I negotiate INCOTERMS with a supplier?
Yes. INCOTERMS are not mandatory — they are agreed contractually. Procurement teams can negotiate any term and can add supplemental provisions to address specific operational requirements beyond the standard INCOTERMS definition.
What happens if the INCOTERM is not specified in the contract?
Absent a specified INCOTERM, courts or arbitration panels must interpret the delivery obligations under applicable law — a costly and uncertain process. Every commodity contract should specify the INCOTERM and the named place with full address precision.
Questions about structuring your commodity supply agreement? Contact our procurement desk at procurement@xrtgroup.com or submit an RFQ through our procurement portal.