Incoterms are three-letter codes that define who arranges transport, who pays for it, and exactly where risk passes from seller to buyer.
That last point is the one that matters when something goes wrong, and it is the one most buyers skip.
EXW means you collect from the factory door. FOB means the seller delivers on board at the origin port and risk passes there. CIF adds sea freight and insurance to destination port, though risk still passes at origin. DDP means the seller delivers to your door with duties paid. FOB suits most experienced importers.
The four terms you will actually meet
| Term | Seller arranges | Risk passes at |
|---|---|---|
| EXW | Nothing beyond making goods available | Factory door |
| FCA | Export clearance and delivery to carrier | Named place at origin |
| FOB | Export clearance and loading on board | On board at origin port |
| CIF | Sea freight and insurance to destination | On board at origin port |
| DAP | Delivery to destination, duties unpaid | At destination |
| DDP | Everything including duties | At your premises |
That CIF detail surprises people regularly. The seller pays the freight, and you carry the risk from the moment the goods are loaded.
Which term suits which situation
- EXW suits buyers with a freight forwarder already handling origin logistics.
- FOB suits most regular importers, since it splits responsibility cleanly at the port.
- CIF suits buyers who want a landed price without arranging freight.
- DAP suits buyers who want delivery handled but will clear customs themselves.
- DDP suits first orders and small shipments where simplicity matters most.
- Finally, FCA suits air freight and container consolidation better than FOB does.
FOB remains the default for sea shipments of industrial goods, and it is what most fan suppliers quote unless asked otherwise.
Why risk transfer matters more than cost
Freight cost is visible and negotiable. Risk is invisible until a container is opened.
Under FOB and CIF, damage during the sea passage is your problem even though the seller may have booked the vessel. Consequently your own cargo insurance matters, and so does the packaging specification you agreed.
Packaging quality and Incoterms interact directly. If risk passes at origin, insist on a written packaging specification and photographs of the loaded container. Our packaging guide covers what to require.
DDP looks easy and hides cost
A delivered price with duties paid is attractive on a first order, and it comes with two caveats.
First, the seller prices in an allowance for duties and clearance, and that allowance is rarely visible. Second, the seller becomes the importer of record in some jurisdictions, which they may not legally be able to do.
So DDP suits samples and small shipments. For regular volume, FOB with your own forwarder is usually cheaper and more transparent.
Documents that go with the term
- Commercial invoice, matching the purchase order exactly.
- Packing list with carton dimensions and weights.
- Bill of lading or air waybill.
- Certificate of origin, where a trade agreement applies.
- Any product certification your market requires at import.
- Finally, insurance certificate where the term includes cover.
Mismatches between invoice, packing list and bill of lading cause more customs delays than the goods themselves ever do.
Writing it into the order
A term without a named place is incomplete, and that is a common error.
Write FOB Ningbo rather than simply FOB, and state the Incoterms version you are using. Meanwhile agree who books the vessel, who pays terminal handling at each end, and what happens if the goods miss the booked sailing.
For the definitive rules, the ICC publishes and maintains Incoterms, and our freight comparison guide covers sea against air.
Incoterms FAQ
Which term should I use for a first order?
DDP or DAP keeps it simple while you learn the route. Once volumes are regular, FOB with your own forwarder usually costs less and gives better visibility.
Does CIF mean the seller carries the risk?
No, and this is the most common misunderstanding. The seller pays freight and insurance to destination, though risk passes to you when the goods are loaded at origin.
Who arranges customs clearance?
It depends on the term. Under FOB and CIF you clear at destination. Under DDP the seller does, which is only possible where they can legally act as importer.
Do I still need cargo insurance under CIF?
Check the cover level, since CIF requires only minimum insurance. For valuable shipments, arranging your own policy at a proper level is usually wise.
Incoterms decide where risk passes, not just who pays. Name the place, state the version, and match the packaging specification to the term you chose.
