Open any international sales contract and you will find a three-letter code sitting next to the price: EXW, FOB, CIF, DDP. These are Incoterms, and they quietly decide some of the most expensive questions in a shipment — who pays for freight, who handles customs, and who absorbs the loss if a container falls overboard. Misreading one of them can turn a profitable order into a loss. This guide explains what they do, in plain language.
What Incoterms actually are
Incoterms — short for International Commercial Terms — are standardised trade terms published by the International Chamber of Commerce (ICC). They exist so that a seller in one country and a buyer in another can agree on delivery obligations without writing ten pages of contract clauses, and without either side relying on their own national assumptions about what “delivered” means.
Each term answers three questions:
- Costs — who pays for transport, loading, insurance and duties.
- Risk — at exactly which point damage or loss stops being the seller’s problem and becomes the buyer’s.
- Obligations — who arranges the carrier, the export clearance and the import clearance.
Just as important is what Incoterms do not cover. They say nothing about the price, the payment method, the transfer of legal ownership, or what happens if the goods are defective. Those still belong in your contract.
The two families
Incoterms are divided into two groups, and choosing from the wrong group is one of the most common errors in practice.
- Rules for any mode of transport — usable for road, rail, air, sea or a combination: EXW, FCA, CPT, CIP, DAP, DPU, DDP. If your cargo travels in a container and moves by more than one method, these are the correct family.
- Rules for sea and inland waterway transport only: FAS, FOB, CFR, CIF. These were designed for goods loaded loose over a ship’s rail — bulk commodities, heavy machinery, break-bulk cargo.
Using FOB for an air shipment or for a container handed over at an inland depot is technically wrong and creates ambiguity about exactly when risk passed. FCA is usually the correct alternative in those cases.
The terms at a glance
| Code | Meaning | Risk passes to buyer when… | Seller obligation |
|---|---|---|---|
| EXW | Ex Works | Goods are made available at the seller’s premises | Minimum |
| FCA | Free Carrier | Goods are handed to the buyer’s carrier at the agreed place | Low |
| FAS | Free Alongside Ship | Goods are placed alongside the vessel | Low |
| FOB | Free On Board | Goods are loaded on board the vessel | Low |
| CFR | Cost and Freight | Goods are loaded on board (seller still pays freight) | Medium |
| CIF | Cost, Insurance and Freight | Goods are loaded on board (seller pays freight + insurance) | Medium |
| CPT | Carriage Paid To | Goods are handed to the first carrier | Medium |
| CIP | Carriage and Insurance Paid To | Goods are handed to the first carrier | Medium |
| DAP | Delivered At Place | Goods arrive at the named place, ready for unloading | High |
| DPU | Delivered at Place Unloaded | Goods are unloaded at the named place | High |
| DDP | Delivered Duty Paid | Goods arrive cleared for import | Maximum |
Read the table as a spectrum. At the top, the seller does almost nothing beyond making the goods available. At the bottom, the seller delivers to the buyer’s door with duties already paid.
The trap in the C-terms
The C group — CFR, CIF, CPT, CIP — deserves special attention because it splits cost from risk, which feels counter-intuitive.
Under CIF, the seller pays for the ocean freight and buys insurance all the way to the destination port. Yet risk transfers to the buyer at the port of origin, the moment the goods are on board. If the vessel sinks mid-voyage, the loss is legally the buyer’s — the buyer simply happens to be covered by a policy the seller purchased.
The practical consequence: buyers should check what insurance level the seller actually bought. Under CIF and CFR the required minimum cover is basic; under CIP the required level is broader. If your cargo is high-value or fragile, negotiate the cover explicitly rather than assuming it is adequate.
Why EXW and DDP look attractive but often are not
EXW is popular with sellers because it appears to remove all responsibility. In reality, the buyer must arrange export clearance in a country where they may have no legal standing to do so. Many exporters end up assisting anyway, but without contractual clarity about who pays. FCA usually solves this cleanly.
DDP is popular with buyers because the quoted price looks all-inclusive. But it obliges the seller to clear customs and pay import duties in a jurisdiction where they may not be registered for local taxes. If the seller cannot legally act as importer of record, DDP is unworkable. DAP is usually the safer choice.
How to write the term correctly
An Incoterm on its own is incomplete. It must always be followed by a named place and a reference to the version being used. For example:
FCA Rotterdam Warehouse 4, Incoterms 2020 CIF Port of Santos, Incoterms 2020 DAP 145 Industrial Road, Nairobi, Incoterms 2020
“FOB” alone is meaningless — FOB which port? And be as specific as possible: “DAP Nairobi” leaves the exact delivery address open, which is where disputes about final-mile costs begin.
Four mistakes that cost money
- Using a sea term for containerised or air cargo. FOB and CIF assume loading onto a vessel; containers are usually handed over well before that.
- Assuming the term settles ownership. Title transfer is a separate contractual matter, governed by your sales agreement and applicable law.
- Comparing quotes across different terms. An EXW price and a DDP price are not comparable until you add freight, duty and handling to the first.
- Omitting the version year. Definitions have changed across editions; naming the edition avoids arguments later.
A simple way to choose
Ask two questions. First: who has better freight rates and more control over the route? That party should arrange transport. Second: who can legally clear customs on each side? Export clearance belongs to the seller’s side, import clearance to the buyer’s side, in almost every practical scenario. Pick the term that matches those two answers, and most disputes disappear before they start.
Conclusion
Incoterms are short codes carrying heavy consequences. Knowing which family a term belongs to, where risk transfers, and what the term deliberately leaves out is enough to avoid the majority of costly misunderstandings in international trade.
If you want to go deeper into freight, warehousing, customs procedures and supply chain planning, it is worth exploring the free Logistics and Supply Chain courses available on Cursa.
