Incoterms, explained: who owns the shipment at each step
Every international sale carries an Incoterm — EXW, FOB, CIF, DAP, DDP and the rest — and it is one of the most misunderstood three-letter codes in trade. It is not a delivery method or a shipping rate. It is a statement of who is responsible for the goods, and who bears the cost and risk, at each point between the seller’s door and the buyer’s. Get it wrong and two companies end up each assuming the other booked the freight.
What an Incoterm actually decides
An Incoterm answers three questions at once: who arranges and pays for carriage, where the risk of loss or damage passes from seller to buyer, and who handles export and import formalities. It does not decide when title to the goods passes — that is a matter for your sale contract — and it does not set the price. It is purely about logistics responsibility.
The terms exporters meet most
- EXW (Ex Works) — the buyer takes over at the seller’s premises and does everything from there. Cheapest for the seller, most work for the buyer.
- FOB (Free On Board) — the seller delivers, cleared for export, onto the vessel; risk passes there. Common for ocean shipments, though often misused for containers where FCA fits better.
- CIF (Cost, Insurance and Freight) — the seller pays freight and insurance to the destination port, but risk still passes at the origin port. The buyer is insured but bears the risk in transit.
- DAP (Delivered At Place) — the seller delivers to a named destination, ready for unloading; the buyer clears it for import.
- DDP (Delivered Duty Paid) — the seller does everything, including paying import duty in the buyer’s country. The most the seller can take on, and easy to underestimate.
Where it goes wrong
The classic mistake is agreeing a term without buying the freight to match it. A seller who agrees DDP takes on customs clearance and duty in a country they may not operate in; a buyer who agrees EXW discovers they must arrange export clearance in the seller’s country, which they often cannot do. The term should reflect who is genuinely best placed to handle each leg — not simply what looked simplest at the negotiating table.
The safe habit is to decide the Incoterm and the freight arrangement together, and to state the named place precisely — “FCA Nhava Sheva” or “DAP Rotterdam”, not just “FCA” or “DAP”. A term without a place is only half an instruction. If you are unsure which fits a particular deal, ask your forwarder before you sign, not after the cargo is booked.