Incoterms explained: who pays on EXW, FOB, CIF, DAP and DDP
Updated
An Incoterm is a three-letter code in your sales contract that says who arranges and pays for shipping, insurance and customs, and the point where the risk of loss moves from seller to buyer. The further along the journey the code puts the handover, the more the seller pays and carries. EXW puts almost everything on the buyer. DDP puts almost everything on the seller.
This is a general guide, not legal or customs advice. Confirm the exact term and what it covers with your freight forwarder, customs broker or buyer before you sign.
What Incoterms are
Incoterms are a set of eleven three-letter trade terms published by the International Chamber of Commerce (ICC). The current version is Incoterms 2020, in force since 1 January 2020 (ICC). They describe the tasks, costs and risks involved in getting goods from seller to buyer.
For each term, the rules settle the same set of questions: who contracts and pays for transport, who provides cargo insurance (if anyone), who handles export and import formalities and pays for them, who packs the goods, and when delivery happens and risk passes (trade.gov).
Incoterms do not cover everything. They don't say when you get paid, who owns the goods, or what happens if the goods are defective. Those belong in your contract and payment terms.
The five terms most small traders run into
EXW (Ex Works). The seller makes the goods available at their own premises. The buyer arranges everything from there: pickup, export clearance, freight, insurance, import clearance and duties. Works for any mode of transport.
FOB (Free on Board). The seller gets the goods cleared for export and loaded onto the ship at the named port. From that point the buyer pays for the sea freight, insurance, and everything at the destination. Sea and inland waterway only.
CIF (Cost, Insurance and Freight). The seller pays the sea freight to the named destination port and buys minimum cargo insurance for the buyer's benefit. The risk still passes to the buyer once the goods are on board at the origin port, even though the seller paid for the voyage. The buyer handles import clearance and duties. Sea and inland waterway only.
DAP (Delivered at Place). The seller arranges and pays for transport to the named destination and carries the risk until the goods arrive there, ready to be unloaded. The buyer handles unloading, import clearance and duties. Any mode of transport.
DDP (Delivered Duty Paid). The seller does everything, including import clearance and paying import duties and taxes. This is the maximum obligation for the seller. Any mode of transport.
Who-pays table
This is a simplified summary. Each ICC rule has more detail than a table can carry, so check the rule text for your term.
| Cost or task | EXW | FOB | CIF | DAP | DDP |
|---|---|---|---|---|---|
| Export clearance | Buyer | Seller | Seller | Seller | Seller |
| Main freight | Buyer | Buyer | Seller | Seller | Seller |
| Cargo insurance | Buyer (optional) | Buyer (optional) | Seller (minimum cover) | Whoever wants it | Whoever wants it |
| Import clearance, duties and taxes | Buyer | Buyer | Buyer | Buyer | Seller |
| Risk passes to buyer | Seller's premises | On board at origin port | On board at origin port | At named destination | At named destination |
What each term means for a small trader
Selling on EXW is the lowest-effort option for the seller. The catch is that you lose control of the shipment, and if the buyer's forwarder mishandles export paperwork, your records can end up messy. Many exporters prefer FOB or a similar term so they keep control of export clearance.
Buying on EXW means you coordinate pickup, export filing and freight from a supplier you may not know well. Cheap on paper, more work in practice.
FOB and CIF are for sea freight only. If you ship by air or by truck, they are the wrong term. Use FCA, CPT or CIP instead (these are also in the ICC rules).
DAP and DDP are easier for the buyer and riskier for the seller. With DDP the seller is responsible for import duties and taxes in the buyer's country, which can be hard to price and handle from abroad. Check with your broker before quoting DDP into a country you don't ship to often.
Mistakes to avoid
- Naming the term without the place. "FOB" alone is incomplete. It should read "FOB Miami" or whichever named port applies.
- Leaving out the version. Write "Incoterms 2020" in the contract so there's no argument about which rulebook applies.
- Mixing up risk and cost. Under CIF the seller pays freight but the buyer carries the risk once the goods are on board. If the ship sinks, the buyer claims on the insurance.
- Using sea-only terms for air or truck freight.
FAQ
Which Incoterm is best for a small exporter? There isn't one best term. FOB (or FCA for non-sea freight) is common because the seller clears the goods for export and hands over at a clear point. Your forwarder and buyer should agree on the term in the quote.
Do Incoterms set the price or payment terms? No. They cover delivery, costs and risk. Price, payment timing and ownership go in your contract.
Who pays if goods are damaged in transit? It depends on where risk passed under your term and who bought insurance. Under FOB, the buyer carries the risk once the goods are on board. Insurance is a separate decision. Confirm cover with your forwarder or broker.
Next step
Each Incoterm decides who owes the freight forwarder, the insurer, the broker and the duty bill. If you are the party paying, see Shield business accounts and the Shield business credit card for trade businesses.