Incoterms Explained: Who Pays for What

If you’ve ever seen three-letter codes like FOB, CIF or DDP on a quote or invoice and nodded along without being sure what they meant — you’re not alone. These are Incoterms, and they quietly decide who is responsible for what on an international shipment.

Getting them right protects you from surprise costs and disputes. Getting them wrong is how a “cheap” quote turns expensive at the border.

What Incoterms actually define

Incoterms (International Commercial Terms) are a standard set of rules, published by the International Chamber of Commerce, that spell out three things for any sale:

• Who arranges and pays for each leg of transport.
• Who handles export and import customs.
• Where risk passes from seller to buyer — the point after which a loss is your problem.

They do not set the price of the goods or transfer ownership — they define responsibility and risk.

The terms you’ll see most

EXW (Ex Works). The seller just makes the goods available at their door. The buyer arranges and pays for everything else — pickup, export, freight, import, delivery. Maximum control for the buyer, maximum effort too.

FOB (Free on Board). The seller gets the goods cleared for export and loaded onto the vessel. From that point — on board at the port of origin — cost and risk shift to the buyer. A very common term for ocean freight.

CIF (Cost, Insurance, Freight). The seller pays the freight and basic insurance to the destination port. But note: risk still passes to the buyer back at origin, once the goods are loaded. You’re covered for the freight, not necessarily for everything that can happen in transit.

DDP (Delivered Duty Paid). The seller handles the entire journey, including import customs and duties, and delivers to the buyer’s door. The most hands-off option for the buyer — and usually priced accordingly.

Why it matters for your landed cost

The Incoterm decides what’s already baked into the price and what you’ll be billed for later. A low “EXW” price can end up costing more than a higher “DDP” one once you add freight, customs and delivery. Comparing quotes only makes sense when you know which term each one is using.

Choosing the right term

• Want control and have the know-how? Terms like FOB or EXW put you in the driver’s seat.
• Want it simple and predictable? CIF or DDP hand more of the work to the seller.
• Think about who is better placed to clear customs on each end — that often decides the sensible term.

When you’re not sure, that’s exactly where a freight partner earns their keep: helping you pick terms that match how much of the journey you want to own — and making sure there are no gaps where a shipment (or a cost) can fall through.