If you buy or sell goods across borders, you will see short codes like FOB, CIF and EXW on almost every quotation. These are Incoterms, a set of trade rules published by the International Chamber of Commerce (ICC). The current version is Incoterms 2020.
Incoterms answer three simple questions: who pays for transport, who arranges insurance, and at what point the risk of loss or damage moves from the seller to the buyer. Getting this right avoids arguments later. Here is a plain guide to the terms you will meet most often.
Why Incoterms Matter
Two quotations with the same price per ton can mean very different total costs. A price “FOB Jakarta” means the buyer still has to pay sea freight, insurance and everything at the destination. A price “CIF Karachi” already includes sea freight and basic insurance to Karachi. Comparing them without understanding the term is like comparing apples with oranges.
The Two Groups of Incoterms 2020
There are 11 rules in Incoterms 2020. Seven can be used for any mode of transport, and four are only for sea and inland waterway transport.
- Any mode of transport: EXW, FCA, CPT, CIP, DAP, DPU and DDP
- Sea and inland waterway only: FAS, FOB, CFR and CIF
EXW (Ex Works)
The seller makes the goods available at their own premises, such as a factory or warehouse. The buyer handles almost everything else: loading, export clearance, transport, insurance and import. EXW gives the seller the least responsibility and the buyer the most. It can be hard for a foreign buyer to manage export formalities in the seller’s country, so many buyers prefer FCA instead.
FCA (Free Carrier)
The seller clears the goods for export and hands them to the carrier chosen by the buyer at an agreed place. Risk passes to the buyer at that point. FCA works well for containers, because goods are often handed over at a container yard before they are loaded on the ship.
FOB (Free on Board)
The seller clears the goods for export and loads them on board the ship at the named port of shipment. Risk passes to the buyer once the goods are on board. The buyer pays the sea freight, insurance and all costs after that. FOB is very common in bulk commodity trade, including spices and grains.
CFR (Cost and Freight)
The seller pays for sea freight to the named port of destination. However, the risk still passes to the buyer once the goods are loaded at the port of shipment. This surprises many new buyers: under CFR, the seller pays for the voyage but the buyer carries the risk during it.
CIF (Cost, Insurance and Freight)
CIF is the same as CFR, but the seller also buys insurance for the voyage. The minimum cover under CIF is basic, so buyers who want wider protection should agree a higher level of cover in the contract or buy extra insurance themselves.
CIP (Carriage and Insurance Paid To)
CIP is similar to CIF but can be used for any transport mode. One important change in Incoterms 2020 is that CIP now requires a higher level of insurance cover (Institute Cargo Clauses A, often called “all risks”) unless the parties agree otherwise.
DAP, DPU and DDP
- DAP (Delivered at Place): the seller delivers the goods, ready for unloading, at the named place in the buyer’s country. The buyer handles import clearance and duties.
- DPU (Delivered at Place Unloaded): like DAP, but the seller also unloads the goods. DPU replaced the old DAT rule in 2020.
- DDP (Delivered Duty Paid): the seller delivers to the buyer’s door and also pays import duties and taxes. This puts the most responsibility on the seller.
Which Term Should You Use?
There is no single best term. A buyer with a good freight forwarder may prefer FOB or FCA to control shipping costs. A first-time buyer may prefer CIF or DAP, so the seller handles more of the logistics. What matters most is that both sides understand exactly what is included.
Tips to Avoid Mistakes
- Always write the full term with a named place and the version, for example “FOB Jakarta, Incoterms 2020”.
- Remember that Incoterms do not cover payment terms, ownership of goods or product quality. These need their own clauses in the contract.
- Check who pays port and terminal charges at both ends. These can add up.
- When in doubt, ask your supplier or freight forwarder to explain each cost in writing.
Need Help with a Quotation?
At Rawaani Global, every quotation we share states the Incoterm, the named place and what is included, so you can compare prices with confidence. If you are planning an import or export, send us your requirement and we will explain the options.
This article is general information. For full rules, refer to the official Incoterms 2020 publication from the International Chamber of Commerce.