Incoterms for buyers: who does what, in plain language

What an incoterm is (and what it is not)

An incoterm is a three-letter term in your purchase contract that divides tasks, costs and risk between seller and buyer: who arranges pickup, who clears export, who pays the freight, where the risk of loss or damage transfers, who deals with the border. The International Chamber of Commerce publishes the rules — eleven terms in the current 2020 edition — and they are the same everywhere, which is the point.

What they do not do: transfer ownership of the goods, set the payment method, or replace the rest of your contract. They answer one question — whose job is each leg? — and every quotation you compare should be read through that question.

The terms you will actually meet, side by side

EXW is usually the wrong ask

Ex Works looks attractively simple: the seller just makes the goods available, you take it from there. But “from there” includes the export clearance in China — formally the buyer’s job under EXW — which an overseas buyer usually cannot do directly. The ICC’s own guidance recommends FCA instead where the buyer cannot manage export formalities, and that is the practical answer for almost everyone: ask your supplier for FCA (named place), not EXW. The goods, the plan and the price end up the same; the paperwork stops being a problem.

FCA, FOB and the container reality

FOB — Free On Board — is reserved for sea transport: the seller clears export and the risk passes when the goods are loaded on board the vessel. It is a workable term and remains common. But containerized cargo is not delivered “on board” by the seller — it is handed to the carrier at a terminal, sometimes days before the vessel arrives, and FOB does not describe that handover well. That is what FCA is for: the seller delivers to your forwarder at an agreed place — the factory or the terminal.

The 2020 revision also fixed FCA’s biggest headache for letter-of-credit buyers: the parties can now agree that the buyer instructs the carrier to issue an on-board bill of lading to the seller once the goods are loaded, so the seller can present the document banks expect.

CIF is not “delivered” — the trap most first-time buyers meet

CIF — Cost, Insurance and Freight — sounds like a complete service to your port, and as a cost statement that is correct: the seller pays the ocean freight and a minimum level of insurance (the rules set the lowest cover tier, Institute Cargo Clauses (C)). But as a risk statement, CIF transferred everything to you back in China, when the goods went over the ship’s rail. A container damaged in the Pacific is your loss to claim — against the seller’s minimum insurance.

Two practical consequences. First, budget for the arrival side: unloading charges, import clearance, duty, delivery — none of it is in a CIF price. Second, if the cargo matters, insure it properly: under CIP (CIF’s multimodal sibling) the 2020 rules upgraded the required insurance to all-risks level (Institute Cargo Clauses (A)) — you can do the same voluntarily. Our cargo insurance guide explains what that is worth.

DAP, DPU and the unloading question

DAP — Delivered at Place — means the seller brings the goods to your address, ready for unloading, with duty unpaid; you clear the import and pay your border costs. DPU is the same except for one thing: under DPU the seller also unloads — it is the only term of the eleven that requires it. Who unloads sounds like a footnote until the delivery truck arrives at a farm with a two-tonne crate and nobody has a forklift. The term decides whose obligation that is; the quotation should still state how it will actually be done. Our unloading guide covers the options.

DDP: the seller’s maximum obligation

Delivered Duty Paid hands the seller everything — transport, export clearance, import clearance, duties and taxes — delivering the goods with the border fully settled. For the buyer it is the simplest term to receive and the heaviest to give: the seller must handle a foreign import, which can require acting as importer of record or registering for tax in your country, and some destinations make that difficult or impossible for a foreign company. That is why availability is confirmed per destination and per cargo, never promised as a blanket service. The long version: DDP explained honestly.

So which term should you use?

• Buying machinery and arranging your own shipping — ask for FCA (or FOB if the seller only knows sea terms). You control the main leg and the arrival side.
• Supplier insists on shipping it — CIF or CPT to your port is workable; just read it as “stops at the port” and price the arrival side, and insure the cargo at your end’s value, not the seller’s minimum.
• You want one price to your door — DAP, or DDP where the destination genuinely allows it.
• Never sure? — send us the quotation you received; reading a supplier quote through the incoterm is a two-minute job, and we do it happily before you commit.