A Beginner’s Guide to Incoterms: EXW, FOB, and DDP Explained

If we’ve heard it once, we’ve heard it a thousand times; communication is key.  The supply chain is no exception, so much so that a system specific to the logistics industry was created to clearly communicate the expectations and responsibilities of each party in a transaction.  Introduced in 1936, International Commercial Terms (a.k.a. Incoterms) are terms that are used to establish the responsibilities (a.k.a obligations) between Buyers and Sellers.  

Since their inception 84 years ago, these terms have been amended seven times, most recently in 2020.  These are presented in order to reduce the confusion of who’s responsible for paying certain components of logistics.  These terms also outline who’s responsible for the goods’ safety and when that responsibility transfers.  The Incoterm used for a shipment is often determined by the desired pricing a Buyer is looking for, the experience of the supplier, and whether you’re shipping sea or air.  

The List of Obligations

Below is a list of the obligations (responsibilities) that create each Incoterm in various combinations.  

  1. Goods, commercial invoice, and documentation 
  2. Export packaging and marking 
  3. Export licenses and customs formalities 
  4. Pre-carriage to seaport/terminal 
  5. Loading charges 
  6. Discharge/Unloading charges 
  7. Main carriage 
  8. Cost of pre-shipment inspection 
  9. Import formalities and duties 
  10. Cost of Customs “Random” Inspections 
  11. Delivery to the named place of destination 
  12. Payment for goods as specified in the sales contract 
  13. Assist Seller in obtaining any documents or information necessary for export or import clearance formalities
A Beginner's Guide to Incoterms by Noviland

A comprehensive guide of each Incoterms obligations created to provide clarification for new and growing eCommerce businesses.

The Most Commonly Used Incoterms

The following Incoterms are most commonly used because they offer the simplest explanation of each party’s responsibility.  The Seller is typically the manufacturer and the Buyer is the one paying for the goods, typically the brand owner. 

You’ll often see these terms reflected as abbreviations following the Seller’s price (i.e. $1 FOB, or $5 DDP) to explain what is included in that Seller’s quote.

Ex Works (EXW)

The Seller makes the goods available at its location so the Buyer can take over all the transportation costs.  The Buyer also bears the risks of taking the goods to their final destination.

  • The Seller’s Obligations: 
    • Goods, commercial invoice, and documentation 
    • Place goods at Buyer’s disposal at the named place on the agreed-upon date (a.k.a Cargo Ready Date (CRD))
    • Notice to the Buyer to enable the delivery 
    • Export packaging and marking
  • The Buyer’s Obligations:
    • Pay the price of the goods as stated in the sales contract 
    • Provide Seller with evidence of having taken delivery 
    • Loading at Seller’s location (unless otherwise agreed upon) 
    • Export licenses and customs formalities 
    • Assess HS Code Classification for import
    • Pre-carriage to terminal 
    • Loading charges 
    • Main carriage 
    • Discharge and onward carriage 
    • Import documentation and duties 
    • Cost of pre-shipment inspection

EXW Simplified

Let’s say Acme Co. buys 1,000 units of shelving from Bonanza Trading Co. in China for $1 EXW.  Bonanza Trading Co. is only responsible for producing the goods.  Acme Co. must coordinate with a third-party Freight Forwarder and QC Company to inspect the goods at Bonanza Trading Co.’s warehouse.  Acme Co. must also arrange to pick them up from Bonanza Trading Co.’s warehouse in China, gather all export/import certifications and tests, and arrange delivery to the final destination.  This includes last-mile trucking and freight insurance.

As a Buyer, it’s suggested that you only accept these terms when you:

  • Have a plethora of time on your hands.
  • Are well experienced in logistics.
  • Have a deep understanding of the exporting process/requirements for the product.
  • Have time and plan to get quotes from several Freight Forwarders.
  • Can keep up with the shipping industry General Rate Increases (GRI)
  • Want to consolidate several orders from various suppliers in the country of origin
  • Can have products inspected at the factory prior to shifting responsibilities.
  • Use a Freight Forwarder that can help with reinforcing packaging 
  • Partner with a Freight Forwarder that can prep using FBA guidelines (if shipping to Amazon FBA)
  • Have full confidence that your supplier will deliver a quality product and work with you on defects/non-conformities.

Free On Board (FOB)

The Seller transports and is responsible for the goods until they’re loaded onto the ship at an agreed-upon port. The Buyer is responsible for everything until the shipment arrives at the final destination.

  • The Seller’s Obligations:
    • Goods, commercial invoice, and documentation
    • Export packaging and marking
    • Export licenses and customs formalities
    • Pre-carriage and delivery
    • Loading charges
    • Delivery onboard vessel at the named port of shipment
    • Proof of delivery
    • Cost of pre-shipment inspection
  • The Buyer’s Obligations:
    • Payment for goods as specified in the sales contract
    • Main carriage
    • Discharge and onward carriage
    • Import formalities and duties
    • Cost of pre-shipment inspection (for import clearance)

FOB Simplified 

In this example, Acme Co. buys 1,000 units of shelving from Bonanza Trading Co. in China for $1.15 FOB Shanghai. Bonanza Trading Co. is responsible for producing the goods and delivering them to the Shanghai Port.  Bonanza Trading Co. remains responsible for the goods until the shipping carrier signs the bill of lading (BOL), meaning the cargo is on the vessel.  Typically, Acme Co. must coordinate with a third-party Freight Forwarder and QC Company to inspect the goods before they’re signed over to the Freight Forwarder, gather all export/import certifications and tests, and arrange delivery to the final destination. This includes last-mile trucking and freight insurance.

As a Buyer, it’s suggested that you only accept these terms when you:

  • Have a lot of suppliers that are expected to ship the items to the same port
  • Are well experienced in logistics
  • Have time to compile and review quotes from several Freight Forwarders.
  • Are up to date with shipping industry General Rate Increases (GRI)
  • Want to consolidate several orders from various suppliers in the country of origin
  • Can have products inspected at the factory prior to shifting responsibilities
  • Have a Freight Forwarder that can help with reinforcing packaging
  • Have a Freight Forwarder that can prep using FBA guidelines (if shipping to Amazon FBA)
  • Want to store your products in the country of origin for a while
  • Are very knowledgeable about the importing process for the goods
  • Have full confidence in your supplier that they will deliver a quality product and work with you on defects/non-conformities

Delivered Duty Paid (DDP)

The Seller is responsible for delivering the goods to the named destination in the country of the Buyer.  The Seller also pays all costs in bringing the goods to that agreed-upon final destination.

  • The Seller’s Obligations:
    • Goods, commercial invoice, and documentation 
    • Export packaging and marking 
    • Export licenses and customs formalities 
    • Pre-carriage and delivery 
    • Loading charges 
    • Main carriage 
    • Proof of delivery 
    • Import formalities and duties 
    • Cost of all inspections 
    • Delivery to the named place of destination
  • The Buyer’s Obligations:
    • Payment for goods as specified in the sales contract 
    • Assist Seller in obtaining any documents or information necessary for export or import clearance formalities

DDP Simplified 

Acme Co. buys 1,000 units of shelving from Bonanza Trading Co. in China for $2.15 DDP from Shanghai.  Bonanza Trading Co. is responsible for the cargo until it reaches the final destination. All costs, including product costs, freight, and import duties are included in the DDP pricing.

As a Buyer, it’s suggested that you only accept these terms when you: 

  • Trust your suppliers aren’t overcharging you for shipping
  • Have a primary focus on working on your business and not in your business
  • Want to scale up your business quickly
  • Work with a supplier that understands both the export and import requirements and processes
  • Have suppliers that can consolidate several orders for you
  • Have suppliers with trustworthy Freight Forwarding partners
  • Trust your supplier is properly classifying the HS Code of the goods

Least Frequently Used Incoterms

Free Carrier (FCA)

The Seller is responsible for export clearance and delivery of goods to the carrier at the named place of delivery.  If the Seller’s place of business is the delivery destination, the Seller is only responsible for loading the goods.    

A carrier is any person or company that undertakes the carriage.  This could be a shipping line, airline, trucking company, railway, or freight forwarder.

  • The Seller’s Obligations: 
    • Goods, commercial invoice, and documentation
    • Export packaging and marking
    • Export licenses and customs formalities
    • Pre-carriage to terminal
    • Delivery to the named place of delivery
    • Cost of pre-shipment inspection
    • Proof of delivery
  • The Buyer’s Obligations:
    • Payment for goods at price agreed upon in sales contract
    • Unloading from arriving means of transportation
    • Loading charges
    • Main carriage
    • Discharge and onward carriage
    • Import formalities and duties
    • Cost of pre-shipment inspection (for import clearance)

Free Alongside Ship (FAS)

The Seller is responsible for clearing goods for export and placing them alongside the vessel at the named port of departure.  This location can be a loading dock or a barge, but cannot be a container terminal.  The Buyer is then responsible for loading the freight onto the vessel, handling local carriage, discharge, import formalities and duties, and onward carriage to the final destination.  

This Incoterm should only be used for ocean or inland waterway transport.  FAS is popular with bulk cargo such as oil or grain.

  • The Seller’s Obligations:
    • Goods, commercial invoice, and documentation
    • Export packaging and marking
    • Export licenses and customs formalities
    • Pre-carriage to terminal
    • Delivery alongside the vessel at the port of shipment
    • Proof of delivery
    • Cost of pre-shipment inspection
  • The Buyer’s Obligations:
    • Pay the price of the goods as provided in the sales contract
    • Loading charges
    • Main carriage
    • Discharge and onward carriage
    • Import formalities and duties
    • Cost of pre-shipment inspection (for import clearance)

Cost and Freight (CFR)

The Seller is required to clear the goods for export, deliver them onboard the ship at the port of departure, and pay for transport of the goods to the named port of destination.  The risk transfers from the Seller to the Buyer when the Seller delivers the goods on board the ship.  The Buyer is responsible for paying all additional transport costs from the port of destination, including import clearance and duties.

This Incoterm should only be used for ocean or inland waterway transportation.

  • The Seller’s Obligations:
    • Goods, commercial invoice, and documentation
    • Export packaging and marking
    • Export licenses and customs formalities
    • Pre-carriage and delivery
    • Loading charges
    • Delivery at the named port of destination
    • Proof of delivery
    • Cost of pre-shipment inspection
  • The Buyer’s Obligations:
    • Payment for goods as specified in the sales contract
    • Risk starting with onboard delivery
    • Discharge and onward carriage
    • Import formalities and duties
    • Cost of pre-shipment inspection (for import clearance)

Cost, Insurance, and Freight (CIF)

The Seller must pay all costs, insurance, and freight to get the goods to the Buyers port of destination (not the final destination for the Buyer). The Buyer bears the risk for the goods as soon as they’re on the ship and responsible for transport once they arrive at the port.

  • The Seller’s Obligations:
    • Goods, commercial invoice, and documentation 
    • Export packaging and marking 
    • Export licenses and customs formalities 
    • Pre-carriage and delivery 
    • Loading charges 
    • Delivery at the named port of destination 
    • Proof of delivery 
    • Cost of pre-shipment inspection 
    • Minimum insurance coverage
  • The Buyer’s Obligations: 
    • Payment for goods as specified in the sales contract 
    • Discharge and onward carriage 
    • Import formalities and duties 
    • Cost of import clearance pre-shipment inspection

Carrier and Insurance Paid (CIP)

The Seller is responsible for the cost of carriage, assuming all risk until the goods are delivered to the first carrier at the place of shipment.  The Seller also assumes all-risk insurance coverage until the freight reaches the named place of destination. The Buyer is responsible for all risks once the goods are delivered to the first carrier. 

  • The Seller’s Obligations 
    • Goods, commercial invoice, and documentation
    • Export packaging and marking
    • Export licenses and customs formalities
    • Pre-carriage and delivery
    • Loading charges
    • Cost of delivery at the named place of destination
    • Proof of delivery
    • Cost of pre-shipment inspection
    • All-risk insurance coverage
  • The Buyer’s Obligations:
    • Payment for goods as specified in the sales contract
    • Import formalities and duties
    • Cost of import clearance pre-shipment inspection

Delivered at Place (DAP)

The Seller transports the goods all the way to the final destination. However, the Buyer is responsible for paying import duties, customs clearance, and any customs inspection fees.

  • The Seller’s Obligations:
    • Goods, commercial invoice, and documentation 
    • Export packaging and marking 
    • Export licenses and customs formalities 
    • Pre-carriage and delivery 
    • Loading charges 
    • Cost of pre-shipment inspection 
    • Main carriage 
    • Delivery to the named place of destination 
    • Proof of delivery 
    • Insurance (usually)
  • The Buyer’s Obligations:
    • Payment for goods as specified in the sales contract 
    • Unloading from arriving means of transportation 
    • Import formalities and duties 
    • Cost of import clearance pre-shipment inspection 
    • Onward carriage and delivery to the Buyer (depending on named place) 

 


 

 

 

 

 

Lisa Kinskey is the Marketing Assistant of Noviland, Inc., a rapidly growing sourcing & purchasing solution making sourcing from overseas factories simpler.  Lisa has a background in sales, marketing, and event planning and currently resides in Kennesaw, Georgia.