Incoterms (International Commercial Terms) define exactly where the seller's responsibility ends and the buyer's begins — for cost, risk, and logistics arrangement. Getting the wrong term in a contract can mean unexpectedly owing for freight, insurance, or customs clearance you assumed the other party was handling.
The Terms New Exporters See Most Often
- EXW (Ex Works): seller's only responsibility is making the goods available at their own facility. Buyer handles everything else, including export clearance — often more than a buyer expects.
- FOB (Free On Board): seller delivers goods on board the vessel at the origin port; risk transfers to the buyer once loaded. Common in ocean freight for a reason — it's a clean, well-understood split.
- CIF (Cost, Insurance, and Freight): seller pays for freight and insurance to the destination port, but risk still transfers once goods are loaded at origin, not on arrival — a distinction that surprises many buyers.
- DDP (Delivered Duty Paid): seller handles everything, including destination customs clearance and duties. Maximum convenience for the buyer, maximum responsibility for the seller.
Why the Choice Matters Beyond Cost
Incoterms also determine who is responsible for export compliance documentation, who arranges insurance, and who controls carrier selection. A seller using EXW who assumes the buyer will handle export licensing can end up out of compliance if that assumption is wrong.
A Common Mistake: Mixing Old and New Rules
Incoterms are periodically revised (2010, 2020, and updates since). Contracts should specify which version applies — e.g., "FOB Incoterms 2020" — since obligations for certain terms have shifted between versions.
Incoterms aren't just shipping jargon on an invoice — they're a legal allocation of cost and risk. Both parties should read them the same way before the contract is signed, not after a dispute.