Incoterms define exactly where the seller’s responsibility ends and the buyer’s begins in an international shipment, covering cost, risk, and paperwork at each stage. Getting them wrong can mean paying for freight you didn’t expect, or being on the hook for cargo insurance you assumed the other party covered. This guide breaks down the most common Incoterms and where each one hands off responsibility.
Table of Contents
- What Are Incoterms?
- EXW (Ex Works)
- FOB (Free on Board)
- CIF (Cost, Insurance and Freight)
- CFR (Cost and Freight)
- DDP (Delivered Duty Paid)
- Quick Comparison Table
- Frequently Asked Questions
What Are Incoterms?
Incoterms (International Commercial Terms) are a standardized set of three-letter trade terms published by the International Chamber of Commerce. They define, for any given shipment, which party (buyer or seller) is responsible for transportation costs, insurance, customs clearance, and risk of loss at each stage of the journey. The current version in wide use is Incoterms 2020.
EXW (Ex Works)
Under EXW, the seller’s only responsibility is to make the goods available at their own premises. From that point on, the buyer handles everything: loading, export clearance, main transport, import clearance, and final delivery. This places the maximum responsibility on the buyer and minimum on the seller.
FOB (Free on Board)
Under FOB, the seller is responsible for delivering the goods to the port of origin and loading them onto the vessel. Once the cargo is loaded on board, risk and cost transfer to the buyer, who then arranges and pays for ocean freight, insurance, and import clearance. FOB is one of the most commonly used Incoterms for sea freight specifically.
CIF (Cost, Insurance and Freight)
Under CIF, the seller arranges and pays for the ocean freight and a minimum level of marine insurance to the destination port, in addition to export clearance. Risk technically transfers to the buyer once goods are loaded on the vessel, even though the seller is paying for freight and insurance to the destination. The buyer handles import clearance and delivery from the destination port onward.
CFR (Cost and Freight)
CFR works similarly to CIF, except the seller does not arrange insurance. The seller pays for freight to the destination port, but the buyer is responsible for insuring the cargo themselves and for import clearance and delivery beyond the destination port.
DDP (Delivered Duty Paid)
DDP places maximum responsibility on the seller. The seller handles export clearance, main transport, import clearance, duties and taxes, and final delivery to the buyer’s specified location. The buyer simply receives the goods at their door. This is the opposite extreme from EXW.
Quick Comparison Table
| Incoterm | Seller Responsibility Ends At | Insurance Arranged By |
|---|---|---|
| EXW | Seller’s premises | Buyer |
| FOB | Loaded on vessel at origin port | Buyer |
| CFR | Destination port (freight paid, risk transfers at loading) | Buyer |
| CIF | Destination port (freight + insurance paid, risk transfers at loading) | Seller (minimum coverage) |
| DDP | Buyer’s final delivery address | Seller |
Frequently Asked Questions
Which Incoterm is most common for sea freight?
FOB and CIF are among the most widely used Incoterms for ocean freight, particularly in Asia-based export trade, since they clearly define responsibility at the point cargo is loaded onto the vessel.
Does CIF mean the seller is responsible if my cargo is damaged at sea?
No. Under CIF, risk transfers to the buyer once goods are loaded on the vessel, even though the seller pays for freight and insurance. The buyer would need to file any cargo insurance claim, even though the seller arranged the policy.
What’s the difference between CIF and CFR?
Both have the seller paying for freight to the destination port. The difference is insurance: under CIF the seller also arranges minimum cargo insurance, while under CFR the buyer must arrange their own insurance.
Is DDP good for the buyer?
DDP is very convenient for buyers since the seller handles everything, including import duties. However, it typically comes at a higher price, and the seller needs to be familiar with the buyer’s country’s import procedures for it to work smoothly.
Need help figuring out which Incoterm fits your next shipment? Contact Paramount Express Agencies for guidance based on your specific trade route and cargo.
