Incoterms Explained: Complete Guide to FOB, EXW, CIF and All 11 Rules (2025)
Incoterms (International Commercial Terms) are standardized three-letter trade terms published by the International Chamber of Commerce (ICC) that define the responsibilities, costs, and risks associated with international shipping. Understanding Incoterms is essential for importers and exporters to avoid disputes, unexpected costs, and shipment delays.
The current version, Incoterms 2020, includes 11 rules that apply to various modes of transportation. This comprehensive guide explains each Incoterm with practical examples to help B2B businesses make informed decisions.
What Are Incoterms and Why Do They Matter?
Incoterms serve as a universal commercial language that clarifies:
- Delivery point: Where the seller’s responsibility ends and buyer’s begins
- Risk transfer: At what point risk of loss or damage passes from seller to buyer
- Cost allocation: Who pays for transportation, insurance, duties, and other charges
- Documentation: Which party handles export/import customs clearance
For B2B importers, selecting the right Incoterm impacts your total landed cost, risk exposure, and operational complexity.
Most Common Incoterms for Importers
EXW – Ex Works (Seller’s Premises)
Best for: Experienced importers with logistics capabilities
Seller’s responsibility: Makes goods available at their facility
Buyer’s responsibility: All transportation, export/import clearance, and costs from seller’s location
Risk transfer: When goods are made available at seller’s premises
Pros for buyers:
- Lowest quoted price from supplier
- Full control over logistics and freight forwarder selection
- Flexibility in shipping method and timing
Cons for buyers:
- Must arrange export clearance in seller’s country (challenging)
- Assumes all risk from the earliest point
- Requires strong logistics expertise
FOB – Free On Board (Named Port of Shipment)
Best for: Most B2B importers; most common Incoterm for sea freight
Seller’s responsibility: Deliver goods on board vessel at named port, handle export clearance
Buyer’s responsibility: All costs and risks from when goods are loaded, including ocean freight, insurance, import clearance
Risk transfer: When goods are loaded on board the vessel
Pros for buyers:
- Seller handles export procedures and local logistics
- Buyer controls ocean freight selection and costs
- Clear transfer point at port simplifies documentation
- Widely understood and commonly used globally
Cons for buyers:
- Must arrange ocean freight and marine insurance
- Responsible for all risks during main carriage
- Limited to sea and inland waterway transport only
Example: You order products “FOB Shanghai $8,500.” Supplier delivers to Shanghai port and loads on your vessel. You pay ocean freight, insurance, and all costs after that point.
CIF – Cost, Insurance and Freight (Named Port of Destination)
Best for: Buyers who prefer simplicity; small to medium shipments
Seller’s responsibility: Deliver goods on board, pay for freight and minimum insurance to destination port, handle export clearance
Buyer’s responsibility: Unloading costs at destination, import clearance, duties, taxes, inland transportation
Risk transfer: When goods are loaded on board at origin port (despite seller paying freight)
Pros for buyers:
- Simplified logistics—seller arranges ocean freight and insurance
- One comprehensive price to destination port
- Good for buyers without freight forwarding relationships
- Easier budgeting with fewer unknowns
Cons for buyers:
- Less control over freight forwarder and shipping schedule
- Insurance may be minimal (only ICC C coverage)
- Potentially higher costs as seller marks up freight
Example: Supplier quotes “CIF New York $9,500.” This includes product cost, export clearance, ocean freight, and basic insurance. You pay port charges, customs clearance, duties, and delivery to warehouse.
FCA – Free Carrier (Named Place)
Best for: Air freight shipments; modern alternative to EXW
Seller’s responsibility: Deliver goods to carrier at named place, handle export clearance
Buyer’s responsibility: All costs and risks from named place onward
Risk transfer: When goods are handed over to carrier nominated by buyer
Pros for buyers:
- Seller handles export procedures (easier than EXW)
- Works for all transport modes including air freight
- Clear handover point reduces disputes
- Buyer controls main freight and costs
DDP – Delivered Duty Paid (Named Place of Destination)
Best for: Buyers wanting complete hands-off delivery; first-time importers
Seller’s responsibility: Everything—delivery to buyer’s door including export clearance, transportation, insurance, import duties, taxes, and clearance
Buyer’s responsibility: Only unloading at final destination
Risk transfer: When goods are made available at destination, ready for unloading
Pros for buyers:
- Zero logistics management—completely door-to-door
- Single total price with no hidden costs
- No import clearance expertise required
- Seller bears all risks until delivery
Cons for buyers:
- Highest quoted price as seller marks up all services
- No control over shipping method or timing
- Seller must be registered to clear customs in destination country
- Less transparency in cost breakdown
Incoterms Comparison: FOB vs EXW vs CIF
Quick comparison of the three most common Incoterms:
| Responsibility | EXW | FOB | CIF |
|---|---|---|---|
| Export clearance | ✗ Buyer | ✓ Seller | ✓ Seller |
| Loading at origin | ✗ Buyer | ✓ Seller | ✓ Seller |
| Main carriage freight | ✗ Buyer | ✗ Buyer | ✓ Seller |
| Marine insurance | ✗ Buyer | ✗ Buyer | ✓ Seller (minimum) |
| Import clearance | ✗ Buyer | ✗ Buyer | ✗ Buyer |
| Typical quoted price | Lowest | Medium | Higher |
| Buyer control | Maximum | High | Medium |
| Best for | Experienced importers | Most B2B buyers | Simplicity seekers |
How to Choose the Right Incoterm
By Experience Level
- Beginners: Start with CIF or DAP for simplicity
- Intermediate: Use FOB for cost control with freight forwarder support
- Advanced: Consider FCA or EXW for maximum control
By Transportation Mode
- Sea freight: FOB and CIF are standard
- Air freight: Use FCA, CPT, or CIP (not FOB/CIF)
- Truck/rail: FCA, DAP, or DDP work well
By Cost Control vs Convenience
- Maximum cost control: FOB or FCA (you arrange freight)
- Balanced approach: CIF or CPT (seller arranges, you know total cost)
- Maximum convenience: DAP or DDP (door-to-door service)
Common Incoterms Mistakes to Avoid
- Using FOB for air freight: FOB is only for sea transport; use FCA for air
- Assuming insurance is included: Only CIF and CIP include insurance (minimum coverage)
- Misunderstanding risk transfer: In CIF, risk transfers at origin port, not destination
- Not specifying the named place: Always include specific location (e.g., “FOB Shanghai, China”)
- Confusing Incoterms with payment terms: Incoterms don’t define when payment is due
- Not including Incoterms 2020: Always specify “Incoterms® 2020” in contracts
Conclusion
Incoterms are fundamental to international trade, defining who pays for what, who bears which risks, and where responsibility transfers. For B2B importers, mastering Incoterms—especially FOB, CIF, and EXW—is essential for cost control, risk management, and smooth operations.
Most importers find that FOB offers the best balance of control and simplicity for sea freight, while FCA serves the same purpose for air freight. Always specify the complete Incoterm including version and named place in your contracts.
