2.4Incoterms: basics
The essentials in 30 seconds
- Incoterms: who pays what, who organises what, who bears the risk — always rule + place + 2020 version.
- Five to know: EXW, FOB/FCA, CIF (risk already with you!), DAP, DDP — ordered along the journey.
- Trade-off: towards EXW/FOB = more control if competent; towards DAP/DDP = simpler, invisible margin.
Running mini-case — Nadia compares FOB and DAP
Nadia imports a raw material: her supplier offers FOB at the departure port or DAP to Algiers. She has the remaining segments priced by her forwarder, checks where risk shifts and who clears import customs. FOB delivered comes out cheaper, but only if she masters transport. This section follows her first equal-scope Incoterm trade-off, written into the contract with precise place and version.
Sequel to case 2.3 — Nadia secures transport and customs after the contract.
1. What Incoterms settle
As soon as a purchase crosses a border, three questions arise: who pays for what, who organises what, who bears the risk if the goods are lost or damaged in transit? The ICC Incoterms® (11 rules, current version 2020) answer them in a standardised way.
Each rule allocates costs (transport, insurance, formalities), obligations (who organises each leg, who clears export and import customs) and the risk transfer point. An Incoterm without a place means nothing: write “FOB Shanghai Incoterms® 2020”, never “FOB” alone.
No need to memorise all eleven: five cover most situations and line up along the journey. The others remain worth knowing for special cases and specific maritime contracts.
2. The five to know: EXW, FOB/FCA, CIF, DAP, DDP
EXW (Ex Works, at the factory): the seller makes goods available at its premises, full stop — the buyer handles everything (loading, transport, export and import customs). Minimal price, maximum complexity: not recommended for beginners.
FOB (Free On Board, maritime): the seller forwards, clears export and loads on board at the agreed port; costs and risks shift once on board. For containers, prefer FCA (handover to the carrier) — the container is handed over at the terminal before going on board. CIF (Cost, Insurance and Freight, maritime): the seller pays transport and insurance to the arrival port, but risk has already shifted to you at loading at departure — the classic trap.
DAP (Delivered At Place): the seller delivers to the agreed place at your premises — you only handle import clearance and its taxes. DDP (Delivered Duty Paid): the seller handles everything, duties and taxes included — maximum comfort, maximum price, and sometimes a foreign seller who masters your customs poorly.
3. Choose, compare and draft
Trade-off: the closer to EXW/FOB, the more control and managed costs (if competent, often via a forwarder); the closer to DAP/DDP, the simpler but the seller's logistics margin is opaque. For equal bids, ask for dual quotation (e.g. FOB vs DAP) and have the remaining legs priced by a forwarder.
Always check the risk transfer point: are the goods already travelling at your risk? Does your insurance cover that leg? Under CIF, the cover owed by the seller is minimal: require an all-risks clause if needed.
Incoterms say who handles formalities, not what they cost: duties, taxes and import rules vary by country — check before the first import and draft carefully (rule + precise place + version).
🔎 Concrete example — FOB vs DAP: compare on equal scope
A supplier offers FOB Shanghai at €9,000 and DAP Lyon at €11,200. The forwarder prices FOB → Lyon (freight, insurance, import customs, taxes) at €1,600.
Calculation: FOB delivered = €10,600 vs DAP €11,200 — FOB is cheaper and you keep control of transport.
Condition: choose FOB only if you (or your forwarder) master the leg: otherwise DAP simplicity is worth the €600 gap.
Section vocabulary
- Incoterms
- Standardised rules (ICC, 2020 version) allocating costs, obligations and risk transfer; always rule + place + version.
Simple example: Nadia writes “FOB Shanghai Incoterms® 2020” into the contract, never “FOB” alone.
What it is not: an acronym with no place or version, a source of disputes.
Reflex: every import offer re-read: rule, precise place, version.
- EXW (Ex Works)
- Goods available at the factory: the buyer handles everything (loading, transport, customs); minimal price, maximum complexity.
Simple example: Nadia rules out EXW: handling foreign export customs is too risky for her.
What it is not: choosing EXW “because it is cheaper” with no logistics capability.
Reflex: beginners: FCA minimum, never EXW.
- FOB (Free On Board)
- Sea freight: seller clears export and loads on board at departure port; costs and risks shift on board (containers: prefer FCA).
Simple example: Nadia takes FOB with her forwarder mastering the segment to Algiers.
What it is not: container FOB without going through FCA at the terminal.
Reflex: FOB only if the downstream segment is mastered.
- CIF (Cost, Insurance, Freight)
- Sea freight: seller pays transport and insurance to arrival port, but risk transfers to the buyer from loading at departure.
Simple example: Nadia demands all-risks cover if she accepts CIF on pricey material.
What it is not: believing “seller who pays” = “seller who risks”.
Reflex: in CIF, check insurance and reservations on delivery.
- DAP / DDP
- DAP: seller delivers to the agreed place, buyer clears import. DDP: seller takes everything, duties and taxes included.
Simple example: Nadia starts in DAP Algiers and clears import with a broker.
What it is not: DDP with a seller not mastering arrival customs.
Reflex: simple DAP first, FOB optimisation next.
In practice — Choose and secure the Incoterm of an international purchase
- For an import purchase (real or simulated), compare the price under two Incoterms (e.g. FOB vs DAP): have the remaining legs priced with a forwarder.
- Identify the risk transfer point of the Incoterm considered: from where do the goods travel at your risk?
- Check the drafting in the contract: rule + precise place + version (e.g. FOB Shanghai Incoterms® 2020) — never an acronym alone.
- Find out about your country's import formalities and taxes before committing.
Ready-to-say script — ask for dual quotation (30 s)
“To compare on equal scope, please price two options: FOB at departure port and DAP to Algiers, both Incoterms 2020. I will add my forwarder's pricing for the remaining segment.”
Send in writing to the supplier, then have the remaining segment validated by the forwarder.
Copy-paste template — Incoterm comparison
SUPPLIER: _______________ | GOODS: _______________
OPTION 1 (rule + place + version): _______________ | PRICE: _______________
OPTION 2 (rule + place + version): _______________ | PRICE: _______________
FORWARDER PRICING (remaining segment): _______________
RISK SHIFTS AT: _______________ | CHOICE: _______________Small business / tight budget
Start in DAP with a local broker: simplicity is worth the gap while volumes stay low.
Algeria SME
Nadia anticipates import clearance and taxes in Algiers before signing: the Incoterm says who handles, not what it costs.
Sea container
Prefer FCA over FOB: the container is handed at the terminal well before going on board.
High-value material
In CIF, contractually demand all-risks cover and take care with delivery reservations.
✓ Best practices
- Require dual quotation (FOB and DAP) to make costs comparable.
- Under CIF, contractually require all-risks cover if the value justifies it.
- Avoid EXW as a beginner: FCA minimum so the seller clears export.
✗ Common pitfalls
- Believing CIF protects you because the seller pays insurance: the risk is already with you.
- Writing “FOB” with no place or version: legally empty and a source of disputes.
- Choosing DDP without checking that the seller masters your customs: comfort is paid in blockages.
Key takeaways
- Incoterms allocate COSTS, OBLIGATIONS and the RISK transfer point — always rule + place + 2020 version.
- Five to know: EXW (all buyer), FOB (shift on board), CIF (seller pays but risk already transferred!), DAP, DDP (all seller).
- Trade-off: towards EXW/FOB = more control if competent (forwarder); towards DAP/DDP = simpler, invisible margin.
- Incoterms say who handles formalities, not what they cost: duties and rules vary by country.
48h Challenge — apply tomorrow
Nadia applies the comparison to an import purchase: dual FOB-vs-DAP quotation requested from the supplier + forwarder pricing for the remaining segment (template above). 20 minutes is enough.
- I can name the 5 useful Incoterms and their shift point.
- I can compare two offers on equal scope.
- I have written a rule + place + version mention.
Frequently asked questions
Under CIF the seller pays insurance: why is the risk mine?
Because CIF separates who pays (seller) and who bears transit risk (you, from loading on board at departure). If the container is damaged at sea, it is your goods: your recourse is against the insurance taken out by the seller (minimal cover by default). Hence the value of requiring an all-risks clause and taking care with reservations on delivery.
Which Incoterm to start with simply?
Start with DAP (seller delivers, you clear import with a broker), then move to FOB/FCA with a forwarder when volumes justify optimisation. Avoid EXW: handling foreign export customs is the beginner's trap.
Under CIF, when is risk transferred to the buyer?