Incoterms Explained: FOB, CIF, EXW and the Rules That Define a Sale
Two companies can sign a sales contract and still disagree completely about who pays for the truck, who books the vessel and where the risk of loss passes. That is the problem Incoterms were designed to solve.
Published by the International Chamber of Commerce (ICC), Incoterms are three-letter abbreviations that allocate costs and risk between buyer and seller. They do not transfer ownership, and they do not replace a contract, but they remove a huge amount of ambiguity when used correctly.
What Incoterms Do and Do Not Cover
Incoterms answer a narrow but crucial set of questions: who arranges and pays carriage, who handles export and import clearance, and at which point risk passes from seller to buyer.
- They do not determine when title or ownership transfers.
- They do not set the price or payment terms.
- They do not replace the contract of sale.
The Four Groups of Incoterms 2020
Incoterms 2020 organises the eleven terms into groups based on how much responsibility the seller takes.
| Group | Terms | Meaning |
|---|---|---|
| E | EXW | Seller makes goods available at their premises; buyer takes maximum responsibility. |
| F | FCA, FAS, FOB | Seller delivers to a carrier or alongside a vessel named by the buyer. |
| C | CFR, CIF, CPT, CIP | Seller pays main carriage but risk transfers earlier, at loading. |
| D | DAP, DPU, DDP | Seller bears cost and risk to or into the destination. |
The Most Common Terms in Practice
A handful of terms dominate most conversations between traders. Here is what each one really means.
- EXW (Ex Works): buyer collects from the seller's factory and handles everything else.
- FOB (Free On Board): seller delivers on board the vessel; risk passes once loaded.
- CIF (Cost, Insurance and Freight): seller pays freight and minimum insurance to destination port, but risk passes on loading.
- DAP (Delivered at Place): seller delivers to the named destination, unloaded by the buyer.
- DDP (Delivered Duty Paid): seller delivers with import duties paid; maximum seller obligation.
FOB Versus CIF: The Classic Debate
FOB and CIF are both meant for sea freight, and the difference between them is one of control. Under FOB the buyer controls the freight and insurance, which experienced importers often prefer. Under CIF the seller controls carriage, which can be convenient for smaller buyers but limits their choice of carrier and insurer.
Common Mistakes With Incoterms
- Using FOB or CIF for containerised goods when FCA is technically more accurate.
- Writing “FOB factory” or “CIF airport”, which mixes incompatible terms.
- Forgetting to name a place, such as “FOB Shanghai” versus just “FOB”.
- Assuming CIF insurance is comprehensive; the default cover is minimal.
- Believing the Incoterm transfers title or payment obligation.
Choosing the Right Term
New importers often default to DDP because it feels safe, but that comfort comes at a price and a loss of control. A better approach is to pick the term that matches your logistics capability and your appetite for risk.
- Assess who has better freight buying power.
- Consider customs complexity in the destination country.
- Decide how much control you want over insurance.
- Name the exact location, never just the city or port.
- State the Incoterms edition explicitly (for example, “Incoterms 2020”).
Incoterms and Insurance
Only two terms, CIF and CIP, oblige the seller to arrange insurance, and in both cases the default cover is limited. Buyers who want full protection should arrange their own all-risk cargo insurance and not rely on the seller's minimal policy.
Why the Edition Matters
The rules were last revised in 2020, and older contracts may still reference Incoterms 2010. The differences are small but real, especially around FCA and bills of lading. Always specify the edition to avoid a dispute over which rulebook applies.
Final Takeaway
Incoterms are the grammar of international sales. Master the handful you actually use, always pair a term with a named place and an edition, and make sure your contract, invoice and insurance all tell the same story about cost and risk.
This is an independent informational guide and does not constitute legal or trade advice. Confirm Incoterms interpretation with the ICC rules and your trade adviser.