Incoterms and cost allocation
Incoterms 2020 explained: who pays what (FOB, EXW, CIF, DDP)?
Incoterms 2020 define, for each shipment, where the seller's responsibility ends and the buyer's begins: who pays for transport, who bears the risk, who handles customs. EXW: the buyer takes everything from the factory. FOB: the seller delivers on board at the port of departure, the buyer pays the freight. CIF: the seller pays freight and insurance to the port of arrival. DDP: the seller delivers cleared at destination, all included. For an importer, FOB often offers the best cost control.
Incoterms are the common language of international trade. Published by the International Chamber of Commerce and revised in 2020, they answer three questions for each shipment: how far does the seller pay, how far does the seller bear the risk, and who handles customs. Poorly understood, they are a classic source of disputes and unexpected fees.
The four Incoterms every importer meets
EXW (Ex Works). The seller makes the goods available at its factory. The buyer takes everything on from there: pickup, export, freight, customs, delivery. Maximum control, but also maximum complexity - not recommended when starting out.
FOB (Free On Board). The seller delivers the goods loaded on board the vessel at the port of departure and bears the costs and risks up to that point. The buyer then pays the main freight, insurance, customs clearance on arrival, and delivery. It is the reference Incoterm for importing while keeping control.
CIF (Cost, Insurance and Freight). The seller pays the freight and minimum insurance to the port of arrival. Simpler for the buyer, but you absorb the rates and destination fees chosen by the supplier.
DDP (Delivered Duty Paid). The seller delivers the goods cleared at the buyer’s premises, duties and taxes paid. The most complete on the seller’s side, but the buyer loses visibility on real costs and control over customs.
Costs or risk: do not confuse the two
A point often overlooked: the Incoterm transfers both the costs and the risk, but not always at the same place. Under CIF, for example, the seller pays the freight to destination, but the risk passes to the buyer as soon as the goods are loaded on board at departure. In case of damage at sea, it is therefore the buyer who is exposed, hence the importance of checking the actual insurance coverage.
Which one to choose for importing?
For most importers, FOB offers the best compromise: you let the supplier manage the local part it knows (factory → port of departure) and you take back control of the international freight with your own freight forwarder. You thereby control the choice of carrier, the transparency of surcharges, and the destination fees - often inflated when imposed under CIF or DDP.
The freight forwarder’s role
Choosing the right Incoterm means trading off simplicity against control. A freight forwarder like OVRSEA advises you on the Incoterm suited to each supplier and each lane, checks the consistency between the negotiated Incoterm and what you actually pay, and takes back control at the exact point where your responsibility begins.
FAQ
Incoterms 2020: who pays what?
Each Incoterm sets the transfer point of costs and risks between seller and buyer. Under EXW, the buyer takes everything on from the factory. Under FOB, the seller delivers the goods on board at the port of departure and the buyer pays the main freight and onward. Under CIF, the seller pays the freight and insurance to the port of arrival. Under DDP, the seller delivers the goods cleared at the buyer's premises, all included.
FOB vs CIF: which should I use when importing?
FOB gives the importer more control: you choose your freight forwarder and control the freight and surcharges, often cheaper than those imposed under CIF by the supplier. Under CIF, the seller organizes transport to the port of arrival, which is simpler but means you absorb their rates and destination fees. Most savvy importers prefer FOB.
What does DDP mean and who handles customs?
DDP (Delivered Duty Paid) means the seller delivers the goods cleared at destination, duties and taxes paid: it is the most complete Incoterm on the seller's side. Convenient on paper, but the buyer loses visibility on real costs and control over customs. Handle with care, especially with a distant supplier.
What does FOB mean and who pays the freight?
FOB (Free On Board): the seller moves the goods and loads them on board the vessel at the port of departure, bearing the costs and risks up to that point. From the moment they are on board, the buyer pays the ocean freight, insurance, customs clearance on arrival, and delivery. It is the reference Incoterm for a controlled import.