Incoterms determine who pays for what and who carries the risk at each stage of a shipment. Get them wrong, and you either pay for services you didn't need or discover too late that your cargo was uninsured during the riskiest part of the journey. Despite their importance, most shippers choose Incoterms based on habit rather than analysis.
What Incoterms Actually Do
Incoterms are published by the International Chamber of Commerce. The current version is Incoterms 2020, though earlier versions are still legally valid if explicitly stated in the contract. They define three things: which party arranges and pays for transportation at each stage, which party bears the risk of loss or damage at each stage, and which party handles export and import clearance.
They do not define when ownership of goods transfers — that's a matter of the purchase contract, not shipping terms. They also don't determine who pays tariffs or taxes, which depends on the destination country's customs regime.
The Six Terms That Matter for Ocean Freight
Of the eleven Incoterms 2020 rules, six are commonly used in ocean freight. The others either apply specifically to other modes or are rarely used in practice.
EXW (Ex Works) is the minimum responsibility for the seller. The buyer arranges everything: pickup from the seller's premises, export clearance, freight, insurance, import clearance, and delivery. The risk transfers at the seller's loading dock.
In practice, EXW creates problems because the buyer — often in another country — must arrange export clearance in the seller's country. This is administratively difficult and sometimes legally impossible. EXW is common in domestic transactions but problematic for international ocean freight.
FOB (Free on Board) is the most widely used Incoterm in ocean freight. The seller delivers goods to the vessel at the named port of shipment. The seller handles export clearance and local charges. Risk transfers when the goods are on board the vessel. The buyer arranges and pays for ocean freight, insurance, and everything at destination.
FOB gives the buyer control over the ocean freight — you choose the carrier, the forwarder, and the insurance. If you want to manage your logistics costs actively, FOB is typically the right starting point.
CFR (Cost and Freight) means the seller arranges and pays for ocean freight to the named destination port. But risk still transfers at the origin port when goods are loaded on the vessel. This creates a gap: the seller pays for transport, but the buyer bears the risk during that transport. The buyer needs to arrange insurance independently.
CFR is convenient when the seller has better freight rates, but the risk gap makes it confusing. Many shippers on CFR terms mistakenly believe the seller carries the risk during the voyage because the seller paid for the freight.
CIF (Cost, Insurance, and Freight) is CFR plus insurance. The seller arranges and pays for freight and minimum insurance to the destination port. Risk still transfers at the origin port. The key word is "minimum" — CIF only requires the seller to provide Institute Cargo Clauses (C), the lowest level of marine cargo insurance. This covers major casualties but excludes many common risks.
If your cargo requires comprehensive coverage, CIF's minimum insurance may be insufficient. You'll either need to negotiate higher coverage with the seller or purchase additional insurance yourself.
DAP (Delivered at Place) means the seller delivers goods to the named destination, ready for unloading. The seller bears all transport costs and risks to the destination — but not import clearance duties and taxes. The buyer handles import customs.
DAP is increasingly popular for e-commerce and door-to-door logistics. It's straightforward for the buyer but gives you no control over the freight or carrier selection.
DDP (Delivered Duty Paid) is maximum responsibility for the seller. The seller handles everything — freight, insurance, export clearance, import clearance, duties, and delivery to the buyer's door. The buyer does nothing except receive the goods.
DDP is simple for the buyer but expensive for the seller, who must navigate import customs in the buyer's country. DDP prices are higher because the seller builds in a margin for customs complexity and duty uncertainty.
Choosing the Right Term
The choice depends on two factors: how much control you want over logistics, and where you want risk to sit.
If you want maximum control over freight costs, carrier selection, and insurance, FOB is the standard choice. You manage the ocean segment, choose your own forwarder, and insure the cargo to the level you decide.
If you want simplicity and are willing to pay a premium for it, CIF or DAP reduces your logistics workload. The tradeoff is higher cost and less visibility into what the seller is paying for freight and insurance.
If you're buying from a supplier who insists on EXW, understand that you'll need to arrange export clearance in their country — which usually means hiring a local forwarder at origin. Shipzy's forwarder directory can help you find a rated forwarder at the origin port for exactly this situation.
The Insurance Trap
The most common mistake in Incoterms is misunderstanding insurance obligations. Under FOB and CFR, the buyer must arrange their own marine cargo insurance. Under CIF, the seller arranges minimum coverage that may not be adequate. Under EXW, nobody is required to arrange insurance — it's entirely optional unless the buyer does it.
Many shippers assume their cargo is insured because they paid for shipping. It isn't — unless the Incoterm explicitly includes insurance (CIF, CIP) or you arranged it yourself. This gap causes significant financial exposure, particularly on high-value shipments.
Frequently Asked Questions
What is the most common Incoterm for ocean freight? FOB (Free on Board) is the most widely used. It gives the buyer control over ocean freight and insurance while the seller handles export clearance and origin charges.
What's the difference between CIF and FOB? Under FOB, the buyer arranges and pays for freight and insurance. Under CIF, the seller arranges and pays for both — but risk still transfers at the origin port. CIF includes only minimum insurance coverage.
Should I use DDP for simplicity? DDP is the simplest for buyers but the most expensive. The seller handles everything including import clearance, and builds margin into the price. It works well for low-value shipments where logistics management isn't worth your time.
Do Incoterms affect who arranges customs clearance? Yes. Under EXW, the buyer handles both export and import clearance. Under FOB, CFR, and CIF, the seller handles export and the buyer handles import. Under DDP, the seller handles both.
Find rated freight forwarders for your origin and destination at shipzy.ai — whether you need an export agent for EXW terms or an import customs broker for FOB.
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