Incoterms often feel like a set of mysterious letters you’re supposed to “just insert into the contract.” And then, suddenly, it turns out that “we thought delivery was included,” “customs is handled by the seller… probably,” “insurance? what insurance?”—and you’re thrown into a logistics quest with paid DLC.
In simple terms, Incoterms are rules that help both parties agree in advance where delivery is considered completed, when risk transfers, and who pays for what. They don’t replace a contract, but they eliminate a big chunk of typical disputes. In this article, we’ll cover the core terms, two practical approaches to choosing delivery conditions, and a step-by-step algorithm so you don’t pay twice for the same service.
What it is: the point where the seller has fulfilled the delivery obligation, and the moment when the risk of accidental loss/damage transfers to the buyer.
How it’s defined: by a specific place: the seller’s warehouse, a terminal, port of loading, ship’s rail/on board, destination point, etc.
Why it matters: one party may pay for transport, while risk may transfer earlier. This is the #1 source of misunderstandings.
What it is: who pays for loading, terminal charges, main carriage, insurance, unloading, local delivery.
How it’s measured: an itemized estimate by stages (to terminal / terminal / main leg / destination terminal / last mile).
Why it matters: “included in the price” without breakdown almost always means “included partially.”
What it is: who organizes and pays for export clearance (seller side) and import clearance (buyer side), including duties and taxes.
How it’s verified: by whether the obligation is assigned under the term and whether the party can realistically do it (not everyone has the right/resources to clear customs in another country).
Why it matters: some terms sound convenient but are impractical or create tax risks in real life.
What it is: the obligation to arrange insurance on specified conditions (not included in every term).
How it’s checked: whether coverage exists and in whose name/benefit it is arranged.
Why it matters: without insurance, a damage dispute turns into “who can explain reality louder.”
What it is: some terms are designed only for sea/inland waterway transport (e.g., FOB/CFR/CIF), while others work for any transport mode (EXW, FCA, CPT, CIP, DAP, DPU, DDP).
Why it matters: a classic mistake is using FOB for container shipments, where cargo is actually handed over at the terminal, not “on board.” Then everyone argues where the damage happened and who’s at fault.
| Term | Where risk transfers | Who pays main carriage | Customs | Common beginner mistake |
|---|---|---|---|---|
| EXW | At seller’s premises (minimal obligation) | Buyer | Export/import usually on buyer | Assuming the seller will “help ship it” by default |
| FCA | When handed to the carrier | Buyer (or agreed otherwise further on) | Export usually seller, import buyer | Not specifying the handover place (warehouse/terminal) |
| CIP | Risk transfers early, but carriage/insurance are paid by seller | Seller | Export seller, import buyer | Confusing “pays carriage” with “bears risk” |
| DAP | At destination, before unloading | Seller | Import usually buyer | Not factoring unloading/downtime at the consignee |
| DDP | At destination (maximum seller responsibility) | Seller | Export and import on seller | Choosing DDP when the seller can’t legally clear import customs |
When it fits: you want to choose the carrier, route, service level, rate transparency, and risk control yourself—especially useful for regular shipments or when the seller is “not a logistics person.”
Pros: clearer controllability; easier to compare offers; simpler to standardize packaging/labeling; fewer surprises from extra charges.
Limitations: you need the capability to organize transport and documents; you may need your own forwarder/logistics specialist.
Risks: if you pick EXW without understanding local realities, you may discover you can’t properly handle export formalities or pick up cargo under local rules (nuances vary by country).
Practical note: for beginners, FCA is often safer than EXW because responsibilities are clearer and you’re less likely to end up with “nobody is responsible for loading/pickup.”
When it fits: you buy once or irregularly; it’s more important to receive goods “almost at your door” than to manage the chain; the seller has strong logistics and a clear price.
Pros: less operational burden on the buyer; easier timeline forecasting; fewer points where you can forget something.
Limitations: less transparency in the cost structure; you depend on the seller’s contractors’ quality.
Risks: confusion between “pays carriage” and “bears risk”; unexpected terminal charges/downtime; vague insurance terms.
Be careful with DDP: it sounds perfect (“all-inclusive”), but in practice the seller must be able and legally entitled to clear import and pay duties. If not, you’ll get delays, a grey scheme, or a “surprise surcharge”—and none of that is fun.
Scenario 1: initial situation—the buyer is importing a small batch for the first time; the seller offers EXW (“pick up from the warehouse”). Actions—the buyer chooses FCA with a specific handover point at a terminal; the seller handles export; the buyer handles main carriage and import. Result—fewer grey zones: it’s clear who is responsible for handing over to the carrier and for documents, reducing the risk of “getting stuck at the start.”
Scenario 2: initial situation—the goods are expensive and damage-sensitive; the timeline matters moderately. Actions—they choose CIP: the seller pays for transport and insurance; the buyer confirms in advance that risk transfers when handed to the first carrier and sets up strong receiving control. Result—less operational burden on the buyer while risks are covered by insurance and a documentation procedure. We’ve worked in this field for over 13 years, and the biggest beginner brain-melter is realizing that who pays and who bears risk are different questions.
1) Which term is the “safest” for beginners?
There’s no universal answer. But it’s often safer to start with FCA (clear handover to the carrier) or DAP (delivery to destination without import clearance by the seller). The right choice depends on who can realistically handle customs and who controls transport.
2) Does Incoterms regulate payment for the goods and transfer of ownership?
No. Incoterms covers delivery, risk, and allocation of obligations for transport/customs/insurance. Payment terms, transfer of title, quality liability, penalties, etc., must be set out separately in the contract.
3) Can you add your own conditions to a term?
Yes—and you should clarify details: exact place, time windows, packaging requirements, notification procedure, documents, insurance, who pays for unloading. The key is not to break the meaning of the term and to put everything in writing, so you don’t end up playing “we meant something else.”