Incoterms Decide Who Pays When the Ship Gets Stuck: 6 Rules for Choosing EXW, FCA, FOB, CIF or DDP

On March 23, 2021, the Ever Given ran aground in the Suez Canal and sat there for six days. Lloyd's List estimated that the blockage held up roughly $9.6 billion of trade every day. When the ship was finally freed, its owner declared general average, an old maritime rule under which every cargo owner on board shares the cost of saving the voyage. Thousands of companies discovered they had to post security before their goods would be released.

Which companies? Not necessarily the ones that had paid for the freight. The answer depended on three letters printed on each sales contract: the Incoterm. Under FOB or CIF, the risk had passed to the buyer the moment the goods were loaded in Asia. Under DAP or DDP, it still sat with the seller.

The Incoterm on your quote decides who pays when something goes wrong at sea, and most exporters choose it by habit.

We have been selling across borders for more than a century, and today our group trades in 75+ countries. These are the six rules I would give any company before it writes a three-letter code on an export price.

What Incoterms actually decide (and what they don't)

Incoterms are a set of rules published by the International Chamber of Commerce, first in 1936. The current edition, Incoterms 2020, took effect on January 1, 2020 and contains 11 rules. Seven work for any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU and DDP). Four are only for sea and inland waterway (FAS, FOB, CFR and CIF).

Each rule answers three questions:

• Delivery: where the seller's obligation to deliver is fulfilled.
• Risk: the exact point where loss or damage passes from seller to buyer.
• Cost: who pays for each leg, including loading, freight, insurance, export clearance and import duties.

Just as important is what they do not decide. Incoterms say nothing about when ownership of the goods transfers, how or when you get paid, or what happens if the buyer goes bankrupt. An Incoterm is a delivery rule, not a payment rule and not a title rule. Those belong in the rest of the contract, which is why I treat Incoterms and export payment terms as two separate negotiations.

Rule 1: Know where risk moves, not just where cost stops

The most expensive misunderstanding in export trade is assuming that whoever pays for the freight also carries the risk. Under CIF, the seller pays freight and insurance all the way to the destination port. Yet the risk passes to the buyer when the goods are loaded on board at the origin port.

That gap is not a technicality. When the container ship Dali struck the Francis Scott Key Bridge in Baltimore in March 2024, its owner also declared general average. Cargo owners were asked to contribute to the salvage costs regardless of who had booked the freight. Before you sign, draw a line on a map where the risk changes hands, and make sure someone has insurance on both sides of it.

Rule 2: Stop using FOB for containers

FOB, Free On Board, is the most quoted Incoterm in the world and it is frequently the wrong one. It was designed for cargo that is lifted over a ship's rail. A container is handed to the terminal days before it is loaded, so between the gate and the deck the goods are out of the seller's control while the seller still carries the risk.

The ICC's own guidance points containerized trade to FCA, Free Carrier, where risk passes when the container is handed to the carrier or terminal. The 2020 revision even allowed an on-board bill of lading under FCA, precisely so that banks working with letters of credit would accept it. If your goods travel in a box, quote FCA, not FOB. The same applies to CFR and CIF, whose container-friendly equivalents are CPT and CIP.

Rule 3: Treat EXW as a domestic rule

Ex Works looks like the safest choice for a seller. You make the goods available at your door and the buyer does everything else. In practice it creates two problems.

First, the buyer is responsible for export clearance in your country, where they may have no legal presence. Second, in the European Union a seller needs proof that goods actually left the EU to apply the VAT exemption on exports. If the buyer's forwarder handles everything, that proof can be hard to obtain, and the tax authority can claim the VAT from the seller. EXW hands the buyer control of your export paperwork, and you keep the tax exposure. For international sales, FCA at your own premises gives almost the same simplicity while you clear the goods yourself.

Rule 4: Quote DDP only if you can act as the importer

Delivered Duty Paid is the most generous offer a seller can make: the buyer receives the goods with duties and import taxes paid. Customers love it. It is also the rule that most often surprises the seller.

To deliver DDP, you usually become the importer of record in the destination country. That can mean registering for VAT there, carrying liability for the customs classification and value, and absorbing any change in duty rates between the quote and the delivery. I have written about how quickly tariff changes can erase a margin. Under DDP, that change lands entirely on you. Never offer DDP into a market where you have not already cleared goods yourself. If the customer wants door delivery but you cannot handle import formalities, DAP gives them the convenience without the tax liability.

Rule 5: Put the Incoterm into the price, not next to it

The same product has a different price under every Incoterm, because each one moves a different set of costs onto your side. A price quoted FCA Bilbao and a price quoted DAP Miami are not the same offer with a different label. One includes ocean freight, insurance, destination handling and inland delivery; the other does not.

Freight volatility makes this concrete. When carriers diverted around the Cape of Good Hope after the Red Sea attacks began in late 2023, voyages between Asia and Europe grew by roughly ten days or more and spot rates rose sharply. Sellers who had fixed CIF or DAP prices months earlier absorbed the increase. Every Incoterm that includes main carriage is also a freight bet; price it like one. Build the cost stack for each term, as I described in the margin stack for export pricing, and add a validity date to any quote that includes freight.

Rule 6: Write the full term, every time

"FOB" on its own is not a contract term. The correct form names the rule, the precise place and the edition: for example, "FCA Seller's warehouse, Azagra, Spain, Incoterms 2020". Leave out the place and you have left open the exact point where risk passes. Leave out the edition and an older version may be argued to apply.

Also check that the term matches everything else: the insurance certificate, the transport document, the letter of credit and your own customs declaration. Under CIF the seller only has to buy minimum cover, Institute Cargo Clauses (C), while CIP requires the broader Clauses (A), at 110% of the contract value in both cases. If the documents and the Incoterm disagree, the bank and the insurer will read the documents.

Key Takeaways

• Incoterms decide delivery, risk and cost; they do not decide payment, ownership or price.
• Paying for the freight is not the same as carrying the risk; under CIF the buyer carries the risk from loading.
• For containerized cargo, use FCA, CPT and CIP instead of FOB, CFR and CIF.
• EXW is best kept for domestic sales; it can leave a European seller without proof of export for VAT.
• Offer DDP only where you can legally act as the importer and absorb duty changes.
• Price each Incoterm separately and put a validity date on any quote that includes freight.
• Always write rule, named place and edition: "FCA Azagra, Spain, Incoterms 2020".

Frequently Asked Questions

What are Incoterms and what do they define?

Incoterms are 11 standard trade rules published by the International Chamber of Commerce that define where the seller delivers, where risk passes to the buyer and who pays each cost of transport and customs. The current version is Incoterms 2020. They do not cover payment terms or the transfer of ownership.

Which Incoterm is most responsible for the seller?

DDP, Delivered Duty Paid, puts the most responsibility on the seller. The seller pays all transport to the named destination, carries the risk until delivery and also clears the goods for import, paying duties and taxes. EXW is the opposite extreme, with the minimum obligation for the seller.

What does the Incoterm FOB mean?

FOB means Free On Board. The seller clears the goods for export and delivers them on board the vessel nominated by the buyer at the named port of shipment, and risk passes to the buyer at that moment. FOB is designed for sea and inland waterway transport and is not recommended for containers.

What is the difference between CIF and FOB shipping?

Under FOB the buyer pays the ocean freight and insurance, while under CIF the seller pays freight and minimum insurance to the destination port. In both cases, however, the risk passes to the buyer once the goods are loaded on board at the origin port.

What is the difference between DDP and FOB shipping?

FOB ends the seller's responsibility at the port of origin, once the goods are on board. DDP extends it all the way to the buyer's named destination, including import clearance, duties and taxes. DDP is far more convenient for the buyer and far riskier for the seller.

Before You Send the Next Quote

Take your last five export quotes and check three things: is the term written in full with place and edition, does the risk point match your insurance, and would FCA serve you better than FOB or EXW? Then read our six rules for export payment terms, because a perfect delivery term is worth little if the buyer never pays. To see how we trade across borders, discover the Manzanos Enterprises group.