Key takeaways
- FOB is the default for sea freight and puts risk on the buyer at the port.
- DDP is the simplest for the buyer and carries the highest hidden cost.
- Insurance and customs clearance sit differently under each term.
Incoterms are three-letter codes that define where the seller’s obligation ends and the buyer’s begins. They decide who books the freight, who insures the cargo, who clears customs and, most importantly, at what point the risk transfers. A price quoted FOB and a price quoted DDP are not comparable numbers.
1. EXW
Ex works means the buyer collects at the factory door and handles everything after. It is the cheapest quoted price and the most work for the buyer, who must arrange export clearance, freight and insurance. For a small buyer without a freight forwarder, EXW is a trap.
2. FOB
Free on board means the seller delivers to the ship at the named port and the risk transfers when the goods are on board. It is the standard for sea freight and the term most Chinese exporters quote. The buyer pays the ocean freight and the insurance.
3. CIF
Cost, insurance and freight means the seller pays to the destination port and insures the cargo. It is FOB plus freight plus insurance, and it is convenient for buyers who do not want to arrange shipping. The insurance cover is minimum, so a buyer with valuable cargo may want more.
4. DDP
Delivered duty paid means the seller delivers to the buyer’s door with duties paid. It is the simplest term for the buyer and the most expensive quote. The seller builds the duty, the freight and the risk into the price, and the buyer cannot see the breakdown.
5. Risk transfer
The risk transfers at the point named in the term, not at the point the goods arrive. Under FOB, cargo lost at sea is the buyer’s loss even though the seller booked the container. Insurance is the only protection, and it should be arranged before the goods leave.
6. Air freight
Air freight uses FCA or CIP more often than FOB because there is no ship. FCA at the airport is the air equivalent of FOB. A quotation that says FOB for an air shipment is a quotation with a term error.
7. Customs
Under DDP the seller clears customs; under FOB the buyer does. A buyer without an importer of record cannot use FOB. In the EU, the importer of record is liable for the product’s compliance, which is a responsibility that should not be taken casually.
8. Hidden costs
DDP quotes often exclude demurrage, storage and inspection fees, which appear later. FOB quotes exclude destination charges, which can be 10 to 20 percent of the freight. Ask for an all-in landed cost estimate rather than a term price.
9. Payment and terms
Incoterms do not govern payment. A 30 percent deposit and 70 percent against a bill of lading is standard for FOB. Under DDP the seller carries more risk and will ask for more of the payment earlier. The two terms should be agreed together.
10. Documentation
Every shipment needs a commercial invoice, a packing list, a bill of lading or airway bill, and a certificate of origin where required. The invoice must state the Incoterm, or the customs value is ambiguous and the clearance stalls.
11. Where it fits
Freight terms run across the vitamin C serum range; the sourcing side continues in the lead time entry.
Reference: Freight quotations and Incoterms 2020 guidance, 2025
