Incoterms in plain English: EXW, FOB, CIF, DAP, DDP and the rest

Incoterms are the three-letter trade terms on a quote, such as FOB or DDP. They are published by the International Chamber of Commerce (ICC), and the current edition is Incoterms 2020. Each one says where the seller's job ends and yours begins: who books and pays for each leg of the trip, and the point where the risk of loss or damage passes from the seller to you.

They do not say when the goods become yours legally, how you pay, or what happens if the goods are faulty. That belongs in your contract or purchase order.

Why it matters

• Two quotes on different Incoterms are not comparable. A FOB price and a DDP price for the same product are different things.
• It decides who books the freight and the insurance, and who deals with customs at each end.
• It moves risk. If goods are damaged at sea, the Incoterms rule decides whose problem that is, which is why it pairs with insurance.

Always write the place and the edition

An Incoterms rule only works with a named place and the edition, for example "FOB Ningbo Incoterms 2020" or "DAP Melbourne warehouse, (your address), Incoterms 2020". Without the place, nobody knows where the seller's job ends.

The eleven rules

The ICC splits them into rules for any mode of transport, and rules only for sea and inland waterway.

Any mode of transport

• EXW (Ex Works): the seller makes the goods available at its own premises. You do everything else, including loading and export clearance in China. The least work for the seller and the most for you.
• FCA (Free Carrier): the seller hands the goods, cleared for export, to the carrier you nominate at the named place. Unlike FOB, the ICC says it can be used for any kind of transport.
• CPT (Carriage Paid To): the seller pays the main transport to the named place, but risk passes to you when the goods are handed to the first carrier.
• CIP (Carriage and Insurance Paid To): as CPT, and the seller also insures the goods. Under Incoterms 2020 the cover for CIP is the wider level, Institute Cargo Clauses (A) or similar.
• DAP (Delivered at Place): the seller delivers to the named place, ready for unloading. You pay import duty and taxes and clear customs.
• DPU (Delivered at Place Unloaded): as DAP, but the seller also unloads. It is the old DAT rule, renamed in Incoterms 2020.
• DDP (Delivered Duty Paid): the seller delivers to the named place, cleared for import, with duty and taxes paid. The most work for the seller.

Sea and inland waterway only

• FAS (Free Alongside Ship): the seller places the goods alongside the ship at the named port.
• FOB (Free On Board): the seller loads the goods on board the ship at the named port in China, cleared for export. You book and pay the sea freight and everything after.
• CFR (Cost and Freight): the seller pays the sea freight to the named Australian port, but risk passes to you once the goods are on board in China.
• CIF (Cost, Insurance and Freight): as CFR, and the seller insures the goods. The default cover for CIF is the narrower level, Institute Cargo Clauses (C), so check what the policy covers and ask for more if you need it.

The traps in CFR and CIF

With CFR and CIF the seller pays the freight but the risk is already yours from the port in China. If the goods are lost at sea, the loss is yours, not the seller's.

• Under CFR the seller does not have to insure the goods at all. If you want cover, you arrange it yourself from the moment the goods are on board. If you do not, there may be no insurance to claim on.
• Under CIF the seller insures, but often at the minimum level, in the seller's name, with a claims process you have never seen. Ask for the policy before you agree, and top it up if you need more.

DDP into Australia

DDP sounds simplest: one price to your door. Check three things first.

• Who is the importer? Under DDP the seller, or its agent, clears the goods into Australia and pays the duty and GST.
• Who gets the GST credit? The ATO says you can claim a GST credit for goods you import when you make the taxable importation, are registered for GST, import for a creditable purpose and hold the import documents. If the seller makes the importation, ask your accountant whether you can claim that GST at all before you agree.
• Is the duty right? If a cheap DDP quote is cheap because of a low declared value or a wrong classification, the problem can land on whoever is the importer.

How Incoterms meet Australian customs value

The ABF works out duty on the customs value, which is usually the transaction value: the price paid for the goods. Its fact sheet says that value does not include the cost of international freight and insurance, and its duty calculation guide describes the customs value as generally the FOB value. So:

• An FOB price is close to the customs value already.
• With an EXW price, the costs of getting the goods to the port and loaded in China usually need to be added.
• With a CFR or CPT price, the ABF deducts the overseas freight. With a CIF or CIP price, it deducts the overseas freight and insurance.
• A DDP price also takes in costs after the goods arrive, such as landing charges, delivery in Australia, and the duty and GST themselves. The ABF's calculation lets landing charges and other costs be deducted as well as freight and insurance, so a DDP price cannot be turned into a customs value by taking off freight and insurance alone.
• So whatever the rule, ask the seller for an itemised breakdown on the invoice: the goods, overseas freight, insurance, and every Australian cost in a delivered price. Then have your customs broker reconcile it to the customs value before the goods are entered.
• If you paid for moulds, tools or similar items the factory used to make your goods, the ABF says those production assists must be included in the value.
• The customs value is in Australian dollars, converted at the exchange rate that applies on the day of export.

GST is then worked out on the value of the taxable importation, which adds duty and the transport and insurance to Australia back in. The GST and duty worked example walks through it.

Decision rules

• If you have a freight forwarder, ask suppliers for FOB (or FCA) so you control freight and can compare quotes.
• If this is your first import and you have no forwarder yet, a delivered price (DAP) can be simpler, but check who clears customs and that the freight is shown separately.
• If you want DDP, confirm in writing who the importer is and who can claim the GST.
• If a quote is CIF or CIP, ask for the insurance policy and what it covers.
• If a quote is CFR or CPT, arrange your own cargo insurance before the goods are loaded, or accept that there is no cover.
• Ask every supplier for the same rule and the same named place, then compare.

Common mistakes

• Comparing an EXW price with a DDP price.
• Writing "FOB China" with no named port.
• Thinking CIF means the seller carries the risk all the way to Australia.
• Assuming a CFR shipment is insured. The seller does not have to insure it.
• Using an Incoterms rule as a payment term. It is not one.
• Accepting DDP without asking who the importer is.
• Letting the freight, insurance and Australian costs be hidden in a CIF or DDP price, so the customs value cannot be worked out.
• Leaving a tooling or mould payment out of the customs value.

Next step

Ask for your quote on one Incoterms rule using the RFQ template, then run it through the landed cost calculator. For whether to ship LCL or FCL, see LCL vs FCL for a first order.

Common questions