Incoterms explained for B2B purchasing

Table of Content

• What Are Incoterms? 
• The 11 Incoterms Explained 
• Cost and Risk at a Glance 
• How to Choose the Right Incoterm 
• Common Mistakes to Avoid with Incoterms 
• Getting It Right in Your Contracts 

What Are Incoterms? 

Incoterms, short for International Commercial Terms, are standardised trade terms published by the International Chamber of Commerce (ICC). The current version, Incoterms® 2020, defines 11 terms. Each one answers two questions:  

1. who pays for each stage of the shipment, and  
2. at what point the risk of loss or damage passes from seller to buyer. 

The misunderstanding most buyers run into is around price. For example, a supplier quoting EXW (Ex Works) will show a lower number than one quoting DDP (Delivered Duty Paid), not because they are cheaper, but because EXW excludes almost every logistics cost: freight, cargo insurance, import clearance, customs duties. The buyer inherits all of it. Comparing those two quotes side by side is comparing a purchase price against a landed cost, without realising it. 

Before you sign, calculate the full landed cost: purchase price + every cost to get the goods through customs and into your facility. That is the only number worth negotiating around. 

The 11 Incoterms Explained 

They incoterms are split into two groups. 

Seven incoterms terms apply to any transport mode: EXW, FCA, CPT, CIP, DAP, DPU, DDP. These are the terms built for the way most goods move today, including containerised and multimodal transport. 

Here is the breakdown of the 7 Incoterms for any mode of transport, ranked from least obligation to most obligation for the seller: 

• EXW (Ex Works): The seller makes goods available at their premises. That is where their responsibility ends. In practice, the buyer handles everything: loading, export clearance, freight, cargo insurance, import clearance, and customs duties.  It is the highest-responsibility term for buyers, and export clearance in many countries legally requires the seller's cooperation regardless. 
• FCA Incoterms (Free Carrier): The seller delivers goods to a named carrier at a named place, completing export clearance. Risk transfers there. FCA is the most practical alternative to EXW for containerised cargo, and gives buyers control over carrier selection without the full burden of EXW. 
• CPT (Carriage Paid To): The seller pays for the international freight to the named destination port or hub, but the risk transfers to the buyer as soon as the goods are handed over to the very first carrier. 
• CIP (Carriage and Insurance Paid To): This matches CPT exactly, but with one major difference: the seller is also required to purchase high-level insurance coverage (Institute Cargo Clauses A) to protect the buyer's risk during transit. 
• DAP (Delivered At Place): The seller handles all transport up to the final destination address, ready for unloading. Risk and costs transfer to the buyer only when the truck or vessel arrives, and the buyer is responsible for import clearance and duties. 
• DPU (Delivered at Place Unloaded): The seller takes care of everything up to the destination and is also responsible for physically unloading the goods from the transport vehicle. Risk transfers to the buyer only after unloading is complete. 
• DDP (Delivered Duty Paid): The seller assumes maximum responsibility. The seller manages the entire journey, handles export and import clearance, pays all duties and taxes, and delivers the goods to the buyer's destination, ready for unloading. 

Four apply to sea and inland waterway only: FAS, FOB, CFR, CIF. These were designed for bulk cargo loaded loose directly into a ship's hold. They made sense before containerisation. They do not map cleanly onto how containers actually move, where goods pass through inland depots and container yards long before reaching the vessel. Using sea-only terms for container shipments creates coverage gaps that are difficult to resolve after the fact. The practical rule: if your goods are moving in a container, use Group 1 terms. 

• FAS (Free Alongside Ship): This term applies to sea and inland waterway transport only. The seller places goods alongside the vessel at the named port. Designed for bulk cargo. Not appropriate for container shipments. 
• FOB (Free On Board): This term applies to sea and inland waterway transport only. The seller loads goods on board the vessel. One of the most commonly used and misused Incoterms. For containerised cargo, containers are handed to the carrier at an inland depot, not loaded at quayside. FOB does not clearly cover the gap between the depot and the vessel. Use FCA instead. 
• CFR (Cost and Freight): This term applies to sea and inland waterway transport only. The seller pays freight to the destination port, but risk transfers when goods are loaded at origin. The buyer bears risk for the main voyage despite having no control over carrier selection. Suitable for bulk cargo only. 
• CIF (Cost, Insurance and Freight): This term applies to sea and inland waterway transport only. The seller pays freight and provides cargo insurance to the destination port. Risk still transfers at origin. One caveat: CIF requires only minimum insurance under Institute Cargo Clauses C, which excludes many common risks. Assuming CIF means full coverage is one of the costliest mistakes B2B buyers make. 

Incoterms Table: Cost and Risk at a Glance 

The table below shows who pays for what under the seven most used Incoterms, and where your risk begins. 

*Neither DAP nor DDP legally mandates the seller to provide cargo insurance, though it is commercially standard practice for sellers to include it. The contract should specify coverage level. 

Seller obligation spectrum: EXW → FCA → CRF→ CFR/CPT → CIF/CIP → DAP → DPU → DDP (Lowest → Highest) 

How to Choose the Right Incoterm 

Choosing an Incoterm is not just a logistics decision. It is an honest assessment of what your business can actually handle. 

• Your logistics capability. Businesses with strong in-house logistics or a reliable customs broker can take on more responsibility (FCA, CPT) and reduce cost. New to a trade lane? DAP or DDP keeps it simple while you build experience. 
• Nature of goods. High-value shipments warrant comprehensive cargo insurance: CIP or a self-arranged policy. Bulk cargo on dedicated sea routes suits FOB or CFR. Everything containerised should use Group 1 terms. 
• Transport mode. For multimodal transport and containers, always use Group 1 terms. Sea-only terms (FOB, CFR, CIF) are for bulk cargo only. 
• Customs capability. Import clearance is the buyer's responsibility under most terms. If you don't have a reliable customs broker in place, or you're importing from a new market, start with DAP to manage risk, then move to FCA or CPT as your capability grows. 

When sending your next RFQ, include the Incoterm alongside your product specifications. Suppliers can then quote on the same basis.

Common Mistakes to Avoid with Incoterms 

These mistakes are not rare. They show up in contracts every day, across every industry and trade lane.  

• Agreeing price before Incoterm. Price without an Incoterm is incomplete. You can't compare supplier quotes using different terms without normalising to a common landed cost basis first. 
• Underestimating EXW. EXW gives the buyer total control and total responsibility. Many buyers don't account for the full cost of managing export clearance, cargo insurance from day one, and every logistics leg. EXW works well when you have the logistics infrastructure to handle every step. 
• Assuming CIF means full coverage. CIF insurance covers the minimum. Clauses C excludes damage from improper stowage, many weather events, and other common risks. If your goods are high-value or fragile, arrange your own policy or negotiate CIP. 
• Confusing "delivered" with DDP. DAP and DPU include delivery but not import clearance or customs duties. Only DDP covers everything to your door with duties paid. 
• Vague named place. The named place is as important as the term itself. "DAP Hamburg" is ambiguous. "DAP Buyer's Warehouse, Logistics Park, Hamburg" is not.  
• Missing version year. Specifying the version year matters: FCA Shanghai, Incoterms® 2020. Contracts that omit the version year are interpreted under whichever version a court decides applies, which may not be the current one. 
• Using sea-only terms for containers. FOB, CFR, and CIF don't fit how containers move. Use FCA, CPT, and CIP instead. 

Getting It Right in Your Contracts 

The ICC's recommended format is simple: 

[Incoterm] [Named Place], Incoterms® 2020 

For example: CIP Rotterdam Port, Incoterms® 2020 or DDP Buyer's Warehouse, Munich, Incoterms® 2020. 

Three things are worth confirming before a supplier contract is finalised: 

1. Incoterm and named place: precise and agreed in writing 
2. Cargo insurance: policy start point matches your risk transfer point, with no gap 
3. Payment terms and documentation: if using a letter of credit, your bank will require a bill of lading with specific notations; FCA under Incoterms 2020 includes a provision for this 

Conclusion 

Incoterms determine how much you pay, who carries the risk, and what happens when something goes wrong. Before finalizing any purchase agreement, vetting these details protects your profit margins. 

Ensure your procurement contracts answer these four definitive questions: 

• Is the correct Incoterm and its version year written explicitly into the contract? 
• Is the designated handover location precise down to the specific warehouse or terminal address? 
• Have you aligned your cargo insurance to eliminate any coverage gaps at the point of risk transfer? 
• Does your team or logistics partner have the practical capability to manage the required export or import clearance? 

Read more about procurement trends, global sourcing strategies and supplier contracts on Inside Business, the B2B blog from europages. 

• Agile procurement organisations: flexible option | europages 
• Procurement: new parameters for purchasing | europages 
• How to Find a Reliable Supplier in Europe| europages 

FAQ 

What are Incoterms?  
Incoterms (International Commercial Terms) are standardised trade terms published by the ICC (International Chamber of Commerce) that define who pays for each stage of a shipment and at what point risk passes from seller to buyer. 

What is the difference between EXW and DDP?  
EXW (Ex Works) places almost all logistics responsibility on the buyer. DDP (Delivered Duty Paid) places it on the seller, including import clearance and customs duties. They represent opposite ends of the responsibility spectrum. 

Can I use FOB for container shipments?  
FOB (Free On Board) was designed for bulk cargo loaded directly onto a vessel. For containerised goods, which are handed to a carrier at an inland depot rather than loaded at quayside, FCA (Free Carrier) is the more appropriate term. 

What does CIF insurance actually cover?  
CIF (Cost, Insurance and Freight) requires only minimum insurance under Institute Cargo Clauses C, which excludes many common risks including damage from improper stowage and certain weather events. For high-value or fragile goods, a separate policy or CIP (Carriage and Insurance Paid To) is worth considering. 

Why does the named place matter?  
The named place defines exactly where responsibility and risk transfer between seller and buyer. A vague location such as "DAP Hamburg" can lead to disputes. A precise address removes ambiguity from the outset.