What Do FOB, CIF, EXW and DDP Mean? Incoterms Explained for Importers

What Are Incoterms and Why Do They Matter?

Incoterms (International Commercial Terms) are a set of 11 standardised trade rules published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers in international transactions — specifically, who pays for transport, insurance, and customs clearance at each stage of the journey.

The current version is Incoterms 2020, which came into effect on 1 January 2020 and remains the applicable standard for international trade in 2026.

Incoterms matter because they directly affect your landed cost — the total cost of getting goods from the supplier's premises to your warehouse. Choosing the wrong Incoterm, or misunderstanding what it covers, can lead to unexpected costs, double-paying for services, or gaps in insurance coverage.

The 11 Incoterms 2020 Rules

The 11 rules are divided into two groups:

Rules for any mode of transport (including sea, air, rail, and road):

• EXW (Ex Works)
• FCA (Free Carrier)
• CPT (Carriage Paid To)
• CIP (Carriage and Insurance Paid To)
• DAP (Delivered at Place)
• DPU (Delivered at Place Unloaded)
• DDP (Delivered Duty Paid)

Rules for sea and inland waterway transport only:

• FAS (Free Alongside Ship)
• FOB (Free On Board)
• CFR (Cost and Freight)
• CIF (Cost, Insurance, and Freight)

The 4 Most Common Incoterms for Importers

While all 11 terms have their uses, four dominate international import transactions. Understanding these four covers the vast majority of situations you will encounter.

EXW — Ex Works

What it means: The seller makes the goods available at their premises (factory, warehouse). The buyer is responsible for everything from that point — loading, export clearance, transport to the port, ocean or air freight, import clearance, and delivery to the final destination.

Who pays what:

Where risk transfers: At the seller's premises, when goods are made available for collection.

Pros:

• Maximum control over the entire supply chain
• You choose every service provider and can negotiate rates
• Often the lowest product price from the supplier (since they include no logistics costs)

Cons:

• You handle export clearance in the supplier's country, which can be complicated (some countries require a local entity to file export declarations)
• Maximum responsibility and complexity
• You bear all risk from the moment goods leave the factory

Best for: Experienced importers with established logistics networks who want full control and cost transparency.

Practical note: EXW is theoretically simple but practically awkward. In many countries, the buyer (a foreign company) cannot easily arrange export clearance. For this reason, many trade professionals recommend FCA as a better alternative to EXW.

FOB — Free On Board

What it means: The seller delivers the goods onto the vessel at the named port of shipment. Once the goods are loaded on board, risk and cost transfer to the buyer.

Who pays what:

Where risk transfers: When the goods are loaded on board the vessel at the port of origin.

Pros:

• Clear division of responsibilities — the supplier handles everything up to the ship
• You control the main freight, so you can negotiate rates and choose routes
• The most commonly used term for sea freight imports — widely understood by all parties
• Easier than EXW because the supplier handles export clearance

Cons:

• Only applicable to sea freight (not air or road)
• You need to arrange and pay for ocean freight, insurance, and UK-side logistics

Best for: Most importers shipping by sea. FOB gives you a good balance of control and simplicity. It is the standard term for trade between the UK and Asia.

CIF — Cost, Insurance, and Freight

What it means: The seller arranges and pays for the main freight and basic cargo insurance to the named port of destination. However, risk transfers to the buyer when the goods are loaded onto the vessel at the origin port — the same transfer point as FOB.

Who pays what:

Where risk transfers: When the goods are loaded on board the vessel at the port of origin (same as FOB, despite the seller paying for freight and insurance).

Pros:

• Simpler for the buyer — fewer logistics to arrange
• The supplier handles freight booking and insurance
• The CIF value is used as the customs value for duty calculation in most countries, making it straightforward

Cons:

• You have less control over freight costs (the supplier may mark up the shipping)
• The insurance provided is typically minimum cover (Institute Cargo Clauses C) — you may want more comprehensive cover
• Risk transfers at origin, not destination, despite the seller paying freight. This confuses many importers
• Only applicable to sea freight

Best for: Importers who prefer simplicity and want the supplier to handle freight arrangements. Common in commodity trades and when buying from suppliers who offer competitive shipping rates.

Important: Many importers mistakenly believe CIF means the seller bears risk until the goods reach the destination port. This is wrong. Under CIF, you bear the risk during the sea voyage — the seller simply pays for the transit on your behalf. If goods are damaged at sea, it is the buyer's risk (though the insurance the seller arranged should cover it).

DDP — Delivered Duty Paid

What it means: The seller delivers the goods to the buyer's premises (or another named destination), cleared for import, with all duties and taxes paid. This is the maximum obligation for the seller.

Who pays what:

Where risk transfers: At the named destination, when the goods are made available to the buyer.

Pros:

• Simplest option for the buyer — you pay one price that includes everything
• No customs paperwork or logistics to manage
• No surprises at the border

Cons:

• Highest product price (all logistics and duty costs are built in, often with margin)
• You have no visibility into individual cost components
• The supplier must register for VAT in the UK (or use an intermediary) to handle import VAT
• Potential issues with Postponed VAT Accounting — if the supplier handles import clearance, you may not be able to use PVA, affecting your cash flow
• You cannot claim preferential duty rates yourself — you are relying on the supplier to do so

Best for: Small or infrequent importers who want a simple, all-inclusive price. Also common for e-commerce and sample shipments.

Warning: DDP can be more expensive than it appears. Because the supplier bundles all costs into one price, they may add margin on freight, duty, and handling that you cannot see. For regular, high-volume imports, FOB or CIF with your own logistics arrangements is almost always more cost-effective.

Comparison: Cost Responsibility by Incoterm

How Your Incoterm Choice Affects Landed Cost

The Incoterm you agree with your supplier directly determines which costs appear on your landed cost calculation.

Under FOB, you need to add freight, insurance, duty, VAT, and local delivery costs to the supplier's price to get your true landed cost.

Under CIF, freight and insurance are already included in the supplier's price, so your additions are duty, VAT, and local delivery.

Under DDP, the supplier's price is your landed cost (assuming they have accurately accounted for all charges).

Use the Import Calculator on LandedCost.co to model your landed cost under different Incoterms and shipping scenarios. This helps you compare supplier quotes on a like-for-like basis.

The Other 7 Incoterms

While FOB, CIF, EXW, and DDP cover most import scenarios, the remaining seven terms serve specific purposes:

FCA (Free Carrier) — the seller delivers goods to a carrier at a named place. More flexible than FOB and works with any transport mode. Increasingly recommended over EXW.

FAS (Free Alongside Ship) — the seller delivers goods alongside the vessel at the port. The buyer pays for loading. Rarely used in modern trade.

CFR (Cost and Freight) — like CIF but without the seller arranging insurance. The buyer arranges their own cargo insurance.

CPT (Carriage Paid To) — the seller pays freight to the destination, but risk transfers when goods are handed to the first carrier. Works with any transport mode.

CIP (Carriage and Insurance Paid To) — like CPT but the seller also arranges insurance. Under Incoterms 2020, CIP requires maximum cover (Institute Cargo Clauses A).

DAP (Delivered at Place) — the seller delivers to a named destination, ready for unloading, but import clearance and duty are the buyer's responsibility. Useful when you want door delivery but need to control duty payments.

DPU (Delivered at Place Unloaded) — the seller delivers and unloads at the destination. The only Incoterm where the seller is responsible for unloading.

Common Negotiation Points with Suppliers

"My supplier only quotes EXW — can I negotiate?"

Yes. Most suppliers can quote under different Incoterms. If they normally quote EXW, ask for an FOB or CIF quote. They already have relationships with freight forwarders and can often get competitive rates. Compare their CIF price against your FOB price plus your own freight quote to find the better deal.

"Should I let the supplier arrange freight?"

It depends on volume. For small shipments or new supplier relationships, letting the supplier handle freight (CIF or CFR) can be simpler. For regular, high-volume shipments, arranging your own freight (FOB) usually saves money because you can negotiate volume rates with your own forwarder.

"What if my supplier wants DAP but I want FOB?"

The Incoterm is a negotiation point, not a fixed rule. Discuss with your supplier which term works best for both parties. Consider the total cost, not just the product price — a lower EXW price with expensive buyer-arranged freight may cost more than a higher CIF price.

"Is the cheapest Incoterm always the best?"

No. The cheapest product price (EXW) comes with the most logistics work and risk. A slightly higher FOB or CIF price that includes export handling and freight may save you money and time overall, especially if the supplier has better freight rates than you can negotiate independently.

Matching Incoterms to Your Landed Cost Model

When using the Import Calculator or managing shipments through Shipment Management, always specify the correct Incoterm. This ensures your landed cost calculation includes only the costs you actually pay, avoiding double-counting or missing costs.

Your Incoterm determines the customs value used to calculate duty. For most imports into the UK, the customs value is the transaction value adjusted to a CIF basis. If you buy FOB, customs will add notional freight and insurance to determine the value for duty purposes. If you buy CIF, the invoice value is used directly.

Understanding this relationship between Incoterms and customs valuation is essential for accurate landed cost calculations and for avoiding overpaying duty on inflated declared values.

Calculate Your Landed Cost Under Any Incoterm

Use the Import Calculator to model how different Incoterms affect your total landed cost. For a breakdown of the duty and VAT component, check the Duty & Tax calculator.

Related reading: See our full guide on how to calculate landed cost with a worked example, or learn how the difference between landed cost and invoice cost affects your pricing.