Incoterms Explained: FOB, EXW, DDP, and Who Pays for What

If you’ve ever gotten a factory quote ending in three mystery letters EXW, FOB, CIF, DDP and quietly nodded along, this guide is for you.

Those letters are Incoterms. They aren’t decoration.

They’re the single line that decides whether “the price” your supplier quoted includes shipping, insurance, and import duty or nothing past the factory door.

Get them wrong, and you sign a number that looks cheap, then get ambushed by freight, port charges, and a customs bill weeks later.

Get them right, and you can compare quotes properly, protect your margin, and stop surprise costs before they land.

This is the full walkthrough: what Incoterms are, the four terms you’ll actually meet, who pays for what in each, the trap that catches almost every apparel importer, and how to pick a term that protects your cash. No jargon dumps. Just decisions.

CHAPTER 01

What Incoterms are (and why the wrong one costs you money)?

Incoterms stands for International Commercial Terms. They’re a set of eleven standard three-letter rules published by the International Chamber of Commerce (ICC).

They exist so a buyer in London and a factory in Sialkot mean the same thing by “delivered.” Every rule answers the same three questions:

• Who pays which costs? Freight, insurance, handling, and duty each costhandling, andned to buyer or seller.
  

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• When does risk transfer? The exact point where the goods stop being the seller’s problem and become yours.
  

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• Who handles the paperwork? Export clearance at origin, import clearance at destination, and security filings.
  

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That’s it. Cost, risk, paperwork. The current edition is Incoterms 2020, in force since 1 January 2020.

The ICC revises the rulebook roughly once a decade, so this is the version your contract should name today.

What Incoterms do NOT do

This is where founders over-trust them. Incoterms do not set your price. They don’t set payment terms.

They don’t decide when ownership legally passes, and they don’t settle which country’s law governs a dispute.

All of that lives in your actual contract. An Incoterm only governs the journey of the goods.

So why does the wrong one cost you money? Because the term silently redraws the price.

An EXW quote and a DDP quote for the same hoodies can differ by 30–50%, not because one factory is dearer, but because one number stops at the factory door and the other includes freight, duty, and delivery to your unit.

Two quotes on different terms are not comparable. Full stop.

CHAPTER 02

EXW, FOB, CIF & DDP in plain terms

There are eleven Incoterms, but as an apparel founder sourcing from Asia you’ll meet four of them 90% of the time. Here they are, ranked from “you do everything” to “the seller does everything.”

The spectrum, in one line

Read left to right, the seller takes on more work, the risk-transfer point moves later in the journey, and the quote gets harder for you to pick apart. That single mental model a slider from EXW to DDP is most of what you need.

CHAPTER 03

Who handles freight, duties & risk in each

Now the money map. A shipment isn’t one cost; it’s a chain of them.

Founders budget for “the product” and “the shipping,” then get blindsided by the three buckets in the middle.

Let’s split every term into who pays each link in the chain.

The seven links in every shipment

• Origin charges local haulage to the port, terminal handling at origin.
  

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• Export clearance customs paperwork to legally leave the origin country.
  

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• Main freight: the ocean (or air) leg. Usually the biggest single line.
  

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• Insurance cover if the cargo is lost or damaged in transit.
  

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• Import duty & tax: customs duty plus your country’s sales tax/VAT at the border.
  

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• Import clearance: the paperwork and broker fees to get goods into your country.
  

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• Last-mile port to your warehouse or 3PL.

And running underneath all of it: where does risk transfer? That’s the point where, if the container sinks, it’s your loss and your insurance claim, not the factory’s.

Three things to burn in. First, notice the risk row and the cost row don’t match under CIF: the seller pays the freight, but risk sits with you the whole voyage.

Second, only DDP puts import duty and tax on the seller; under everything else, that border bill is yours.

Third, the reason EXW looks cheapest is that you’re paying for all seven links separately, often through people you haven’t hired yet.

For the deeper mechanics of freight and risk handling, and how duty gets calculated on apparel, see our foundational pieces on freight & risk and import duties.

CHAPTER 04

The container trap: why “FOB” is technically wrong for your hoodies

This is the part almost every apparel Incoterms guide gets quietly wrong, and it’s exactly the detail that makes you look like you know what you’re doing on a call.

FOB, CIF, CFR, and FAS are sea-and-inland-waterway terms only. Technically, the ICC says they should not be used for containerized cargo. Your hoodies don’t get loaded loose over a ship’s rail; they go into cartons, into a container, which is handed over at a terminal days before the ship sails.

The correct term for a container is FCA (Free Carrier). Under FCA, risk transfers when the goods are handed to the carrier at the agreed point, the container yard, or the terminal, which is how containers actually move.

So why does everyone still quote FOB?

History and banks. For years, letters of credit required an “on board” bill of lading, which FOB produced and FCA didn’t.

So exporters kept quoting FOB for containers even though it was the wrong tool.

Incoterms 2020 fixed this. Under FCA, the buyer can now instruct the carrier to issue an on-board bill of lading to the seller after loading so FCA now works with letters of credit, with none of the yard-gap risk.

The takeaway: don’t let anyone tell you FOB “covers” your container until it’s on the ship. It doesn’t. Either buy transit insurance from the factory door or ask for FCA.

CHAPTER 05

Which term suits a new importer?

There’s no “best” Incoterm only the right one for your logistics maturity. Be honest about where you are, then pick.

The pattern most brands follow: DDP for the first orders, FOB/FCA once you’ve built a forwarder relationship. You graduate toward more control as you get the infrastructure to handle it.

CHAPTER 06

Choosing terms that protect your cash

Incoterms aren’t just a logistics decision; they’re a cash-flow decision. Here’s how each shape moves money around your business.

DDP front-loads everything into one invoice

Easy to budget: one number, one payment.

But you pay the import duty before you’ve sold a single unit, and it’s buried inside the supplier’s price, where you can’t see their markup on freight and clearance.

Simple, but you’re paying for that simplicity twice in cash timing and in a margin you can’t audit.

FOB / FCA spreads costs across the journey

You pay the factory, then freight, then duty at the border in stages. More moving parts, but you shop each one, and you don’t hand a stranger a blank cheque for shipping. Better for margin, worse for simplicity.

Watch the cut-rate DDP offer

Some suppliers win DDP deals by undervaluing your goods at customs to shrink the duty.

That’s fraud committed in your name, on your import record. If a DDP price looks impossibly low, ask exactly how duty is being declared and on what value.

Get the term, the named place, and the duty basis in writing.

Mind the insurance gap

Under EXW, FCA, FOB, CFR, and CPT, you carry the risk in transit.

Don’t assume the factory’s insurance covers you after the risk transfers; it usually doesn’t.

Buy your own cargo insurance for the risk that transfers; here the risk becomes yours. A single lost container without cover can end a young brand.

CHAPTER 07

The mistakes that cost founders real money

Five errors we see again and again. Each one is avoidable in a sentence.

1. Assuming “seller pays freight” means “seller carries risk”

Under CIF (and CFR, CIP, and CPT), the seller pays the carriage, but risk is transferred at origin. If the ship goes down mid-voyage under CIF, that’s your loss and your claim even though the factory booked and paid the freight. Cost and risk are two different rows.

2. Taking EXW because it’s the lowest line

EXW looks cheapest because it excludes almost everything. You inherit origin haulage, export clearance you legally can’t do as a foreigner, and every cost after. The “saving” evaporates the moment you price the real work.

3. Comparing quotes on different terms

An FOB quote and a DDP quote are different animals. Comparing their headline prices tells you nothing. Normalise everything to landed cost per unit first.

4. Using FOB for air freight or thinking it covers a container

FOB is sea-only. For air freight, the correct term is FCA. Using FOB on an air shipment creates legal ambiguity you don’t want in a dispute. And on sea, remember: FOB doesn’t cleanly cover your container in the yard before loading.

5. Not naming the place

“FOB” on its own is incomplete. It has to be “FOB Karachi.”No named port means no defined handover point which means an argument is waiting to happen. Always: term + named place.

CHAPTER 08

How to write the term into your PO

Once you’ve chosen, spell it out properly on both the purchase order and the proforma invoice. A complete Incoterm clause has three parts: the rule, the named place, and the version.

Name the version every time. A contract that just says “FOB” without a year is technically ambiguous; older editions transferred risk differently. “Incoterms 2020” removes the doubt.

An Incoterm is not a full contract

This is the last trap. Incoterms cover cost, risk, and paperwork for the goods’ journey nothing else. They do not protect you from receiving the wrong product, a late run, or a quality miss. Spell those out separately in your agreement:

• Insurance scope: who insures, for how much, covering what.
  

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• Who books the forwarder and by when.
  

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• Delay liability: what happens if the run ships late.
  

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• QC sign-off: approval and inspection before goods leave the factory.
  

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An Incoterm says who moves the box. Your contract says what’s in it and what happens if it’s wrong. You need both.

THE SHORT VERSION

Pick the term for your margin, not the sticker

Three letters decide who pays, who’s at risk, and who does the paperwork on every order you place.

Read them as a slider from EXW (you do everything) to DDP (the factory does everything).

Start near DDP while you’re learning, move toward FOB/FCA as you build a forwarder relationship, and never compare quotes on anything but landed cost per unit.

Name the term, name the place, name the version, and insure your own goods from the moment the risk becomes yours.

Do that, and the surprise costs stop being surprises.

Which term are your factories quoting you right now, and is it the one that actually fits your setup? If you’re not sure, that’s the first thing worth fixing before your next order.

Incoterms FAQ for streetwear founders