Incoterms: who pays for what, and where your risk ends

Three letters sit on your quotation, and most of the time they were copied from the last quotation. They look like shipping jargon, which is why they get treated as the freight forwarder's business rather than yours. The incoterm is the line in your quote that decides how much of the journey you are paying for.

What an incoterm settles#

Incoterms are published by the International Chamber of Commerce. The current edition, Incoterms 2020, has eleven terms and came into force on 1 January 2020. Each term answers two questions.

Who pays for each step between your factory floor and the buyer's warehouse: inland transport, export clearance, loading, main carriage, insurance, unloading, import duty, delivery at the far end.

Where risk passes, meaning the point after which loss or damage to the goods is the buyer's problem rather than yours.

Those two points are not always in the same place. Under CIF you pay for carriage and insurance all the way to the destination port, while risk passes to the buyer at loading. You are paying for a leg on which the goods are already at the buyer's risk. That is what the term says, and it surprises people who assume the two travel together.

The ones Indian exporters use#

EXW (Ex Works). The buyer collects from your premises and you pay almost nothing. It causes trouble on exports, because Indian export clearance formalities are far easier for you to complete than for a foreign buyer, and the paperwork trail still has to exist in your name.

FOB (Free on Board). You clear the goods for export and load them onto the vessel. Cost and risk pass at that point. It is the most common term in Indian export practice and the easiest to price, because you are quoting for a leg you control.

CFR / CIF (Cost and Freight / Cost, Insurance and Freight). You also pay the main carriage, and under CIF the insurance. Risk still passes at loading.

DAP / DDP (Delivered at Place / Delivered Duty Paid). You carry the goods to a named place in the buyer's country. Under DDP you also pay import duty and handle import clearance in a country whose rules you may not know.

Moving from EXW towards DDP takes on more cost, more risk, and more that can go wrong in a jurisdiction you do not operate in.

Two details that catch container exporters#

FOB, CFR and CIF were written for goods loaded over a ship's rail. A container leaves your hands at the terminal, often days before the vessel loads, so under those terms you carry risk over a stretch of the journey you no longer control. The ICC recommends FCA, CPT and CIP for containerised cargo for exactly that reason, and Indian exporters quote the sea terms out of habit.

CIF and CIP do not buy the same insurance. CIF obliges you to take only minimum cover, Institute Cargo Clauses (C). CIP requires the wider Institute Cargo Clauses (A). A buyer who asks for CIP and is quoted CIF pricing is being quoted for less cover than the term requires.

Where the margin quietly goes#

Quote FOB, then agree to deliver CIF at the same headline number, and you have absorbed the freight without repricing. Three places it leaks:

Freight quoted early, booked late. You priced CIF on a rate you were given six weeks ago. Rates moved. The difference comes out of your margin.

Charges at the far end. Under delivered terms, destination handling, storage and local charges are yours, billed in a currency and a market you do not follow.

Duty under DDP. You pay import duty in the buyer's country, at rates and classifications you did not verify. When an extra measure lands on your product, as with the additional US duty on Indian goods, DDP puts it on your side of the invoice.

Price each leg separately and add them, rather than adjusting one all-in number. When the buyer asks for a different term, you then know what changes.

What it does to your documents#

An FOB value and a CIF value for the same shipment are different numbers, because the CIF value contains freight and insurance. Declaring one while invoicing the other creates a difference that customs and your bank will both find.

So the term has to read the same way on your purchase order, your invoice and your shipping bill, with the value each implies. It is one of the fields that must agree across the set, and one of the likelier places the set falls apart, because the term is agreed verbally and then typed by three people. Under a letter of credit the credit states the term, and the invoice has to match it.

Choosing one#

Quote the term you can control and price accurately. For most Indian exporters selling to a buyer with their own freight arrangements, that is FOB, or FCA where the cargo moves in a container. Take on more of the journey when it wins the order and you hold a firm freight rate and known destination charges.

Before accepting DDP into a country you have not cleared goods into, get a written landed-cost figure from a customs broker there, covering duty, taxes and local charges. If nobody will put a number on it, you have your answer.