How to Choose the Right Incoterm for Your Shipment

Most companies pick an Incoterm out of habit. The rule on the last contract goes onto the next one, and nobody revisits it until something goes wrong. That is how importers end up on EXW terms they cannot lawfully perform, and how exporters end up on DDP in countries where they cannot reclaim the tax.

Choosing deliberately takes about ten minutes. Here is the sequence we teach.

Question one: is it containerized

Answer this first, because it removes four options immediately.

FAS, FOB, CFR and CIF were written for cargo loaded across a ship's rail. They assume the seller controls the goods until they are on the vessel. With a container that is simply not true. The box is handed over at a yard or terminal days earlier, and from that moment the seller can neither protect it nor inspect it, yet under FOB the seller carries risk until loading.

For containers use FCA, CPT, CIP, DAP, DPU or DDP. Keep the four sea rules for bulk cargo, project cargo and anything genuinely loaded loose onto a vessel.

Question two: who can clear customs at each end

A legal question more than a commercial one.

Under EXW the buyer is responsible for export clearance in the seller's country. In many jurisdictions a foreign buyer with no local entity cannot file an export declaration at all. The practical result is that the seller does it anyway, informally, with no contractual basis and no protection. FCA fixes this properly: the seller clears for export, everything else is unchanged, and the cost to the seller is small.

The mirror image applies to DDP. The seller becomes responsible for import clearance, duty and tax in the buyer's country. In several Gulf markets a nonresident seller cannot register for VAT and therefore cannot recover import VAT, which turns a recoverable tax into a real cost. Before quoting DDP, check whether you can actually perform it.

Question three: who is better at arranging carriage

Whoever has the better freight rates and the better carrier relationships on a given lane should arrange that leg. This is a commercial judgement rather than a rule.

A large importer with negotiated rates is usually better off buying FCA and controlling the main carriage itself. A small importer without freight buying power is often better off with CPT or CIP and letting a larger seller use its rates. The same logic runs the other way for exporters.

Be honest about the comparison. A seller quoting CIF is including freight and insurance in the price, and that margin is rarely visible. Buyers who move from CIF to FCA and tender the freight themselves frequently find the landed cost drops.

Question four: where do you want risk to sit

Under eight of the eleven rules risk passes at origin. Only DAP, DPU and DDP keep the seller on risk through the main journey.

So if you are a buyer who wants the seller carrying the goods until they arrive, CIF and CPT will not do it, whatever they cost. You need a delivered rule. If you are a seller who does not want exposure on a long ocean leg, avoid the delivered rules and price accordingly.

Check this against your cargo insurance too. If you already hold an open marine policy, taking risk earlier costs you very little and buying CIP cover from the seller may be duplication.

Sensible defaults

These are starting points, not prescriptions.

• Gulf importer, containerized, has freight rates. FCA at origin, and control the main carriage.
• Gulf importer, no freight buying power. CIP to a named destination, which gives all risks cover under the 2020 edition.
• Exporter wanting a simple handover. FCA at your own premises or a named terminal.
• Exporter selling a landed price with local presence. DAP, or DDP only if you can genuinely clear and recover tax.
• Bulk commodity by sea. FOB or CFR, which is what those rules were built for.

Write it properly

Whatever you choose, name the rule, the place and the edition. CIP, Jebel Ali Warehouse 12, Dubai, Incoterms 2020 leaves nothing to argue about. CIP Dubai leaves the delivery point and the insurance level open.

Our Mastering Incoterms 2020 course runs this decision process against real shipping documents, and the Incoterms guide sets out all eleven rules. If letters of credit are part of your process, read how Incoterms and letters of credit interact before you commit to a rule.

Frequently asked questions

Which Incoterm is best for an importer?

There is no single best rule. Importers with their own freight rates usually do better on FCA and controlling the main carriage. Importers without buying power often prefer CIP, which includes all risks insurance under the 2020 edition.

Why is EXW risky for international buyers?

EXW makes the buyer responsible for export clearance in the seller country, which a foreign buyer often cannot legally complete. FCA moves that duty to the seller and changes little else.

When should we avoid DDP?

Avoid DDP where you cannot register for tax in the destination country. A nonresident seller may be unable to recover import VAT, which turns a recoverable tax into a real cost.

Can we use FOB for container shipments?

You can, but you should not. Risk stays with the seller until loading even though the container left the seller control days earlier. FCA is the correct rule for containers.

Does the seller carry risk if the seller pays the freight?

Not necessarily. Under CPT, CIP, CFR and CIF the seller pays for carriage while the goods travel at the buyer risk. Cost and risk are separate questions.