Incoterms for Dummies

What Are Incoterms and Why Should You Care?

Picture this: You're manufacturing something in another country, and suddenly you're faced with terms like "FOB," "CIF," and "EXW." Feels like trying to decode a secret language, right? Don't worry - you're not alone.

Incoterms (International Commercial Terms) are like the "rules of the road" for international shipping. They tell you who's responsible for what during the shipping process, from the moment goods leave the seller until they reach the buyer.

Think of them as a universal shipping language that helps everyone involved know exactly what they're responsible for.

Incoterms 101: The Basics Made Simple

Here's what Incoterms actually handle:

• Who pays for shipping

• Who's responsible if something goes wrong

• Who handles customs and paperwork

• When the responsibility transfers from seller to buyer

• Who needs to get insurance

It's like a detailed roadmap for your shipment's journey - every step is clearly marked, and everyone knows their role.

The "Big Four" Incoterms You Need to Know

Let's break down the most common Incoterms you'll encounter:

1. EXW (Ex Works) - "The DIY Option"

• The seller just gets your stuff ready at their location

• You handle everything else (think: picking it up, shipping it, customs, etc.)

• Best when: You want complete control and the lowest purchase price

1. FOB (Free on Board) - "The Classic Sea Shipping Choice"

• The seller delivers goods to the port and loads them on the ship

• You handle the main shipping costs and import duties

• Best when: You're shipping by sea and want a fair split of responsibilities

1. CIF (Cost, Insurance & Freight) - "The All-Inclusive Sea Option"

• The seller handles shipping costs and insurance to your port

• You take care of unloading and customs clearance

• Best when: You want more services included in your purchase price

1. DDP (Delivered Duty Paid) - "The Full-Service Option"

• The seller handles everything right to your door

• Includes all shipping, customs, and duties

• Best when: You want the simplest, most hands-off experience

How to Choose the Right Incoterm: A Simple Guide

Ask yourself these three questions:

1. How much control do you want over the shipping process?

2. How much responsibility are you willing to take on?

3. What's your budget looking like?

Here's a quick cheat sheet:

• Want the lowest upfront price? Choose EXW

• Shipping by sea and want balance? Go with FOB

• Want more protection? Pick CIF

• Want zero hassle? DDP is your friend

Common Mistakes to Avoid

1. Not Getting It in Writing Always make sure your chosen Incoterm is clearly stated in your contract. Don't assume everyone's on the same page.

2. Forgetting About Insurance Just because an Incoterm includes "insurance" doesn't mean you have enough coverage. Always double-check the details.

3. Mixing Up Different Versions Incoterms get updated every ten years. Make sure you specify which version you're using (like "Incoterms 2025").

   
   
   

Real-World Example: Let's Break It Down

Let's say you're importing chairs from China to the USA:

With FOB (Free on Board):

• Chinese supplier delivers chairs to Shanghai port

• They load them onto the ship

• You pay for the ocean freight

• You handle import duties and final delivery

• If anything happens after loading in Shanghai, it's your responsibility

This is why FOB is popular - it creates a clear handoff point where responsibilities switch from seller to buyer.

Quick Tips for Success

• Always specify the exact location (like "FOB Shanghai Port")

• Get insurance even if it's not required by your Incoterm

• Keep all documentation organized and accessible

• Work with experienced shipping partners who understand Incoterms

• When in doubt, ask for clarification before signing anything

Need More Help?

Remember: Incoterms might seem complicated at first, but they're actually designed to make international shipping easier. Start with the basics, and you'll be speaking the language of international shipping in no time.

You can try Cubic's free Incoterms Calculator to get started!

Consider working with a freight forwarder or logistics expert for your first few shipments. They can guide you through the process and help you avoid common pitfalls.