Education — Concept

Incoterms: what they actually mean for procurement cost and risk

A three-letter code on your purchase order determines who pays freight, who bears transit risk, and who handles customs. Accepting whatever the supplier proposes adds 15-30% to your total import costs.

15–30%

Cost impact of wrong Incoterm choice

On a $500K annual import spend, that's $75K–$150K in avoidable cost — like paying for shipping twice

Incoterms 2020 rules to choose from

Ranging from EXW (buyer handles everything) to DDP (seller handles everything)

63%

Buyers defaulting to FOB/FCA

Most accept whatever the supplier proposes — without checking if it makes sense

What Incoterms Actually Define

Cost

Who pays for transport, freight, insurance, and customs. The wrong allocation can make you pay for shipping you did not budget for.

Risk

The exact point where loss/damage risk transfers from seller to buyer. If your goods are damaged before that point — not your problem. After it — entirely yours.

Clearance

Who handles export and import customs clearance. Getting this wrong means your shipment sits at the border while you scramble for paperwork.

Rule of Thumb: Match Term to Mode

Containerized ocean freight? Use FCA, not FOB. FOB was designed for bulk cargo loaded onto a ship. For containers handed to a carrier at an inland terminal, FCA is the correct term — like using the right tool for the job.

Want the seller to handle everything? Use DAP, not DDP. DDP makes the seller responsible for import duties — but the seller may not know your country's tariff codes. DAP shifts import clearance to the buyer who knows the rules.

Buying from a small supplier? Avoid EXW. EXW puts every cost and risk on you from the seller's door — including loading the truck. Small suppliers may not even have a loading dock. You cannot manage what you cannot control.

Jargon Decoder

EXW Ex Works — buyer bears everything from the seller's door. Like buying furniture and having to rent the truck, load it yourself, and drive it home.

FOB Free On Board — seller delivers to the ship, risk transfers when goods cross the ship's rail. For containers, use FCA instead.

CIF Cost, Insurance & Freight — seller pays freight and insurance to destination port. Buyer bears risk from that point. Like a seller shipping with basic insurance — you still need your own coverage.

DDP Delivered Duty Paid — seller handles everything including import duties. Highest seller responsibility, but risky if the seller does not know your local import rules.

Sources: ICC Incoterms 2020; International Chamber of Commerce trade advisory estimates; Industry benchmarks on FOB/FCA usage rates

Rzzro

Procurement, quantified.