Every quote from a factory in Shenzhen or a forwarder in Rotterdam carries an Incoterm. It is three letters followed by a place: FOB Ningbo, CIF Los Angeles, DDP Dallas. Most first-time importers read the price and ignore the three letters. The three letters are usually where the surprise bill comes from.
What Incoterms are — and what they aren't
Incoterms are the International Chamber of Commerce's shorthand for which side of a sale does what on an international shipment: who pays for what leg, who carries the risk at each hand-off, who arranges insurance, who clears export and import. They are not a complete contract. They do not decide when the goods become legally yours (that is the sale contract). They do not settle disputes between the seller and the carrier (that is the bill of lading). They cover one very specific question: at which point does cost and risk pass from seller to buyer.
The current revision is Incoterms 2020. It replaced the 2010 edition in January 2020. Quotes still occasionally arrive marked "Incoterms 2010" — the practical content is mostly the same, but a few changes are worth understanding because one of them is a rename and one of them materially changes an insurance level.
What changed in 2020
- DAT became DPU. "Delivered at Terminal" was renamed "Delivered at Place Unloaded" to reflect that the delivery point does not have to be a terminal — it just has to be a place where the seller unloads the goods.
- CIP insurance level was raised. Under CIP the seller must now buy insurance at Institute Cargo Clauses (A) — all-risk — as the minimum. CIF insurance stayed at the older Clauses (C) minimum, which is named-perils only. If a shipment moves under CIF and is high-value, the buyer usually tops up with their own marine policy.
- FCA now lets the buyer's carrier issue an on-board bill of lading back to the seller. This is a small rule with a big effect for small importers paying by letter of credit — banks often require an on-board BL, and this change lets FCA satisfy that requirement without forcing sellers into FOB.
- Own transport is explicitly allowed under FCA, DAP, DPU and DDP. The seller does not have to engage a third-party carrier if they are using their own trucks.
- Security-related requirements (ISPS, C-TPAT, AEO) are more explicitly allocated in each rule.
The 11 rules, grouped by mode
| Any mode of transport | EXW · FCA · CPT · CIP · DAP · DPU · DDP |
|---|---|
| Sea & inland waterway only | FAS · FOB · CFR · CIF |
If you are shipping a container through a port, any rule in either row can technically apply. If you are shipping a carton by air or cross-border truck, stick to the first row — FOB on an air shipment is a signal the other side does not understand the rule set.
The three traps that cost small importers the most money
Trap 1: Accepting EXW from a factory
EXW ("Ex Works") puts the buyer in charge of the moment the seller wraps the pallet at the factory door. In theory that is fine. In practice, if you are not a registered exporter in China, you cannot file the export declaration in your own name — so you need the seller to do it anyway, under their licence. EXW then becomes a fiction: you pay a forwarder to arrange a pickup the seller still has to co-operate on, and any delay at the factory is your problem even though you could not walk in to fix it. For most small imports from Asia, FCA (Free Carrier, at the factory or at the origin port) is the right default. The seller still handles the export paperwork, which the seller is the only party legally able to do, and the risk hand-off sits at a point you can actually verify.
Trap 2: Reading "free" in FOB as "free to me"
FOB ("Free on Board") does not mean the buyer rides free. It means the seller's obligation ends free of any further risk or cost at the moment the goods cross the ship's rail. Every dollar after that — ocean freight, origin THC at some ports, destination THC, documentation, customs, drayage, delivery — belongs to the buyer. When a factory quote says "US$2.40 per unit, FOB Shanghai" and a landed-cost calculation says US$3.15, the delta is not a negotiating artefact. That delta is the shipping, the customs bond, the ISF filing, the chassis split, the pre-pull, the detention that nobody called out — and it is real. Put the full landed-cost worksheet next to the FOB quote before you compare suppliers.
Trap 3: Treating DDP like "they handle everything"
DDP ("Delivered Duty Paid") looks attractive to a first-time importer: one invoice, one partner, no customs headache. The problem is that most overseas sellers are not licensed as US importers of record. When they sell DDP, they are quoting duty at a rate they guessed, they are often filing under someone else's bond, and they are frequently skipping the ISF-10 — which is a $5,000 CBP penalty per shipment when it is caught. If your cargo needs FDA prior notice, FCC filings or USDA paperwork, a generic DDP seller almost certainly will not run those. DDP also makes the buyer invisible to US Customs, which makes it very hard to recover duty after an HTS correction or dispute an entry. For small imports that are simple and low-risk, DDP from a reputable seller with a real US broker relationship can work. For anything else, take delivery at a DAP point on the US side and handle the last mile and the customs entry through a broker you control.
How to pick one
A working default for a small US importer buying from Asia: FCA at the factory or origin port, with your own forwarder handling the ocean and the customs entry. You control the carrier selection. You see the real landed cost. You can file the ISF on time. When you grow enough to have steady container volume and a contracted forwarder, you stay on FCA and your lane rates are the negotiated ones, not the ones buried inside a CIF quote.
If a seller insists on CIF or DDP, ask them to itemise: ocean rate, THC, BAF, insurance (and the policy class), customs bond, duty rate assumed, broker fee. If the itemisation comes back complete and competitive, fine. If it comes back as a single number, the surprise bill is already in the quote — it just hasn't arrived yet.
Want a landed-cost worksheet built around your real lanes? We run a free customs-and-landed-cost review on a current PO — usually finds a misclassification or a surcharge that should never have been accepted. Book a customs review →
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