If your procurement team has ever debated "who should pay this shipping cost" after the goods are already in transit, the root of the problem most likely lies in one thing: Incoterms not clearly stated—or misunderstood—in the contract/PO. This article summarizes the most frequently used Incoterms 2020 terms and what they mean for you as a buyer.
What are Incoterms?
Incoterms (International Commercial Terms) are a set of standard rules published by the International Chamber of Commerce (ICC), defining the division of costs, risks, and responsibilities between sellers and buyers in goods shipment transactions. The currently applicable version is Incoterms 2020. Without clear Incoterms in the contract, both parties can have different assumptions about who bears what—and this often only becomes apparent when it's too late.
EXW (Ex Works) vs FOB (Free on Board)
EXW represents the minimum obligation for the seller: goods only need to be made available at the seller's premises (factory/warehouse). From that moment, all costs and risks of delivery—including loading the goods onto the vehicle—become the buyer's responsibility. For cross-border transactions, the ICC itself does not recommend EXW: export clearance becomes the buyer's responsibility, and buyers often find it difficult to handle directly in the seller's country. For similar needs (minimum obligation for the seller) but safer for international transactions, the ICC recommends FCA instead.
FOB shifts responsibility further: the seller bears the costs and risks until the goods are successfully loaded onto the vessel at the port of origin. Once the goods are "on board", the risk transfers to the buyer. FOB is only applicable for sea/inland waterway shipments.
CIF (Cost, Insurance, Freight) vs CIP (Carriage and Insurance Paid To)
CIF obliges the seller to pay for shipping costs and minimum insurance until the goods arrive at the agreed destination port—but the risk still transfers to the buyer once the goods are loaded at the port of origin (similar to FOB, only with the added obligation to pay freight & insurance). CIF is also specific to sea/inland waterway modes.
CIP is the version of CIF applicable to any mode of transport—including air, land, or multimodal—and requires a broader level of insurance (following the highest cargo insurance institution clauses) compared to CIF.
Shipping with containers? FOB and CIF are not the right choices
FOB and CIF are designed for bulk/break-bulk cargo loaded directly onto a vessel by the seller—not containerized cargo. In container shipping practice, goods are typically handed over to the shipping line or container terminal several days before they are actually loaded onto the vessel. If the contract still uses FOB or CIF, the seller technically still bears the risk while the goods are "waiting" at that terminal—even though the seller no longer has any control over the goods there.
Therefore, the official ICC Incoterms® 2020 publication explicitly advises: for containerized cargo, use FCA (Free Carrier), CPT, or CIP—not FOB, CFR, or CIF. FCA functions like a "container version" of EXW/FOB: risk transfers once the goods are handed over to the carrier or terminal designated by the buyer, so there are no unclear risk gaps. Before agreeing on an Incoterm with a supplier, make sure your team knows whether the shipment uses containers or bulk cargo—the wrong choice of term here is one of the most common causes of insurance claim disputes and losses when goods are damaged/lost at the terminal.
DAP (Delivered at Place) vs DDP (Delivered Duty Paid)
DAP means the seller delivers the goods to the agreed destination (not just a port), ready for unloading—however, import duties, import taxes, and customs formalities remain the buyer's responsibility.
DDP is the maximum obligation for the seller: the seller bears everything, including handling import duties and import taxes, until the goods are actually received by the buyer at the destination. This is the most "convenient" term for the buyer, but it is usually reflected in a higher price.
Why Incoterms must be explicitly stated
The most common mistake: the PO or contract only states the Incoterm code without location and without version (e.g., just "FOB", not the full format recommended by ICC: "FOB Tanjung Priok, Incoterms® 2020"), or uses old terms from previous Incoterms versions whose rules have changed. This lack of clarity is what most often triggers cost disputes and delays when goods are already in transit.
Always include the code + specific location + version, following the official ICC format—for example, "CIF Tanjung Priok, Incoterms® 2020" or "DAP Buyer's Warehouse, Cikarang, Incoterms® 2020". Stating the version is important because the rules of each Incoterm can change between editions (2010 → 2020).
Use FCA/CPT/CIP for containers, not FOB/CFR/CIF—as officially recommended by the ICC, so there are no risk gaps while goods are waiting at the terminal.
Ensure your finance & logistics teams understand the cost implications of each term, not just the procurement team signing the PO.
Finding suppliers who understand your shipping terms
Suppliers accustomed to cross-city or cross-country transactions are usually familiar with Incoterms and can agree on the correct terms from the start of negotiations—reducing the risk of cost disputes later. This is one of the things worth checking when screening potential suppliers, besides price and product specifications.
Looking for suppliers familiar with cross-city/country transactions? Browse the company directory on ID Industri by sector and region, or download the free B2B Procurement Guide 2026 for a complete framework on safely selecting and negotiating with suppliers.