Incoterms & Delivery Terms: Who Pays, Who Risks, and Who Clears Customs

Most import disputes I hear about don't start with a bad product. They start with a vague line on a quotation: "price includes delivery." Delivery to where? Loaded on the truck, or sitting in your warehouse? And who handles the import paperwork when the container reaches port? That's exactly the gap Incoterms & Delivery Terms are meant to close.

Think of Incoterms as a short set of three-letter codes that split costs, risks, and tasks between a buyer and a seller. Each code answers the same questions: who books the freight, who insures the cargo, who clears export and import customs, and at what point the risk of loss moves from seller to buyer. Get the code wrong and you can owe money for goods that are already damaged, or find yourself paying for customs clearance you assumed the supplier covered.

What Incoterms actually decide (and what they don't)

The International Chamber of Commerce publishes Incoterms, and the current version is Incoterms 2020. The rules cover four things: the delivery point, the transfer of risk, the division of costs, and the paperwork each side must provide. They do not cover the price of the goods, the payment method, the quality of the product, or which law governs a dispute. Those belong in your sales contract and your payment terms.

This is the part new importers miss. A supplier quoting "CIF" is not promising your goods will arrive safely. Under CIF, the seller arranges carriage and minimum insurance to your destination port, but risk passes to you when the goods are loaded on the vessel. If the container is lost at sea, you claim on the insurance — the seller's job is done.

The rules also assume the parties name a specific place. "FOB" alone is meaningless. FOB Shenzhen is a defined handover point at the port; FOB with a vague city reference gives both sides room to argue about who pays the inland leg.

Choosing the right Incoterm starts with where risk and cost change hands between seller and buyer—not with the term that sounds most familiar. Work through the sequence below to select and document the right term for a shipment.

1. Map the physical route: pickup point, main carriage (sea, air, road, rail), and final destination, so you know which legs each party actually controls.
2. Decide who arranges and pays for carriage, export/import clearance, and insurance; the Incoterm must match the commercial contract on these points, not contradict it.
3. Identify the exact point where risk transfers from seller to buyer, and confirm it aligns with when cost responsibility transfers—under C-terms these diverge.
4. Match the term to the transport mode: sea and inland waterway only for FAS, FOB, CFR and CIF; any mode for EXW, FCA, CPT, CIP, DAP, DPU and DDP.
5. Check the chosen term against destination-country rules: DDP, for instance, can create a taxable permanent establishment or require an import licence the seller may not hold.
6. Agree the named place or port precisely (e.g. "FCA Shanghai Pudong Airport, seller's warehouse" rather than "FCA China"), because the named location defines where obligations switch.
7. Specify the Incoterm edition (Incoterms 2020) and any variations in the sales contract, including who bears terminal handling charges and loading costs.
8. Confirm the term against the payment method (letter of credit, open account) and the documents the bank will require—CIF and FOB have different documentary expectations.
9. Record the term in the commercial invoice, packing list, and carrier booking, and brief the freight forwarder and customs broker so operations match the contract.
10. Review the term at contract renewal or when the route, carrier, or insurance cover changes, since a term that suited one lane may not suit the next.

Incoterms govern delivery obligations, risk, and cost allocation, not title transfer, payment terms, or product quality—those belong in the sale contract itself. Getting the named place and the edition right prevents the most common disputes, where parties agree on the three-letter code but disagree on which costs or risks sit either side of it.

The four families, without the jargon

Eleven terms exist, but they group into four patterns. Knowing the pattern tells you roughly who carries the load at each stage, even if you forget the exact letters.

E and F terms: buyer does the heavy lifting

EXW (Ex Works) puts almost everything on you. The seller makes the goods available at their premises; you arrange pickup, export clearance, freight, and import clearance. It sounds cheap, but it often isn't — foreign buyers frequently can't handle Chinese or Indian export paperwork from abroad, and the supplier's local forwarder may charge you retail rates.

FCA, FAS, and FOB shift a little more to the seller: they clear the goods for export and hand them to your carrier. FCA works well for containerised cargo because the handover happens at a terminal or forwarder's depot, not on the vessel. FOB was written for break-bulk shipping and is often the wrong tool for a sealed container.

C terms: seller pays freight, risk moves early

CFR, CIF, CPT, and CIP have the seller pay for carriage to a named destination. The catch is the same in all four: risk transfers at the point of shipment, not arrival. CIP requires broader insurance cover than CIF, which matters if your cargo is high-value or fragile.

D terms: seller carries the load to the destination

DAP and DPU put the seller on the hook until the goods reach your named place. DPU adds unloading at destination to the seller's plate. DDP goes furthest: the seller clears import customs and pays duties. DDP looks convenient, but it's problematic in markets where the importer of record must be a locally registered entity, and it hides the duty cost inside the unit price.

A quick side-by-side for the terms you'll meet most

The table below compares the six codes that show up on most supplier quotations. It assumes a named place or port is agreed.

Read the risk column twice. Cost and risk don't travel together under C terms, and that split is where surprise invoices come from.

Delivery terms in the customs and documents sense

There's a second meaning hiding in your question. Customs authorities also talk about "delivery terms" as a data field on the entry declaration, and that field needs to match the invoice. If your commercial invoice says CIF and the customs entry says FOB, expect a query, a delay, or a valuation adjustment.

The value declared for duty usually depends on the term. Under CIF-based systems, freight and insurance get added to the customs value. If the supplier's invoice is silent on the term, the broker may have to estimate, and estimates cost time.

How to pick a term without getting burned

There's no universally "best" Incoterm. The right one depends on your freight volume, your customs setup, and how much control you want over the shipping line. A practical checklist to run before you sign:

• Match the term to your actual logistics capability — if you can't book freight or clear customs, D terms or FCA with a forwarder are safer than EXW.
• Name the place precisely: port, terminal, or street address. "FOB China" is an argument waiting to happen.
• Check who is the importer of record in your destination country before accepting DDP.
• Agree on insurance separately. CIF's minimum cover rarely reflects the real replacement cost.
• Confirm the term appears identically on the quotation, the purchase order, the commercial invoice, and the packing list.
• Note which Incoterms version applies — 2020 and 2010 differ in places, notably in insurance and FCA on-board provisions.

None of this replaces your sales contract. Incoterms are a delivery clause, not a dispute-resolution clause; add governing law and arbitration terms separately.

Where delivery terms meet supplier payments

Payment structure and delivery term should reinforce each other. If you pay 100% upfront on EXW terms, you've taken on every risk with no leverage. If you pay on a letter of credit, the documents the bank checks — bill of lading, invoice, insurance certificate — should line up with the term you agreed. A mismatch between the bill of lading and the invoice term is a common reason a letter of credit is rejected.

A workable pattern for new importers: start with FCA or FOB and a forwarder you choose, keep 20–30% on delivery, and only move to DDP once you understand the landed cost breakdown in your destination market. The term isn't the deal — it's the map of who does what when something goes wrong.