Incoterms 2020 Explained: FOB vs CIF vs DDP (Who Pays What)

Few three-letter acronyms cause as many disputes as Incoterms. They look like jargon, but they answer two questions that decide who wins or loses money on every international shipment: who pays for each leg of the journey, and at what exact point does risk pass from the seller to the buyer?

What Are Incoterms?

Incoterms — short for International Commercial Terms — are a set of 11 standardised three-letter rules published by the International Chamber of Commerce (ICC). The current edition is Incoterms 2020. They do not replace your sales contract; they slot into it and define the division of cost, risk and responsibility between seller and buyer.

The 11 Rules at a Glance

Seven rules work for any transport mode (EXW, FCA, CPT, CIP, DAP, DPU, DDP) and four are for sea/inland-waterway only (FAS, FOB, CFR, CIF). They run on a spectrum: at one end EXW (Ex Works) puts almost everything on the buyer; at the other DDP (Delivered Duty Paid) puts almost everything on the seller.

FOB — Free On Board

Under FOB, the seller delivers the goods, cleared for export, on board the vessel at the named origin port. Risk passes once the goods are on board. From that moment the buyer pays the ocean freight, insurance and destination charges. FOB is popular because it gives the buyer control of the main carriage — but note the ICC recommends FCA instead for containerised cargo, since containers are handed over at a terminal, not loaded directly by the shipper.

CIF — Cost, Insurance and Freight

With CIF, the seller pays the cost and freight to the destination port and buys insurance for the buyer. Crucially, risk still passes at the origin port (when goods are on board) even though the seller pays freight to destination — a classic source of confusion. CIF only applies to sea freight; its all-mode cousin is CIP.

DDP — Delivered Duty Paid