Incoterms Explained: Who Pays, Who Risks, Who Clears Customs
-
Juan Hurtado
- Updated: Oct 02, 2026
- 3 min read
What are Incoterms, and why do they matter?
Incoterms define who pays, who bears the risk, and who clears customs. They are the rules that decide responsibilities in international shipping. Without them, you risk surprise costs, disputes, or cargo delays.
Who pays for transport under different Incoterms?
It depends on the term. Some Incoterms make the buyer pay; others, the seller. Know this before signing a contract to avoid unexpected freight bills.
Who carries the risk of damage or loss?
Risk transfers at different points depending on the Incoterm. For example, under FOB (Free On Board), risk shifts when the goods are loaded onto the ship. Under DDP (Delivered Duty Paid), the seller carries the risk until delivery to the buyer’s location.
Who handles customs clearance?
Some Incoterms make the seller responsible for export and the buyer for import. Others, like DDP, require the seller to handle both. Misunderstanding this can lead to customs delays and fines.
How do Incoterms impact your bottom line?
Choosing the wrong Incoterm can kill your margin. If you pick DDP without factoring in customs duties, you might end up paying more than you make. Always calculate the full cost before agreeing.
Which Incoterm is best for your business?
It depends on your control preferences and risk tolerance. If you want full control, choose EXW (Ex Works) and handle everything yourself. If you want simplicity, DDP shifts all responsibility to the seller but at a higher cost.
| Incoterm | Who Pays for Transport | Who Carries Risk | Who Handles Customs | Best For |
|---|---|---|---|---|
| EXW (Ex Works) | Buyer | Buyer | Buyer | Experienced importers |
| FOB (Free On Board) | Buyer (from port onward) | Buyer (from loading onward) | Seller (export), Buyer (import) | Balanced risk-sharing |
| CIF (Cost, Insurance, and Freight) | Seller | Buyer (after destination port) | Seller (export), Buyer (import) | Buyers wanting lower upfront risk |
| DDP (Delivered Duty Paid) | Seller | Seller | Seller | Buyers seeking simplicity |
Bottom line: How to choose the right Incoterm?
Ask yourself: Do I want control or convenience? Control means more risk but lower costs (EXW, FOB). Convenience means less hassle but higher costs (CIF, DDP). Pick based on your priorities and experience.
FAQ
- What happens if I choose the wrong Incoterm? You could face surprise costs, disputes, or delayed shipments.
- Can Incoterms be customized? No, they are standardized, but you can negotiate additional terms in your contract.
- Do Incoterms cover insurance? Only CIF and CIP include insurance; others require you to arrange it separately.
- Are Incoterms legally binding? Yes, when included in a contract, they are enforceable.
- How often are Incoterms updated? Every 10 years, with the latest version being Incoterms 2020.
Need help navigating Incoterms or managing suppliers? Zignify makes it simple.
