EXW, FOB, DDP: the three words that decide who pays for what

Every quote you receive from a supplier sits on an Incoterm, whether or not anyone says so out loud. It is usually three letters after the price, and most buyers skip over it. It is the single line that decides how much of the journey you are paying for, and how much of it you are personally responsible for when something goes wrong.

There are eleven Incoterms in the 2020 edition published by the International Chamber of Commerce. In practice, importing finished goods from Asia into Europe or the United States, you will meet three.

EXW: you collect it from the factory

Ex Works. The seller's job ends when the goods are ready at their premises. That is the whole obligation. From the factory floor onward, everything is yours: loading, inland transport to the port, export clearance in the origin country, the ocean freight, insurance, import clearance, duty, VAT, and the truck to your warehouse.

EXW produces the lowest-looking number on a quote, which is exactly why it is quoted so often to first-time buyers. It is also the term that assumes the most competence from you. Export clearance in particular is awkward: you are a foreign company trying to file an export declaration in a country where you have no legal presence, so in practice you need the supplier or a local agent to do it anyway.

If someone quotes you EXW and cannot tell you what the same goods cost DDP, they are not quoting you a landed price. They are quoting you the easy part.

FOB: the seller gets it onto the ship

Free On Board. The seller pays inland transport to the port of origin, handles export clearance, and loads the goods onto the vessel you nominate. Risk transfers to you once the goods are on board. From there you pay ocean freight, insurance, import clearance, duty and delivery.

FOB is the workhorse of container shipping, and for good reason. It splits the job at the point where responsibility naturally changes hands: the seller handles their own country, where they have the relationships and the language, and you handle yours.

One caution. FOB was written for goods loaded over the rail of a ship, and it is frequently used for air freight and for containers handed over at an inland depot, where it does not strictly fit. It usually causes nobody any trouble, but if a dispute ever arises about exactly when risk passed, that mismatch is where it will start.

DDP: the seller delivers, duty paid

Delivered Duty Paid. The seller carries everything to the named destination: freight, insurance, import clearance, duty and, depending on how the contract is written, the import taxes. You take delivery and unload.

DDP puts the maximum obligation on the seller, which is why a DDP number looks the highest and is in fact usually the most honest. It is the only one of the three that answers the question you actually have, which is what does this cost me, delivered?

There is one structural wrinkle worth understanding. In the European Union, reclaiming import VAT requires you to be the importer of record. Under a pure DDP arrangement the seller can end up in that role, and a foreign seller generally cannot reclaim your VAT for you. This is why serious DDP arrangements into the EU are usually written as DDP excluding VAT, or as DAP with a separate duty line, so that the VAT stays where it can be reclaimed. If a supplier offers you DDP into the EU and has no answer about who is the importer of record, that is the question to press.

The same goods, three ways

Here is what the same shipment looks like under each term. The numbers are illustrative, chosen to show the shape of the thing rather than to quote any real lane:

Why the cheapest quote is usually EXW

Look down that table and the reason becomes obvious. An EXW price has one row in it. A DDP price has nine. Comparing them side by side and picking the smaller number is not comparing prices at all.

This is the single most common way importers lose money without noticing: they negotiate hard on a number that was never the real number, then absorb freight, clearance and duty as separate invoices arriving over the following six weeks, by which point nobody is adding them back up.

What to do with this

Three habits are worth more than memorising the other eight terms.

Never compare two quotes on different Incoterms. Convert both to the same basis first, ideally delivered to your door. If a supplier will not or cannot do that, do it yourself before you decide.

Always name the exact place. An Incoterm without a place is incomplete. "FOB" means little; "FOB Ningbo" means something. "DDP" means little; "DDP Bratislava 831 04" means something. The place is where the obligation actually ends.

Decide who is the importer of record before you agree DDP. That name on the customs entry carries the legal responsibility for the declared value and the classification, and in the EU it determines who can reclaim the import VAT. It is not a formality.

How we quote

We quote one delivered number, with the goods, our fee, freight and an estimated duty line all inside it, because that is the only figure you can make a decision with. The duty line is an estimate against the HS code we believe fits the goods: customs decides the code and the rate at entry, so we show it separately and never pretend it is a price from us.