To choose the right Incoterm, answer three questions: who books the main carriage, where you want risk to pass to the buyer, and who handles customs formalities. For most exporting SMEs, FCA (or FOB by sea) protects the seller better than EXW, and DAP gives the customer convenience without the destination taxes that come with DDP.
What is an Incoterm, and what does it not settle?
Incoterms® 2020 are 11 rules from the International Chamber of Commerce (ICC) that allocate costs, risks and delivery obligations between seller and buyer. They are not law: they apply only if you include them in the sales contract.
They also do not decide the price, the payment method, the transfer of ownership or the applicable tariffs. That is why you should always state the exact place and the version, for example “FCA seller's premises, Tarragona, Incoterms 2020”.
Which Incoterm should you choose for your situation?
Before looking at any table, be clear on these criteria:
- Product: high-value or fragile goods call for control over transport and insurance; standard palletised cargo allows more flexibility.
- Customer: an experienced importer with its own forwarder usually prefers FCA; a small customer wanting a turnkey delivery will prefer DAP.
- Mode of transport: FOB and CIF are for sea and inland waterway transport only. For containers or road freight, FCA, CPT, CIP or DAP fit better.
- Payment method: with a documentary credit or collection, transport documents matter; FCA lets you ask for an on-board bill of lading.
- Internal capacity: do not agree a term your team cannot manage.
What is the difference between EXW, FCA, FOB, CIF, DAP and DDP?
- EXW: the seller makes the goods available at its premises and the buyer takes on the rest, including loading and export clearance.
- FCA: the seller hands the goods to the carrier named by the buyer and keeps control of export clearance.
- FOB: risk passes to the buyer once the goods are loaded on board the vessel; the buyer books the freight. Sea only.
- CIF: the seller pays freight and insurance to the destination port, although risk passes at the port of shipment. Sea only, and the default minimum insurance is the lowest level of cover (ICC C).
- DAP: the seller delivers at the agreed place of destination, not unloaded and not cleared for import.
- DDP: the seller bears all costs and risks up to destination, including import duties and taxes.
Remember that only CIF and CIP oblige the seller to buy insurance. Under every other term each party decides whether to insure. Under CIP the default cover is the highest level (ICC A), while under CIF it is the minimum, so agree it in writing.
Why is EXW usually a bad idea for exporting?
Under EXW the buyer must handle export clearance from your country, something a foreign customer rarely does well. If the paperwork fails, the shipment stalls and the problem lands on your desk.
You also lose visibility of the goods just as they leave your control. If your customer wants to collect the goods, FCA is usually the more practical alternative: the buyer still books the transport, but the seller keeps control of export clearance.
When does DAP make sense, and when should you avoid DDP?
DAP is popular with customers who want convenience: you organise transport to their door and they handle the import. It is a good way to stand out, provided you can cost the transport accurately.
DDP is a different matter. It obliges you to handle import in the destination country and bear its duties and taxes, including VAT or its equivalent. If you do not know the local tax rules or have no one to act as importer, one mistake can wipe out your margin. Use it only when you know the destination well and have run the numbers.
Common mistakes when agreeing an Incoterm
- Using FOB or CIF for container or road shipments out of habit.
- Writing just “DAP France” instead of a specific place and the rules version.
- Quoting DDP without checking destination taxes and import costs.
- Not aligning the Incoterm with the payment method and the documents the bank requires.
- Not checking transport insurance and assuming someone has arranged it.
Before fixing the final term, calculate your price under each option: the Incoterm changes what your price includes and therefore your margin. You can see the full process in our guide to exporting and ICEX's practical reference in its Incoterms 2020 guide (in Spanish).
How Vycte helps
At Vycte we help you decide the Incoterm, the export documentation and the payment terms for each deal, as an outsourced export department. We advise on the documentation and terms, and align them with what your forwarder handles so the contract is consistent. If you would like to review it with us, get in touch.
Frequently asked questions
Which Incoterm is best for a first export? To start with, FCA is usually a prudent choice because you hand over to the buyer's carrier and keep control of export clearance; by sea, FOB is the usual equivalent.
What is the difference between CIF and CIP? CIF is for sea and inland waterway transport only and requires minimum insurance; CIP works for any mode of transport and requires highest-level cover by default.
Do I need to state the Incoterms version in the contract? Yes, write “Incoterms 2020” next to the term and the place, because earlier versions still circulate and may be read differently.
