The Four Incoterms That Cover Almost Every Parts Shipment
Two quotes for the same part can differ by a third for no reason other than the three letters next to the price. Incoterms decide how much of the journey is inside the number, where risk transfers and who deals with customs on each side. Getting them wrong does not usually lose money on the first shipment. It loses an argument about who pays for the one that went wrong.
These are the four that cover almost every machined part shipment, in the order buyers meet them.
EXW, Ex Works
The shop makes the parts and puts them somewhere at its own premises. Everything after that is yours.
- You arrange: collection, export clearance, freight, insurance, import clearance
- You pay: all of it
- Risk passes: at the shop, before loading
- Quoted price contains: the parts and nothing else
EXW gives the lowest number and the most work. It only makes sense if you already have a forwarder in the supplier country who can collect and clear the goods for export. In strict terms EXW does not even oblige the seller to load the truck, which is a detail that produces a phone call at least once in every buyer’s life.
There is a second problem: export clearance in the supplier’s country normally has to be filed by a local party. Under EXW that is technically you, and you have no local presence. In practice the shop or your forwarder handles it as a favour, which is fine right up until the shipment that needs a certificate of origin and nobody filed the declaration it has to be issued against.
FOB, Free On Board
The shop delivers the parts to a named port, clears them for export and loads them on the vessel. You take over from there.
- Shop arranges and pays: inland haulage, export clearance, loading
- You arrange and pay: ocean freight, insurance, import clearance, duty
- Risk passes: when the goods are on board
- Quoted price contains: parts, local transport, export paperwork
FOB is the default for sea freight and it is where most repeat programmes settle. You see the freight cost separately, which means you can negotiate it, and the local paperwork stays with the party that can actually file it.
FOB is written for sea freight. Using it for an air shipment is technically wrong and creates ambiguity about when risk passed. For air, FCA at the airport is the correct term, although plenty of invoices say FOB anyway.
DAP, Delivered At Place
The shop delivers the parts to an address you name, typically your factory or warehouse. You handle import.
- Shop arranges and pays: everything up to your address
- You arrange and pay: import clearance, duty and taxes, unloading
- Risk passes: at your address, on the arriving vehicle, before unloading
- Quoted price contains: parts, all transport
DAP is the easiest way to run a first order. The transport is somebody else’s problem and you still control the customs entry, which is the part that determines your duty and your origin position.
The trap is that DAP does not include duty. Buyers see “delivered” and assume everything is covered, then get a bill from the carrier. Read the term as “delivered but not cleared”.
DDP, Delivered Duty Paid
The shop delivers to your address and pays the import duty and taxes as well.
- Shop arranges and pays: everything, including import clearance and duty
- You do: unload
- Risk passes: at your address
DDP looks ideal and is rarely a good idea. It requires the seller to act as importer of record in your country, which in many places requires a local tax registration they do not have. Shops that quote it either work through a forwarder that fronts the process, at a premium, or they are quoting something they have not fully understood.
There is also a hidden cost: under DDP you often never see the customs entry, which means you cannot verify the declared value, the classification or the origin claim. Those are the three things that decide whether your import is correct.
Side by side
| EXW | FOB | DAP | DDP | |
|---|---|---|---|---|
| Inland transport in supplier country | You | Shop | Shop | Shop |
| Export clearance | You | Shop | Shop | Shop |
| Main freight | You | You | Shop | Shop |
| Insurance | You | You | Shop, not obliged | Shop, not obliged |
| Import clearance | You | You | You | Shop |
| Duty and import taxes | You | You | You | Shop |
| Unloading at destination | You | You | You | You |
| Risk passes at | Shop premises | On board vessel | Your address | Your address |
Note the insurance row. None of these four terms obliges the seller to insure the goods. CIF and CIP do. If nobody bought cover, nobody is covered.
The traps that actually catch people
Comparing quotes on different terms. The most common and the most expensive. Fix the term before you ask for prices, or normalise everything into a landed cost per part before you compare.
Assuming DAP includes duty. It does not. Only DDP does.
Using FOB for air freight. Technically wrong, and it leaves the handover point undefined at exactly the moment you need it defined.
Forgetting the certificate of origin under EXW. It is issued against the export declaration. If you took export clearance out of the shop’s hands, make sure somebody is still applying for the certificate of origin.
Naming a port but not a terminal. “FOB Vietnam” is not a term. “FOB Cat Lai” is. Name the port.
Assuming risk and title move together. They do not. Incoterms allocate cost and risk. Title follows your contract.
What to write on the purchase order
Write the rule, the named place and the version. For example:
FOB Cat Lai, Incoterms 2020
DAP 14 Industrial Way, Leeds LS10 1AB, United Kingdom, Incoterms 2020
Three elements, no ambiguity. A term without a named place is not a term, and leaving the version off means an argument later about which edition applied.
If you are still deciding which term to ask for, put it on the RFQ as “not sure, advise me”. Any shop worth quoting will tell you which one suits your volume and route. Send the drawing and up to three shops in Vietnam will quote it on the term that fits.
See also: all 11 Incoterms 2020 rules sorted for machined parts, with named places in Vietnam and the customs value effect.
Frequently asked questions
Which Incoterm should I use for a first order?
DAP, in most cases. It puts the transport on the shop, which removes the part of the process you have least experience with, and it still leaves import duty and taxes with you where they belong. Switch to FOB once the volume is real and you want to see the freight cost separately.
Why will shops not quote DDP?
Because DDP makes the seller responsible for import clearance and duty in your country, which usually means being the importer of record somewhere they have no presence and no tax registration. Shops that do quote DDP normally pad the number heavily to cover that risk.
Does the Incoterm change who owns the goods?
No. Incoterms cover cost, risk and who arranges what. Title passes according to your contract and your payment terms, which are a separate matter. It is a common and expensive assumption that they are the same thing.
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