Why Incoterms Matter
An Incoterm (International Commercial Term) defines who is responsible for shipping, insurance, customs clearance, and risk transfer at each step from factory to final delivery. Getting the wrong one can add 20-30% to your landed cost in surprise fees.
The Common Five for China Sourcing
EXW (Ex Works)
- Buyer picks up from the factory door
- Buyer pays everything: inland China trucking, export customs, ocean freight, destination customs, destination delivery
- Cheapest listed price, but most work
- Not recommended for new sourcers — too many moving parts
FOB (Free On Board)
- Supplier delivers to the port of origin and loads onto the ship
- Buyer pays ocean freight, destination customs, and destination delivery
- Risk transfers at the ship's rail
- Most common for mid-size orders
- Good choice when you have a freight forwarder
CIF (Cost Insurance Freight)
- Supplier delivers to the destination port, including ocean freight and insurance
- Buyer pays destination customs, duties, and destination delivery
- Supplier's insurance is usually minimal (110% of invoice); consider buying additional
- Good choice when you don't have a forwarder
DAP (Delivered at Place)
- Supplier delivers to a specified destination, but buyer pays customs/duties
- Supplier takes most risk
- Common for smaller parcels via express
DDP (Delivered Duty Paid)
- Supplier handles EVERYTHING including destination customs and duties
- Buyer just receives at their door
- Highest quoted price; zero logistics work for buyer
- Common for sub-$5K orders shipped via air
- Caution: on larger orders, DDP can hide margin and create customs surprises
Price Comparison
For a $10,000 order, a typical price ladder for the same product:
- EXW: $9,000 (buyer does everything)
- FOB Ningbo: $9,500
- CIF Los Angeles: $10,200
- DDP Los Angeles: $11,500 (but no logistics work)
Spread is typically 8-20% from EXW to DDP.
What Changes with Each Term
Customs clearance
- EXW, FOB, CIF: buyer clears destination
- DDP: supplier clears destination (risk if supplier incompetent with your local customs)
Duties
- EXW, FOB, CIF, DAP: buyer pays duties
- DDP: supplier pays (but may hide cost in price or under-declare value)
Insurance
- FOB: neither party insures unless specified
- CIF: supplier insures but minimum
- DDP: supplier insures
Risk transfer
- EXW: at factory door
- FOB: at ship's rail in origin port
- CIF: at ship's rail in origin port (but supplier paid freight)
- DDP: at buyer's door
Which Term to Choose
First order, small volume
DDP. Let the supplier handle logistics. Price is less of a concern than avoiding customs surprises.
Recurring mid-size orders
FOB. Work with a freight forwarder you trust. You control freight cost and insurance.
Large recurring volume
FOB or EXW. You have your own freight team; every dollar of intermediary markup matters.
Red Flags
- DDP quotes that seem too cheap often mean under-declared value at customs (illegal)
- CIF insurance is usually minimal — always read the fine print
- EXW with a supplier who won't help with local trucking can get stuck
How Catalayer Helps
[Sourcing Agent](/sourcing-agent) RFQ templates include Incoterm selection so you always quote apples-to-apples. [Source Finder](/source-finder) surfaces pricing context across multiple suppliers.
Key Takeaways
- Incoterms determine who pays for what and where risk transfers
- FOB is the most common for mid-size orders with a trusted forwarder
- DDP simplifies logistics but costs 10-20% more
- Always clarify Incoterm in the first RFQ email
See [/glossary/fob](/glossary/fob), [/glossary/cif](/glossary/cif), [/glossary/ddp](/glossary/ddp).