Incoterms and Shipping Cost Guide

Why Incoterms matter for cost planning

Incoterms (International Commercial Terms) are a set of 11 standardised rules published by the International Chamber of Commerce (ICC) that define who pays for freight, insurance, export clearance, import clearance and delivery in an international sale. The Incoterm you agree with your supplier determines which costs appear on your commercial invoice versus which costs you must arrange and pay separately.

Choosing the wrong Incoterm — or misunderstanding your current one — can mean you are paying for costs you assumed the supplier was covering, or you are missing costs from your landed-cost calculation entirely.

The four most common Incoterms explained

FOB — Free on Board

The seller delivers the goods onto the vessel at the port of export and clears them for export. From that point, the buyer pays international freight, insurance, import clearance, duty, and delivery to their warehouse. FOB is the most common term for sea freight imports from China and Asia.

Buyer pays: ocean freight, insurance, import duty, VAT, customs broker, destination handling, domestic delivery.

CIF — Cost, Insurance and Freight

The seller pays for international freight and minimum insurance to the port of destination. The buyer is responsible for import clearance, duty, VAT and delivery from the port. CIF is important because most countries (except the US) use the CIF value as the customs value for duty calculation.

Buyer pays: import duty, VAT, customs broker, destination handling, domestic delivery.

DAP — Delivered at Place

The seller delivers the goods to a named destination (typically the buyer’s warehouse or a nominated address), bearing all transport costs and risk. The buyer is responsible only for import clearance, duty and VAT. DAP is common in e-commerce and B2B sales where the seller wants to offer a “delivered” price.

Buyer pays: import duty, VAT, customs clearance.

DDP — Delivered Duty Paid

The seller bears all costs and risks including import duty, VAT and customs clearance in the destination country. The buyer receives the goods with no additional border costs. DDP represents maximum seller responsibility and is used when sellers want to guarantee a fully landed price to the buyer.

Buyer pays: nothing beyond the agreed DDP price (though unloading at destination may still be buyer’s responsibility depending on contract).

Why shipping cost is part of landed-cost planning

The Incoterm determines which shipping costs are included in the supplier’s price and which the buyer must budget separately. Under FOB, the buyer must add freight, insurance and all destination costs to the supplier invoice to arrive at landed cost. Under DDP, the supplier’s price already includes everything — but that price will be higher to reflect the costs the seller is absorbing.

Understanding this relationship prevents two common errors: (1) comparing supplier prices on different Incoterms as if they were like-for-like, and (2) underestimating landed cost by omitting costs that the Incoterm assigns to the buyer.

Worked example

Common mistakes to avoid

• Comparing supplier quotes on different Incoterms — a £5,000 FOB quote and a £7,200 DDP quote are not comparable without adding the FOB buyer’s costs.
• Assuming CIF means delivered — under CIF, the buyer still pays import duty, VAT, customs clearance and domestic delivery. The seller only covers freight and minimum insurance to the port.
• Forgetting that customs value depends on the Incoterm — CIF-basis countries use the CIF value; the US uses FOB value. If you are on EXW terms, you may need to reconstruct the CIF or FOB value for customs purposes.
• Not confirming insurance coverage under CIF — CIF sellers are only required to provide minimum Institute Cargo Clause C insurance. If you need broader coverage (Institute Cargo Clause A), you must arrange it yourself or negotiate it into the contract.
• Assuming DDP means zero risk — even under DDP, if the seller under-declares value or classifies incorrectly, the customs authority may pursue the importer of record for back-duties.

How the calculators help

The Incoterms Cost Split Calculator shows which party pays each cost element under all 11 Incoterms 2020 rules. The Shipping Cost Calculator helps estimate freight charges when you are the party responsible for arranging transport. The Landed Cost Calculator brings all cost elements together into a single landed cost per unit. And the HS Code Duty Calculator estimates the duty component you need for Incoterms where the buyer pays duty (FOB, CIF, DAP).