An Incoterm is three words in a contract that quietly decide who carries the risk during the main carriage, who pays for which leg, and who has to clear the goods through customs at each end. Buyers often treat it as shipping jargon and let the supplier’s default stand. That default is usually the one that suits the supplier.
This guide covers what a trade term does and does not decide, the handful of rules that come up in equipment orders, and the specific trap in each. It is practical rather than legal: the term you choose interacts with your insurance, your customs position and your payment instrument, and all three belong with your freight forwarder and trade advisor.
What an Incoterm actually decides
Three things, and it is worth separating them because people conflate them:
- Where delivery occurs — the point at which risk transfers from seller to buyer. This is the one that matters when something is damaged in transit. Before that point it is the seller’s problem; after it, yours.
- Which costs sit on which side of that point. Freight, terminal handling, export clearance, import clearance, duties.
- Who is responsible for customs formalities — export clearance in the country of dispatch and import clearance in the country of arrival.
Note the asymmetry that catches people out: the point where risk transfers and the point where cost transfers are not always the same. Under the sea-shipment rules where the seller pays the freight, the seller is paying for a leg during which the goods are already at the buyer’s risk.
What it does not decide
Equally important, because these are the assumptions that produce disputes:
- Transfer of ownership. Title passes according to the contract and the applicable law, not according to the trade term.
- Which law governs, and remedies for breach. Not covered.
- Whether the insurance is adequate. Where a rule obliges the seller to arrange insurance, it is usually a minimum cover — which may be well below the value of a container of modules.
- Who is liable for defects. That is the sale contract and the warranty, not the delivery term.
The rules that come up in equipment orders
You will encounter a small set repeatedly. The descriptions below are in plain terms; the precise obligations are set out in the current ICC rules, and your forwarder will work from those.
- EXW (Ex Works) — the seller makes the goods available at their premises. The buyer does everything else, including loading and export clearance.
- FCA (Free Carrier) — the seller delivers to a carrier nominated by the buyer, and handles export clearance. A more balanced starting point than EXW.
- FOB (Free On Board) — for sea shipment, the seller loads the goods on board the vessel; risk passes at that point.
- CFR / CIF — the seller contracts and pays for the main carriage to the destination port (CIF additionally requires minimum insurance). Risk still passes at shipment, not at arrival.
- DAP (Delivered At Place) — the seller delivers at the named place, having carried the goods there, but import clearance and duties remain the buyer’s.
- DDP (Delivered Duty Paid) — the seller delivers with duties paid and import clearance completed.
Why EXW causes problems for equipment buyers
EXW looks like the cheapest quote because the seller’s obligations are minimal. The difficulty is that the buyer becomes responsible for export clearance in the seller’s country — a jurisdiction where the buyer may have no presence, no customs relationship and no ability to produce the documents the local authority wants.
On a container of modules that can mean the goods cannot legally leave. Buyers who have been caught by this once generally move to FCA, where the seller handles export clearance and hands over to the nominated carrier.
Why the sea rules are misread
The most common misunderstanding on CIF and CFR: because the seller has paid the freight to the destination port, buyers assume the seller carries the risk until the goods arrive. They do not. Risk passes at shipment under these rules.
So the buyer is exposed for the entire ocean leg and needs its own insurance for it — the minimum cover the seller arranges under CIF is set at a level that may not reflect the invoice value, let alone the replacement cost and the project delay if the container is lost.
Why DDP looks attractive and where it bites
DDP puts the maximum obligation on the seller: cleared, duty paid, delivered. For a buyer with no import capability it removes a real obstacle.
Two cautions. First, a seller quoting DDP has to be able to clear goods in your country, which is a different capability from manufacturing them — and the price has to include duties that may change. Second, it concentrates customs and compliance responsibility with the party you have the least visibility into. Where sourcing rules or country-of-origin documentation apply to your market, that is not a formality; our note on sourcing rules covers why the origin paperwork matters as much as the goods.
How the term interacts with your payment instrument
The delivery term and the documentary credit have to agree. The documents a credit calls for — bill of lading, insurance document, commercial invoice — are issued according to who contracted the carriage, which is set by the Incoterm. A credit that requires a document the seller is not obliged to produce under the agreed term will not be satisfiable.
Settle the delivery term first, then instruct the credit. Reversing the order produces amendments, and amendments cost time on both sides. The document set and its common failure points are covered in our guide to letter of credit terms on equipment orders.
Trade terms for domestic deliveries
Equipment shipped from US stock to a US destination is a domestic delivery, without an international import entry. Incoterms rules can still apply to domestic as well as international trade.
Agree a suitable rule, its version and named delivery place, or state loading, unloading and risk transfer directly in the order. See the ICC Incoterms rules overview.
What to settle before the order goes out
Reference table
Swipe horizontally to view all columns →
| Item | What to decide | What goes wrong if it is left to default |
|---|---|---|
| Delivery rule | Which rule, named explicitly | The supplier’s default applies, which suits the supplier |
| Named place or port | Precise, not a country | “FOB China” leaves the port and the cost split open |
| Who contracts main carriage | Follows from the rule — confirm it | Buyer assumes seller has booked it, or vice versa |
| Export clearance capability | Whether you can clear in the seller’s country | EXW becomes unshippable |
| Insurance | Who insures, and to what value | Minimum statutory cover against full replacement cost |
| Duties and taxes | Which side bears them | An unexpected landed cost, or a delivery that stalls at the border |
| Documents required | Set consistently with the rule | A credit that cannot be satisfied |
| Domestic orders | Suitable rule, named place and risk transfer | Responsibilities mismatched to the actual delivery |
How we work
We supply the equipment and the commercial documents that go with it, and we quote to the delivery rule you specify rather than to a default. For US-stock deliveries, agree the delivery point, loading and unloading, and risk transfer, with or without an Incoterms rule.
What we will not do is tell you which rule is right for your business. That depends on your customs position, your insurance arrangements, your freight relationships and the payment instrument behind the order, and it belongs with your forwarder and your trade advisor. Get those settled first and send the rule with the enquiry — then the quote is comparable against another, because both are priced to the same handover point.
If you are still at the qualification stage, the wider import picture is in our checklist for US buyers, and cost structure is covered in what moves solar equipment pricing.
BUYER CHECKLIST
Buyer considerations for this scope
Name the port or place precisely, not the country
"FOB China" leaves the loading port and the cost split open, which is exactly the ambiguity a trade term is supposed to remove. Name the terminal, the port or the delivery address, and make sure the same wording appears in the order and in the documents.
Settle the delivery rule before you instruct a credit
The documents a letter of credit calls for are issued according to who contracted the carriage, which the Incoterm determines. A credit demanding a document the seller is not obliged to produce under the agreed term cannot be satisfied, and fixing it afterwards means amendments paid for on both sides.
Check the insurance against replacement cost
Where a rule obliges the seller to arrange insurance, it is a minimum cover. Compare it with the invoice value and with what a lost container actually costs you in project delay — then decide whether you need your own cover on top for the leg where the risk is already yours.
PRACTICAL ANSWERS
Questions buyers ask about this
Does an Incoterm transfer ownership of the equipment?
No. A trade term decides where delivery occurs and risk transfers, which costs sit on which side, and who handles customs formalities. Ownership passes according to the sale contract and the applicable law, not according to the delivery rule. The same applies to remedies for breach and to liability for defects.
Who carries the risk under CIF?
The buyer, from the point of shipment. CIF requires the seller to contract and pay for the main carriage and to arrange minimum insurance, but risk passes at shipment, not at arrival. This is the most common misreading of the sea rules: paying for the freight and carrying the risk are two different things, and the buyer needs its own cover for the ocean leg.
Why is EXW a problem for equipment buyers?
Because the buyer becomes responsible for export clearance in the seller's country — a jurisdiction where the buyer may have no presence, no customs relationship and no way to produce the documents the local authority requires. EXW prices look attractive because the seller's obligations are minimal; the risk is that the goods cannot legally leave.
Do I need an Incoterm for equipment shipped from US stock?
Incoterms rules may be used for domestic as well as international contracts. Agree the rule, version and named delivery point if used; otherwise, state delivery, unloading and risk-transfer responsibilities directly in the order.
EXPLORE FURTHER