FOB vs CIF, DDP, EXW — Choosing the Right Shipping Term

When planning international shipments, the choice of trade term determines who pays for transport, who arranges insurance, and when risk transfers. FOB (Free on Board) is a commonly used term, but it is important for beginners to understand how FOB compares with alternatives such as CIF, DDP, and EXW so they can make smart decisions for cost, control, and compliance.

Here is a practical comparison of FOB with four common alternatives, presented from the perspective of typical seller and buyer responsibilities:

• FOB (Free on Board): Seller delivers goods on board the vessel at the named port of shipment (Incoterms). Risk transfers at that point. Buyer arranges and pays for main carriage and typically insurance. Best when the buyer wants control of ocean freight and insurance but prefers the seller to handle export packing and loading.
• CIF (Cost, Insurance, Freight): Seller pays costs and freight to the named port of destination and must procure minimum insurance. Risk still transfers to the buyer once goods are on board the vessel, similar to FOB. CIF is seller-favorable on cost responsibility but the buyer still faces risk once the goods are loaded.
• DDP (Delivered Duty Paid): Seller assumes nearly all responsibility, paying for delivery to the buyer's location, import duties, and clearance. Risk transfers at delivery. DDP is buyer-friendly and convenient but can be complex and risky for sellers unfamiliar with the buyer's import rules.
• EXW (Ex Works): Seller makes goods available at their premises. Buyer assumes nearly all costs and risks, including export clearance. EXW is buyer-responsible and places the greatest burden on the purchaser to organize transport and export compliance.

Choosing between these terms depends on three main factors: how much control you want over the transport, who is more capable of handling export/import formalities, and how you want costs allocated.

Practical guidance for buyers:

• If you have a reliable freight forwarder and want control of ocean freight and insurance, FOB is often a good choice. It gives you flexibility to negotiate freight rates and choose carriers.
• If you prefer the seller to include ocean freight and basic insurance in the price, CIF may be easier, but remember risk transfers at loading, so insurance limits matter.
• If you want a turnkey delivery and are willing to accept a higher price, DDP removes most headaches—useful for first-time buyers unfamiliar with import rules.
• If you can manage every step of logistics and want to minimize seller obligations, EXW gives you control but requires strong logistics capability.

Practical guidance for sellers:

• Use FOB when you can handle export packing, loading, and clearance, but prefer not to manage longer-haul transport or insurance. It reduces seller exposure once goods are on board.
• Consider CIF only if you are comfortable arranging ocean freight and basic insurance and want to offer a bundled selling price.
• Avoid DDP unless you have expertise with the buyer's customs and tax rules; DDP can create unexpected liabilities for duties and compliance.
• Offer EXW cautiously; many buyers will reject EXW if they lack the capacity to handle export formalities in the seller's country.

Key best practices when choosing or negotiating FOB and other terms:

1. Always specify the exact Incoterms version and the named place (for example, FOB Shanghai Incoterms 2020). This avoids ambiguity about when risk transfers.
2. Clarify who is responsible for export clearance and documentation. Even with FOB, export formalities are usually a seller responsibility under Incoterms, but this can vary in practice.
3. Confirm insurance arrangements. Under CIF the seller must provide minimum coverage; under FOB the buyer should arrange insurance once goods are on board.
4. Decide who will receive and use the transport documents, especially the bill of lading, which controls title to the goods in many trades.
5. Match the Incoterm to the transport mode. FOB is suitable for sea or inland waterway only; for containerized multimodal transport, FCA or CPT may be better options.

Example decision scenarios:

• A startup importer who wants simplicity and predictable landed cost might opt for DDP for early orders, then move to FOB once they build logistics experience.
• A large buyer with global shipping contracts may prefer FOB so they can leverage their freight rates and select insurers.
• A seller who wants to remain competitive without taking on import risk can offer CIF to handle ocean freight but not assume import duties, or FOB to let buyers control the ocean leg.

In summary, FOB is a middle-ground term that balances responsibilities between buyer and seller. Understanding how it compares with CIF, DDP, and EXW — and matching the term to your operational strength and risk tolerance — will help you manage costs and avoid confusion during international shipments.