If you have ever received a freight quotation or reviewed a purchase order from an overseas supplier, you have almost certainly encountered three-letter codes like FOB, CIF, or DDP. These are Incoterms — standardised trade terms published by the International Chamber of Commerce (ICC) that define who pays for what, who bears the risk of loss or damage, and at which point responsibility transfers from seller to buyer during an international shipment.
Choosing the right Incoterm has a direct impact on your landed cost, insurance obligations, and how much control you have over the logistics chain. For Australian importers, understanding these terms is not just helpful — it is essential for making informed purchasing and shipping decisions.
What Are Incoterms?
Incoterms (International Commercial Terms) were first published in 1936 and are updated periodically to reflect changes in global trade practices. The current version, Incoterms 2020, includes eleven terms divided into two categories: terms applicable to any mode of transport and terms applicable only to sea and inland waterway transport.
Each Incoterm specifies three things:
- Cost allocation: Who pays for transport, insurance, customs clearance, and terminal handling at each stage of the journey.
- Risk transfer: The precise point at which the risk of loss or damage passes from the seller to the buyer.
- Obligations: Which party is responsible for arranging transport, obtaining export and import licences, and providing documentation.
EXW — Ex Works
Under EXW, the seller makes the goods available at their premises (factory, warehouse, or other named place). From that point forward, the buyer bears all costs and risks — including export clearance, inland transport to the port, ocean freight, import customs, and delivery to the final destination.
Example: An Australian furniture retailer purchases dining tables EXW from a factory in Ho Chi Minh City. The buyer must arrange pickup from the factory, export customs clearance in Vietnam, ocean freight to Sydney, Australian customs clearance, and delivery to their warehouse. The buyer carries all the risk from the moment goods leave the factory gate.
Best for: Experienced importers who want full control over the logistics chain and have established relationships with freight forwarders.
FOB — Free on Board
FOB is one of the most commonly used Incoterms in Australian trade. The seller is responsible for delivering the goods on board the vessel at the named port of shipment. Once the goods are loaded, risk and cost transfer to the buyer. The seller handles export customs clearance and local transport to the port.
Example: An Australian machinery importer buys components FOB Shanghai. The Chinese supplier delivers the goods to Shanghai port and loads them onto the vessel. From that point, the Australian buyer is responsible for ocean freight, marine insurance, import clearance, and domestic delivery.
Best for: Importers who want to control the ocean freight leg and choose their own carrier or freight forwarder, while leaving the export-side logistics to the supplier.
CIF — Cost, Insurance, and Freight
Under CIF, the seller pays for the ocean freight and arranges marine insurance to the named port of destination. However — and this is a point many importers miss — the risk still transfers to the buyer when the goods are loaded on board the vessel at the port of origin. The seller's insurance obligation is only for minimum cover (Institute Cargo Clause C), which may not be adequate for all cargo types.
Example: An Australian electronics distributor imports televisions CIF Melbourne. The Korean supplier arranges and pays for ocean freight to Melbourne and provides a marine insurance certificate. If the container is damaged during the voyage, the buyer must claim against the insurance policy arranged by the seller.
Best for: Importers who prefer a simpler landed cost calculation and are comfortable with the seller arranging freight and basic insurance. However, consider whether the minimum insurance cover meets your needs — you can always arrange additional cover through your own broker.
CFR — Cost and Freight
CFR is identical to CIF except the seller does not arrange insurance. The seller pays the ocean freight to the named destination port, but the buyer bears the risk from the moment goods are loaded on board at origin. The buyer is responsible for arranging their own marine cargo insurance.
Best for: Importers who have their own marine insurance arrangements (such as an annual open cargo policy) and prefer to manage their cover directly rather than relying on the seller's policy.
DAP — Delivered at Place
Under DAP, the seller delivers the goods to a named place in the destination country — for instance, the buyer's warehouse — ready for unloading. The seller bears all transport costs and risks up to that point. The buyer is responsible only for import customs clearance, duty, GST, and unloading.
Example: An Australian construction company imports specialised steel beams DAP to their project site in Western Sydney. The European supplier arranges all transport including ocean freight and domestic delivery in Australia, but the Australian buyer must clear the goods through customs and pay import duties.
Best for: Importers who want their supplier to manage the full transport chain but need to retain control of import customs clearance (often for duty and tariff management reasons).
DDP — Delivered Duty Paid
DDP places maximum responsibility on the seller. The seller delivers the goods to the named destination, cleared for import, with all duties and taxes paid. The buyer simply receives the goods — no customs paperwork, no freight arrangements, no duty payments.
Example: A small Australian retailer purchases artisanal ceramics DDP to their shop in Brisbane. The Italian supplier handles everything: export clearance, ocean freight, import customs clearance in Australia, payment of duty and GST, and delivery to the shop door.
Best for: Small importers with limited logistics experience, or situations where the supplier has an established Australian logistics network. Be aware that the supplier's costs for Australian customs clearance and duties will be built into the price, so it pays to verify these charges are reasonable.
Choosing the Right Incoterm
There is no universally "best" Incoterm — the right choice depends on your experience, your cargo, your supplier relationship, and how much control you want over the logistics chain. Here are some practical considerations for Australian importers:
- Control vs. convenience: FOB gives you control over the freight leg; CIF or DDP gives you convenience at the potential cost of transparency.
- Insurance: If you buy CIF, check the level of cover. Minimum CIF insurance (ICC C) excludes many common risks. An annual open cargo policy through your own broker often provides better and cheaper cover.
- Customs and duties: If your goods qualify for preferential duty rates under a free trade agreement, you may want to manage customs clearance yourself (FOB or DAP) rather than leaving it to a supplier who may not optimise tariff classification.
- Total landed cost: Always compare the total cost — not just the product price. A lower EXW price may end up costing more than a higher CIF price once you add freight, insurance, and handling charges.
At MoveHaul, we help Australian importers evaluate Incoterms in the context of their specific supply chain. Whether you are buying FOB from China or DDP from Europe, our team ensures your freight costs are transparent and your cargo arrives on time.