Incoterms 2020 vs Landed Cost: A Clear Guide

Incoterms (International Commercial Terms) are the contractual rules published by the International Chamber of Commerce that allocate responsibilities between buyer and seller in an international goods transaction. The current edition is Incoterms 2020, in force since 1 January 2020. The eleven terms determine who arranges transport, who pays for it, who insures, where risk transfers, and who is responsible for customs clearance and duty.

For landed cost calculation the Incoterm matters because it sets the dutiable value (FOB, CIF, or other), determines who is the importer of record, and structures the cash-flow obligations. This guide walks through the 11 terms with their cost implications.

The 11 terms grouped

The 11 Incoterms 2020 fall into four groups:

Group E: departure

• EXW (Ex Works): seller makes goods available at their premises. Buyer arranges everything, including export clearance.

Group F: main carriage unpaid

• FCA (Free Carrier): seller delivers to a named carrier or place. Buyer pays main carriage.
• FAS (Free Alongside Ship): seller delivers alongside the vessel at the port of loading. Sea/inland waterway only.
• FOB (Free On Board): seller delivers when goods are on the vessel. Sea/inland waterway only.

Group C: main carriage paid

• CFR (Cost and Freight): seller pays ocean freight to destination port; risk transfers at loading. Sea only.
• CIF (Cost, Insurance and Freight): CFR plus minimum cargo insurance. Sea only.
• CPT (Carriage Paid To): seller pays freight to named destination; risk transfers at first carrier. Any mode.
• CIP (Carriage and Insurance Paid To): CPT plus cargo insurance. Any mode. In 2020 insurance scope is the higher Institute Cargo Clauses A.

Group D: arrival

• DAP (Delivered At Place): seller delivers at named place, not unloaded. Any mode.
• DPU (Delivered at Place Unloaded): seller delivers at named place, unloaded. Any mode. Replaced DAT.
• DDP (Delivered Duty Paid): seller delivers cleared for import, duty paid. Any mode.

Quick cost matrix

Who pays each cost item under each term:

Risk transfer is not the same as cost transfer

A subtle point that catches many importers: risk transfers at a different point than cost responsibility under some terms.

• CIF: cost runs to destination port (seller pays freight), but risk transfers when goods are loaded on the vessel at the origin port. If the ship sinks mid-Pacific with your goods, you (the buyer) bear the loss, not the seller.
• CIP: same dynamic; risk transfers at first carrier.
• CPT: same; risk transfers at first carrier.

The risk-cost gap is why CIF/CIP/CPT terms require thinking carefully about insurance coverage. The seller is obligated to procure minimum insurance under CIF; under CIP 2020 the seller must procure higher cover. Buyers may want to top up for full Institute Cargo Clauses A coverage if not already included.

Effect on the customs value

Different customs authorities use different default bases for customs value:

• US: typically FOB-based (the import is appraised at the transaction value as defined by 19 USC 1401a, but in practice many adjustments are FOB-equivalent).
• EU: CIF-based (cost, insurance, freight to the port of entry).
• UK: CIF-based.
• Canada: FOB-based (with adjustments).
• Most other countries: CIF-based.

When the agreed Incoterm differs from the local customs basis, the customs broker must adjust. For example, a US import on CIF terms has the customs value adjusted down to FOB (freight and insurance subtracted) for US customs purposes; the freight and insurance are noted separately.

Worked example: a 100,000 USD shipment China to USA

Under each Incoterm, who pays what:

Assume: 100,000 USD product value FOB Shanghai, 4,000 USD ocean freight to Long Beach, 400 USD marine insurance, 800 USD origin terminal charges, 1,200 USD destination handling, 800 USD US trucking to LA warehouse.

EXW (Ex Shanghai)

Buyer cost line items:

• Product: 100,000 (assumes EXW = same product price)
• Origin trucking: ~500
• Origin terminal charges: 800
• Loading: 200
• Ocean freight: 4,000
• Marine insurance: 400
• Destination handling: 1,200
• US customs duty + 122 + 301 (say 47.5% total on FOB): 47,500
• US broker: 250
• US trucking: 800
• Total landed: ~155,650

FOB (Shanghai)

Buyer cost line items:

• Product FOB Shanghai (includes export clearance, origin transit, loading): 100,000
• Ocean freight: 4,000
• Marine insurance: 400
• Destination handling: 1,200
• US duty: 47,500
• Broker, trucking: 1,050
• Total landed: ~154,150 (small saving versus EXW because seller does origin work more cheaply)

CIF (Long Beach)

Seller cost line items (in 100,000 product value):

• Product FOB + freight + insurance = product invoiced at CIF, say 104,500 USD on the commercial invoice.

Buyer cost line items:

• Pay seller invoice: 104,500
• Destination handling: 1,200
• US duty on FOB: 47,500 (US customs deducts freight and insurance from CIF for duty purposes)
• Broker, trucking: 1,050
• Total landed: ~154,250

DDP (LA warehouse)

Seller cost line items: everything to LA warehouse, including duty and 122 and 301.

Buyer cost: just the DDP invoice from seller. Whatever number the seller quotes.

Under DDP the seller takes on the IOR role and faces the practical issue that they may not be set up to do that in the US.

DDP complications: the IOR question

DDP means the seller is the importer of record. In practice:

• Seller has a US entity: simple. The US entity is IOR.
• Seller does not have a US entity: the seller must arrange a US indirect representative or risk losing money on the duty calculation. Some shipping companies offer DDP-with-IOR services for a fee.

For complex shipments (high-value, controlled goods, subject to AD/CVD), DDP from non-resident sellers is impractical. DAP shifting to the buyer is the common alternative.

Choosing the right Incoterm

Decision factors:

• Who has the best freight rates? If buyer has volume contracts, FOB/FCA preferred.
• Who has the customs expertise? DDP shifts compliance burden to seller.
• Cash flow timing: DDP means seller cash-flows the duty; under FOB the buyer cash-flows.
• Risk preferences: buyers wanting maximum control choose FCA/FOB. Sellers wanting to remove logistics complexity choose DAP/DPU.
• Insurance: CIF/CIP shifts insurance procurement to seller; buyer must verify the policy meets their needs.

How the calculator handles Incoterms

The LandedFees calculator lets you specify the Incoterm and automatically:

1. Sets the customs value basis according to the destination country (FOB for US, CIF for EU/UK).
2. Allocates freight and insurance to the correct party.
3. Computes duty on the correct base.
4. Estimates total landed cost regardless of who pays each step.

Related guides

• FOB vs CIF vs DAP: Which Costs You More?
• Commercial Invoice vs Packing List vs BoL
• How to Read a Commercial Invoice for Customs
• How to Calculate Freight + Insurance
• What Is a Customs Broker and When Do You Need One
• Reading Your Landed Cost Report

Run a landed cost calculation in the calculator.