Incoterms 2020 Overview: FOB, CIF, CFR, DDP, EXW, FCA
Lesson Contents Overview
Learning Objectives
Comprehensive Technical GuidanceTextbook & Training SOP
1. The Architecture of ICC Incoterms 2020
The International Chamber of Commerce (ICC) published Incoterms 2020 to standardize global trade contracts. Incoterms establish three core dimensions:
- Cost Allocation: Who pays for inland transport, terminal handling, ocean freight, and customs duties?
- Risk Transfer: Where does legal risk of loss or damage pass from factory to foreign buyer?
- Task Obligations: Who arranges export/import permits, security filings, and transport contracts?
2. Deep Dive: The 6 Core Incoterms in RMG Manufacturing
1. FOB — Free On Board (Named Port of Shipment)
- Standard Rule: Strictly for ocean / maritime transport (e.g., FOB Chattogram Port, Bangladesh).
- Seller Obligations: Inland transport from factory, C&F handling, export customs clearance, Off-Dock stuffing, port charges, and loading onto the feeder vessel.
- Risk Transition: Risk passes the instant the container is securely loaded on board the vessel.
- Buyer Obligations: Booking ocean vessel, paying ocean freight, marine insurance, destination customs clearance, and destination inland delivery.
2. FCA — Free Carrier (Named Place of Delivery)
- Multimodal Rule: Designed for containerized ocean freight, air shipments, and road transport.
- Risk Transition: Occurs at the named inland depot (e.g., FCA Incontrade ICD, Chittagong) upon physical handover to the buyer's appointed carrier.
- Commercial Advantage: Protects the factory against depot storage incidents occurring between gate-in and vessel loading.
3. CIF — Cost, Insurance and Freight (Named Port of Destination)
- Seller Pays: FOB costs + Ocean Freight to destination port + Marine Cargo Insurance.
- Insurance Requirement: Under Incoterms 2020 CIF, the seller must provide Institute Cargo Clauses (C) minimum cover (though buyers typically negotiate Clause A).
- Risk Transfer: At the port of origin upon vessel loading (NOT at destination port).
4. CFR — Cost and Freight (Named Port of Destination)
- Identical to CIF, except the buyer purchases and arranges marine cargo insurance.
5. DDP — Delivered Duty Paid (Named Place of Destination)
- Maximum Seller Exposure: The garment factory is responsible for all costs and risks until cargo is delivered to the buyer's warehouse door in the destination country, including payment of import customs duties, VAT/GST, and local port clearance.
- Operational Challenge: Foreign factories usually require an established fiscal representative in the destination country to clear DDP customs.
6. EXW — Ex Works (Named Place of Delivery)
- Minimum Seller Obligation: Factory makes packaged garments available at their factory loading dock. The buyer manages export clearance, EXP form processing, transport, and freight.
- Regulatory Issue in Bangladesh: EXW is problematic because Bangladesh Bank regulations require the local exporter of record to maintain the legal EXP form and foreign currency proceeds realization.
Master Incoterms 2020 Matrix for Apparel Export and Import
| Incoterm | Mode of Transport | Point of Risk Transfer | Export Customs Clearance | Main Ocean/Air Freight | Marine Cargo Insurance | Import Tariffs & Duties |
|---|---|---|---|---|---|---|
| EXW (Ex Works) | Any Mode (Multimodal) | At Seller's Factory Floor / Warehouse | Buyer Responsibility | Buyer Pays | Buyer Option | Buyer Pays |
| FCA (Free Carrier) | Any Mode (Multimodal) | Delivered to Carrier at Named Place / Off-Dock | Seller (Factory) Pays | Buyer Pays | Buyer Option | Buyer Pays |
| FOB (Free On Board) | Sea & Inland Waterway Only | When Loaded On Board Vessel at Port | Seller (Factory) Pays | Buyer Pays | Buyer Option | Buyer Pays |
| CFR (Cost and Freight) | Sea & Inland Waterway Only | When Loaded On Board Vessel at Port | Seller (Factory) Pays | Seller (Factory) Pays | Buyer Option | Buyer Pays |
| CIF (Cost, Insurance & Freight) | Sea & Inland Waterway Only | When Loaded On Board Vessel at Port | Seller (Factory) Pays | Seller (Factory) Pays | Seller Pays (Minimum ICC C/A) | Buyer Pays |
| DAP (Delivered at Place) | Any Mode (Multimodal) | At Named Destination Place (Ready for Unloading) | Seller (Factory) Pays | Seller (Factory) Pays | Seller Option | Buyer Pays |
| DDP (Delivered Duty Paid) | Any Mode (Multimodal) | At Named Buyer DC (Duty Paid & Cleared) | Seller (Factory) Pays | Seller (Factory) Pays | Seller Pays | Seller (Factory) Pays |
Practical Commercial Flow
Apex Garments quotes $3.50 per piece FOB Chattogram ($175,000 total). The German buyer requests a CIF Hamburg quote. Commercial Executive calculates: (1) 40ft Container ocean freight Chattogram to Hamburg = $3,200; (2) Marine Cargo Insurance (ICC A @ 110% value) = $480; (3) Total added logistics cost = $3,680 ($0.0736 per piece). The commercial team submits a revised CIF Hamburg quote of $3.58 per piece. Apex Garments books the container freight and insurance, but the risk of cargo loss at sea transfers to the German buyer once the container is loaded onto the vessel in Chittagong.
Factory Real-Life Scenario
Scenario: A container of woven shirts shipped on FOB terms was dropped by a crane during port loading in Chittagong, crushing 150 cartons before the container was securely set on board the vessel.
Solution: Under FOB rules, risk passes only when the goods are safely loaded "on board" the vessel. Because the accident occurred during loading, the risk remained with the factory. The factory commercial team filed a claim against their inland transit insurance and port handling operator.
Impact: Recovered $18,500 in damaged goods value through inland transit policy.
Commercial Officer Best Practice
In trade contracts and L/Cs, always specify the exact location and Incoterms version, for example: "FOB Chattogram Port, Bangladesh (Incoterms 2020)". Omitting the city name or year creates legal ambiguity.
Top Beginner Mistakes to Avoid
- Using FOB for air freight shipments (FCA Hazrat Shahjalal International Airport should be used instead).
- Assuming that under CIF terms, the seller is responsible for cargo damage during the ocean voyage (the risk transfers at the port of origin; the seller only purchases insurance for the buyer's benefit).
- Agreeing to DDP terms in countries where the factory lacks a local registered tax entity to pay import VAT and customs duty.
Important Commercial & Trade Terminology (3 Terms)
The exact physical moment and location where the legal and financial risk of loss or damage to the goods shifts from the seller to the buyer.
💡 Note: Under FOB, this occurs on board the vessel.An Incoterm where the seller delivers goods, cleared for export, to the carrier nominated by the buyer at a named inland depot or factory premises.
💡 Note: Ideal for containerized RMG exports.The maximum seller obligation Incoterm where the seller delivers goods cleared for import, paying all transport, destination customs, and import duties.
💡 Note: Requires foreign customs clearance capability.Interview Preparation Questions & Answers (2 Questions)
Master these high-frequency interview questions for Commercial Officer, Merchandising, and Export Executive roles.
In modern containerized shipping, exporters do not deliver loose cartons directly to the vessel side; rather, they deliver covered vans to inland container depots (Off-Docks / ICDs) where cargo is received by the carrier's terminal operator days before vessel arrival. Under traditional FOB, risk theoretically remains with the seller while the container sits in the depot yard until physically lifted "on board" the ship. Under FCA (Named Off-Dock), risk transfers immediately when the carrier receives the goods at the depot, accurately reflecting real supply chain operational custody.
Frequently Asked Questions (1 FAQs)
Clear, beginner-friendly answers to the most common questions about the Commercial Department.
Key Takeaways & Summary Points
Executive Lesson Summary
Mastering Incoterms 2020 rules ensures precision in commercial pricing, eliminates transport liability disputes, and aligns operational logistics with international legal standards.
Lesson Downloads & SOP Templates
Garment Costing: How to Calculate Garment Cost Step by Step
Comprehensive industry standard guide.
Read GuideHS 6109.10.00
T-shirts, singlets and other vests, knitted or crocheted, of cotton
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