Incoterms Explained – A Simple Guide to FOB, DDP and EX Works

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When it comes to Incoterms, it is important to be able to define the differences among them. In the following article we will make it easy for you to see these differences so you can pick what works best for you. As you read through this brief text you will get simple and ready-to-use definitions regarding FOB, DDP and Ex Works.
You have probably heard the term a hundred times: communication is key. Well, it is mentioned so often, because it is true and the supply chain is no exception when it comes to using it. A certain system that specifies in the logistics industry was created mainly to allow and maintain clear communication with regards to business transactions (such as responsibilities or expectations) among parties. Ever since their inception, Incoterms or International Commercial Terms have been made to initiate the responsibilities of both Buyers and Sellers.

A lot has changed since their foundation. During the past 85 years the terms have been modified several times. These modifications adapt to new circumstances and are set up so that they enable clear communication and reduce the likelihood of misinformation or confusion among parties. A specific example would be defining who is responsible for paying for certain stages of logistics in a business transaction; or who will be responsible for the goods safety. At times even transfer of this responsibility is included. Which type of Incoterm will be used is determined by the Buyer and their specific need in pricing or in the way of shipment (sea, land or air)

Common Obligations

Whether it comes to using either of the above three Incoterms, there are many obligations tied to them. Below is a brief list of the most common obligations that -among others- one might endure during a business transaction:

  • Loading Charges
  • Export Packaging
  • Export Marking
  • Pre-Carriage to Seaport
  • Pre-Carriage to Terminal
  • Loading & Unloading Charges
  • Export Licences, Customs & Random Inspections
  • Goods, Commercial Invoice & Documentation
  • Seller Assistance in Formalities
  • Main Carriage
  • Pre-Shipment Inspection Costs

What FOB Means in Shipping

In the following section we will look at the most important terms to understand when it comes to FOB. We will break down whose responsibility is what exactly. Such as who is in charge of shipping documents, the correct payment for the goods that follows the contract. Generally, the most common FOB issues can be prevented by keeping in mind the following section with its definition and differentiation between which party should take on which obligations as part of the transaction.

FOB or Free on Board basically means that the Seller will distribute its goods to the nearest port and it will be responsible for everything afterwards. After this, the Buyer can pick it up themselves, or commonly: they hire a freight forwarder to then ship the goods for them. Here the Seller will be responsible for clearing the goods for export and then the Buyer will be the responsible party for the remaining steps of the chain. Then it is really important that the name of the corresponding port is accurate as the goods will be distributed there.
FOB is really popular among the Incoterms because of the above reasons: It allows easy 3rd party inspections, grants simple access to freight forwarder services – who are usually easily available at or near the ports- and the responsibilities are fairly divided among the parties.

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Some of the Most Common Obligation of the Parties

The Buyer’s Obligations:

  • Main Carriage
  • Payment for Goods Based on Contract
  • Discharge  
  • Onward Carriage
  • Import Formalities & Duties
  • Pre-Shipment Inspection Costs

The Seller’s Obligations:

  • Goods, Commercial Invoice, & Documentation
  • Export Packaging & Marking
  • Customs Formalities
  • Pre-Carriage 
  • Delivery
  • Loading Charges
  • Delivery Onboard Vessel at The Named Port Of Shipment
  • Proof of Delivery
  • Cost of Pre-Shipment Inspection

What EXW Means in Shipping

EXW or Ex Works is one of the most basic Incoterm a supplier can choose. Here, the Seller simply makes the goods available at the given place (i.e.: the factory) and is not responsible for the goods once they leave the gates. From here onwards the Buyer will be responsible for all additional steps in distribution as well as covering the remaining costs, such as insurance.
EXW is popular because it is very simple. The advantage of it is that it has one of the lowest costs among the available Incoterms. However as mentioned above the responsibilities and costs are not exactly shared equally among the parties. Still it could be an option for you if you have a close proximity to the destination and an already set up chain of logistics with available and cost efficient methods. It can also be a worthy option if you are in need of keeping your budget tight.

Common Obligations of Buyers and Sellers When Using EXW:

The Buyer’s Obligations:

  • Pre-Carriage To Terminal / Main Carriage 
  • Pay the Price of Goods in Accordance With Contract 
  • Providing the Seller with Evidence that the Delivery Has Been Conducted
  • Loading at Agreed Upon Location & Time
  • Import Documentation And Duties 
  • Export Licenses And Customs Formalities 
  • Loading Charges 
  • Discharge And Onward Carriage 

The Seller’s Obligations: 

  • Goods
  • Commercial Invoice
  • Documentation 
  • Dropping off of Goods at Agreed Upon Location & Time
  • Notice to Buyer to Enable Delivery 
  • Export Packaging & Marking

Example: EXW Agreements for China Importing – Are they a good idea?

Shortly: It can be. If during the transaction air freight is used. Buyers tend to consider this being a cheaper option since the unit price can oftentimes be cheaper. However as mentioned above as well: the rest of the costs and duties – such as inland transport, clearance, insurance and documents – will still have to be organized and executed by the Buyer.

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What DDP Means in Shipping?

DDP or Delivery Duty Paid refers to when the Seller covers the cost of everything and is responsible for every aspect of the transaction. Besides, the Seller also takes responsibility for every step as well. The only responsibility of the Buyer is to unload the goods once they arrive at their final destination chosen by them.
So why is it that not everyone uses DDP at all times. Simply put: it might be easiest for the buyer but it is certainly not the lowest in costs. Since the Seller assumes all responsibilities, with that they also assume the choice to go with one or another shipping company. They will always pick the one they like or the one that is most efficient with their services sover the one that would be cheapest. 

DDP Used to:

  • Hold Sellers Responsible for International Costs
  • Protect Buyers
  • Ensure Safe Cross-Country Deliveries (by Airfreight)

This method, while simple, gives a lot of trust to the shipping company. It is therefore a worthy step to ask for a price estimate and combine all above elements of the three methods to make your final decision. Costs tend to be a deciding matter in many cases of course. However many buyers will much rather prefer a simple and easy way to get their goods over the hassle and they won’t mind what it will cost.

Anyway, no matter you select FOB, EXW or DDP. Honourocean focus on logistics more than 12 years, we can support you very well

Maybe you view the below article then decide which term you will select.

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