Incoterms 2020 Guide for Procurement Teams: EXW, FOB, CIF, DDP Explained

TL;DR: Incoterms are standardized trade terms published by the International Chamber of Commerce that define who pays for shipping, insurance, customs, and risk transfer between buyers and sellers. Procurement teams must specify the correct Incoterm in every RFQ to get comparable supplier quotes. The most common terms are EXW (seller's door), FOB (ship's rail), CIF (port with insurance), and DDP (delivered to buyer). Choosing the wrong Incoterm can add 15-30% hidden costs to your purchase. AuraVMS helps procurement teams standardize Incoterms across all supplier quotes for accurate comparison.

Every procurement professional has experienced this frustration: you send an RFQ to five suppliers, receive five quotes, and realize you cannot compare them. One supplier quoted EXW their factory in Shenzhen. Another quoted FOB Shanghai. A third quoted CIF to your nearest port. The fourth quoted DDP to your warehouse. The prices look different, but which one is actually the best deal?

This is the Incoterms problem, and it costs companies thousands of dollars in hidden procurement costs every year. If your team does not understand Incoterms deeply, you are likely overpaying for goods or taking on risks you did not intend to accept.

This guide will give you everything you need to master Incoterms 2020 from a procurement perspective. You will learn what each term means, when to use it, how it affects your total cost of ownership, and how to standardize Incoterms in your RFQ process for accurate supplier comparison.

What Are Incoterms and Why Do They Matter for Procurement

Incoterms, short for International Commercial Terms, are a set of eleven standardized trade definitions published by the International Chamber of Commerce. First introduced in 1936, they have been updated periodically, with the current version being Incoterms 2020.

These terms define three critical aspects of any international transaction:

1. Cost allocation: Who pays for transportation, insurance, customs clearance, duties, and other logistics expenses
2. Risk transfer: At what point does the risk of loss or damage transfer from seller to buyer
3. Documentation responsibility: Who handles export licenses, bills of lading, certificates of origin, and other paperwork

For procurement teams, Incoterms are not just legal jargon. They directly impact your landed cost, your risk exposure, and your ability to compare supplier quotes accurately.

Consider this scenario. You receive two quotes for 10,000 units of electronic components:

At first glance, Supplier A looks $7,000 cheaper. But EXW means you must arrange and pay for all transportation, customs clearance, duties, and insurance from the supplier's door to yours. When you calculate the true landed cost, Supplier A might actually cost $55,000 or more.

This is why AuraVMS requires procurement teams to specify the Incoterm in every RFQ. Without standardization, you are comparing apples to oranges.

The Eleven Incoterms 2020 Explained

Incoterms 2020 includes eleven terms divided into two categories: terms for any mode of transport and terms specifically for sea and inland waterway transport.

Terms for Any Mode of Transport

These seven terms can be used whether goods are shipped by air, road, rail, sea, or multimodal transport.

EXW Ex Works (Named Place of Delivery)

EXW represents the minimum obligation for the seller. The seller makes the goods available at their premises or another named place. From that moment, all costs and risks transfer to the buyer.

As the buyer, you are responsible for:

• Loading goods at the seller's premises
• Export customs clearance
• All transportation costs
• Import customs clearance
• Duties and taxes
• Delivery to final destination

When to use EXW: When you have strong logistics capabilities and can negotiate better freight rates than the supplier. Large procurement organizations with dedicated logistics teams often prefer EXW because they have volume discounts with carriers.

Risk for procurement: EXW puts maximum risk on the buyer. If something goes wrong during export clearance or transportation, it is your problem. Many procurement teams avoid EXW for this reason.

FCA Free Carrier (Named Place of Delivery)

FCA means the seller delivers the goods, cleared for export, to a carrier nominated by the buyer at a named place. Risk transfers when goods are handed over to the carrier.

As the buyer, you are responsible for:

• Main carriage from the named place
• Import customs clearance
• Duties and taxes
• Delivery to final destination

When to use FCA: When you want the seller to handle export procedures but you control the main transportation. FCA is often more practical than EXW because export clearance stays with the seller who knows local regulations.

CPT Carriage Paid To (Named Place of Destination)

CPT means the seller pays for transportation to the named destination, but risk transfers when goods are handed to the first carrier at the origin.

This creates a critical split: the seller pays for carriage, but the buyer bears the risk during transport. Many procurement professionals misunderstand this distinction.

As the buyer, you are responsible for:

• Insurance during main carriage (recommended)
• Import customs clearance
• Duties and taxes
• Delivery from named place to final destination

When to use CPT: When you want the supplier to arrange transportation but you will handle insurance and import procedures.

CIP Carriage and Insurance Paid To (Named Place of Destination)

CIP is identical to CPT but adds a requirement that the seller must obtain insurance for the buyer's benefit. Under Incoterms 2020, CIP requires comprehensive Institute Cargo Clauses A coverage, which is the highest level.

As the buyer, you are responsible for:

• Import customs clearance
• Duties and taxes
• Delivery from named place to final destination

When to use CIP: When you want the supplier to handle both transportation and insurance, particularly for high-value goods where comprehensive coverage is essential.

DAP Delivered at Place (Named Place of Destination)

DAP means the seller delivers the goods ready for unloading at the named destination. Risk transfers when goods are placed at the buyer's disposal on the arriving transport.

As the buyer, you are responsible for:

• Unloading costs
• Import customs clearance
• Duties and taxes

When to use DAP: When you want the seller to handle most logistics but you will manage import procedures. DAP is popular for shipments where the buyer has established relationships with customs brokers.

DPU Delivered at Place Unloaded (Named Place of Destination)

DPU is the only Incoterm that requires the seller to unload the goods. The seller bears all costs and risks until goods are unloaded at the named destination.

As the buyer, you are responsible for:

• Import customs clearance
• Duties and taxes

When to use DPU: When you need goods delivered and unloaded at a specific terminal or facility and want the seller to handle unloading logistics.

DDP Delivered Duty Paid (Named Place of Destination)

DDP represents the maximum obligation for the seller. The seller delivers goods cleared for import, with all duties and taxes paid, at the named destination.

As the buyer, you are responsible for:

• Unloading costs only

When to use DDP: When you want a true total cost quote with no surprises. DDP is ideal for procurement teams who want to compare supplier quotes directly without calculating additional logistics costs.

AuraVMS recommends specifying DDP in RFQs when you need straightforward price comparison across suppliers. With DDP, the quoted price is very close to your actual landed cost.

Terms for Sea and Inland Waterway Transport Only

These four terms should only be used when goods travel primarily by ship.

FAS Free Alongside Ship (Named Port of Shipment)

The seller delivers goods alongside the vessel at the named port. Risk transfers when goods are placed alongside the ship.

As the buyer, you are responsible for:

• Loading onto the vessel
• Main sea freight
• Marine insurance
• Import customs and duties
• Delivery to final destination

FOB Free on Board (Named Port of Shipment)

FOB means the seller delivers goods on board the vessel at the named port. Risk transfers when goods pass the ship's rail.

As the buyer, you are responsible for:

• Main sea freight
• Marine insurance
• Import customs and duties
• Delivery to final destination

FOB is one of the most commonly used Incoterms in international procurement. It gives buyers control over the main carriage while ensuring sellers handle export procedures and loading.

CFR Cost and Freight (Named Port of Destination)

CFR means the seller pays freight to the destination port, but risk transfers when goods are loaded on the vessel at origin.

As the buyer, you are responsible for:

• Marine insurance (critical because risk transfers at origin)
• Import customs and duties
• Delivery from port to final destination

CIF Cost, Insurance and Freight (Named Port of Destination)

CIF adds insurance to CFR. The seller pays for freight and insurance to the destination port. However, unlike CIP, CIF only requires minimum Institute Cargo Clauses C coverage.

As the buyer, you are responsible for:

• Import customs and duties
• Delivery from port to final destination
• Consider additional insurance if goods are high-value

How to Choose the Right Incoterm for Your RFQ

Selecting the correct Incoterm for your RFQ depends on several factors. Here is a framework procurement teams can use:

Factor 1: Your Logistics Capabilities

If your organization has strong logistics capabilities with negotiated carrier rates, consider using terms that give you more control:

• EXW or FCA for maximum control
• FOB for sea shipments where you control freight

If your logistics team is small or you prefer supplier-managed logistics:

• DAP or DDP for most control given to seller
• CIP or CIF when you want seller-arranged insurance

Factor 2: Risk Tolerance

EXW and FOB transfer risk to the buyer early in the journey. DDP and DAP keep risk with the seller until delivery.

For high-value or fragile goods, consider DDP or terms where the seller retains risk longer. For commodity goods with reliable supply chains, earlier risk transfer may be acceptable in exchange for lower prices.

Factor 3: Quote Comparability

This is where many procurement teams struggle. If you receive quotes with different Incoterms, accurate comparison becomes nearly impossible.

AuraVMS addresses this by allowing procurement teams to specify required Incoterms in RFQ templates. When all suppliers quote on the same Incoterm, comparison is straightforward.

For maximum comparability, consider:

• DDP to your warehouse for true total cost comparison
• FOB a specific port if most suppliers ship via sea
• FCA supplier's facility if you have standardized logistics partners

Factor 4: Customs and Compliance

Import procedures can be complex, especially for regulated industries. Consider who has better customs expertise:

If you have established import procedures and customs broker relationships, FCA or FOB may be preferable. If suppliers regularly export to your country and understand the requirements, DAP or DDP might be more efficient.

Common Incoterm Mistakes That Cost Procurement Teams Money

Mistake 1: Not Specifying Incoterms in RFQs

The most common mistake is failing to specify the required Incoterm in your RFQ. When suppliers choose their own terms, you receive incomparable quotes.

AuraVMS RFQ templates include Incoterm fields precisely to prevent this issue. Every supplier sees the same requirements and quotes on the same basis.

Mistake 2: Using Sea Terms for Air or Road Shipments

FOB, CIF, CFR, and FAS are designed for sea transport. Using FOB for air freight shipments creates legal ambiguity and potential disputes.

For multimodal or air shipments, use FCA, CPT, CIP, or DAP instead.

Mistake 3: Confusing Cost Allocation with Risk Transfer

Many procurement professionals assume that if a supplier pays for shipping, they also bear the risk. This is not true for CPT, CFR, CIP, and CIF.

Under these terms, the seller pays for transportation, but risk transfers at origin. If goods are damaged in transit, the buyer bears the loss unless they have insurance.

Always review both cost allocation and risk transfer point when evaluating Incoterms.

Mistake 4: Underestimating DDP Pricing

Some procurement teams avoid DDP because supplier quotes seem higher. However, when you calculate the true total cost including freight, insurance, customs brokerage, duties, and last-mile delivery, DDP often provides better value.

Suppliers who regularly ship DDP have optimized their logistics and may achieve better rates than you can negotiate independently.

Mistake 5: Ignoring Insurance Requirements

CIF and CIP both include insurance, but at different coverage levels. CIF only requires minimum C-clause coverage, while CIP requires comprehensive A-clause coverage.

For valuable goods, CIF coverage may be insufficient. Either negotiate higher coverage or arrange supplementary insurance.

How AuraVMS Standardizes Incoterms in Your RFQ Process

Managing Incoterms manually across dozens of RFQs and hundreds of suppliers creates inconsistency and errors. AuraVMS provides several features to standardize Incoterms in your procurement process.

RFQ Template Incoterm Fields

When creating an RFQ in AuraVMS, you can specify the required Incoterm. Suppliers see this requirement clearly and must quote on that basis. This ensures all quotes are comparable from the start.

Supplier Portal Clarity

AuraVMS supplier portal displays Incoterm requirements prominently. Suppliers understand exactly what is expected, reducing clarification requests and quote resubmissions.

Quote Comparison with Incoterm Visibility

When comparing quotes in AuraVMS, the Incoterm for each quote is displayed alongside pricing. If a supplier quoted on different terms, the system flags the discrepancy for review.

Landed Cost Calculator Integration

AuraVMS can integrate with landed cost calculators to help procurement teams understand the true cost of quotes received on different Incoterms. Even if suppliers quote on varying terms, you can estimate the adjusted comparison.

Incoterms 2020 vs Previous Versions: Key Changes for Procurement

If your procurement contracts reference older Incoterms versions, you should understand the key changes in Incoterms 2020.

DAT Replaced by DPU

Incoterms 2010 included DAT (Delivered at Terminal). This has been replaced by DPU (Delivered at Place Unloaded), which is more flexible because it can specify any place, not just a terminal.

Insurance Requirements for CIP Increased

CIP now requires Institute Cargo Clauses A (comprehensive coverage) instead of the minimum C coverage. This is a significant change for procurement teams using CIP.

CIF retains the minimum C coverage requirement, creating a meaningful difference between these two terms.

FCA Bill of Lading Option

Incoterms 2020 allows parties using FCA to agree that the buyer's carrier will issue an on-board bill of lading to the seller. This addresses a practical issue with letters of credit that require on-board bills of lading.

Own Transport Clarification

DAP, DPU, and DDP now explicitly allow the seller to use their own transport rather than contracting a third-party carrier. This clarifies common practice for companies with in-house fleets.

Incoterms Best Practices for International Procurement

Practice 1: Standardize Within Product Categories

Choose a default Incoterm for each product category and stick to it. For example:

• Commodity components: FOB manufacturer's nearest port
• Critical or high-value items: DDP your warehouse
• Large equipment: DAP your facility

Standardization enables historical cost analysis and accurate budgeting.

Practice 2: Specify Named Places Precisely

Incoterms require named places, and precision matters. "FOB China" is not valid. "FOB Shanghai Port" is better. "FOB Shanghai Yangshan Deep Water Port" is best.

The named place determines where costs and risks transfer. Vague specifications create disputes.

Practice 3: Document Incoterms in Contracts

Always include the Incoterm with its version year in purchase orders and contracts. Write "CIF Los Angeles Port (Incoterms 2020)" not just "CIF Los Angeles."

AuraVMS automatically includes full Incoterm specifications in generated purchase orders.

Practice 4: Review Insurance Coverage

For terms where you bear risk during transport (EXW, FCA, FOB, CFR, CPT), ensure you have adequate cargo insurance. Do not assume supplier insurance covers goods after risk transfer.

Practice 5: Train Your Team

Ensure everyone involved in procurement, from buyers to finance to receiving, understands Incoterms basics. Misunderstandings lead to incorrect cost allocations, budget variances, and supplier disputes.

Incoterms Quick Reference Table for Procurement

Frequently Asked Questions

What is the difference between FOB and CIF for procurement?

FOB (Free on Board) means the seller delivers goods loaded onto the ship at the origin port. From that point, the buyer pays for freight and insurance and bears all risks. CIF (Cost, Insurance, Freight) means the seller pays for freight and insurance to the destination port, but risk still transfers at origin when goods are loaded. The key difference is who pays for shipping and insurance, not who bears the risk during transit.

Which Incoterm gives the most accurate quote comparison?

DDP (Delivered Duty Paid) provides the most accurate comparison because it includes all costs to your door. When suppliers quote DDP, you can compare prices directly without calculating additional logistics costs. AuraVMS recommends specifying DDP in RFQs when quote comparability is the priority.

Can I use FOB for air shipments?

Technically, FOB should only be used for sea transport. For air shipments, use FCA (Free Carrier) instead. FCA at the airport provides similar cost and risk allocation as FOB but is appropriate for air freight.

Who should handle import customs clearance?

This depends on your organization's capabilities. If you have established customs procedures and broker relationships, terms like FOB, FCA, or DAP may be preferable. If you want the supplier to handle everything, DDP transfers import clearance responsibility to them. However, DDP can be problematic if suppliers are unfamiliar with your country's import requirements.

How do Incoterms affect landed cost calculations?

Incoterms directly determine which costs are included in the supplier's quote. EXW quotes only include the product cost at the factory. DDP quotes include nearly everything. For accurate landed cost calculations, you must understand what is and is not included based on the quoted Incoterm, then add the missing components.

What happens if a supplier quotes on a different Incoterm than requested?

If your RFQ specifies DDP and a supplier quotes FOB, you have two options. You can ask them to requote on DDP terms, or you can calculate the estimated landed cost yourself to enable comparison. AuraVMS flags Incoterm discrepancies during quote review so procurement teams can address them before making decisions.

Should I always choose the Incoterm that gives me the lowest price?

Not necessarily. The lowest quoted price may not be the lowest total cost. EXW quotes are typically lowest because they exclude all logistics costs, but once you add freight, insurance, customs, and duties, the total may exceed a DDP quote. Always calculate total landed cost regardless of quoted Incoterm.

Mastering Incoterms is essential for any procurement team involved in international sourcing. The right Incoterm ensures you receive comparable quotes, understand your true costs, and avoid unexpected expenses.

AuraVMS simplifies Incoterm management by building standardized terms into your RFQ process. When every supplier quotes on the same basis, you can focus on evaluating value rather than deciphering incompatible pricing structures.

Ready to standardize your RFQ process and get accurate, comparable supplier quotes? Start your free trial of AuraVMS today at auravms.com and see how proper Incoterm management transforms your procurement efficiency.