Incoterms on Wholesale Purchase Orders: Who Pays Freight, Duty and Risk

Every wholesale purchase order carries a three-letter term that most buyers skim past. That term decides who pays for inland haulage, export clearance, ocean or air freight, insurance, import duty and final delivery – and, separately, the point at which risk of loss moves from seller to buyer. Getting it wrong does not usually lose the shipment. It loses money quietly, on every order, in a place nobody is reconciling.

The terms are standardised, which is the good news: the same abbreviation means the same thing regardless of the supplier. The complication is that the term describes obligations, not outcomes, and the practical result depends on whether the buyer actually has a forwarder, an importer registration and a customs broker in place.

The Four Terms Wholesale Buyers Actually Meet

EXW – ex works. The seller makes the goods available at their premises. Everything else – loading, export clearance, freight, import, delivery – is the buyer’s. It looks cheapest on the quotation because the price contains the least, and it is the term most likely to produce surprises for buyers without a local agent: the factory may not be able to produce export documentation, and uncollected goods can sit at the gate.

FOB – free on board. The seller delivers the goods on board the vessel at the named port and handles export clearance. The buyer pays ocean freight and everything downstream. This is the default for sea freight because it keeps control of the main leg with the buyer while leaving the export side, which needs local licences, with the seller.

CIF – cost, insurance and freight. The seller pays freight and insurance to the destination port, but risk still transfers at the origin port. Buyers often assume the seller remains responsible during transit; they do not. Insurance is bought for the buyer’s benefit but claims are the buyer’s problem to file.

DDP – delivered duty paid. The seller delivers at the destination with duty paid. Convenient, and the most expensive, because the seller prices in risk and financing. It also means the seller is importer of record, which can conflict with the buyer’s need to hold import documentation for their own tax position.

Risk and Cost Transfer at Different Points

The distinction that causes disputes is that cost and risk do not always move together. Under CIF the seller pays freight to destination while risk passed at the loading port. Under DAP the seller pays carriage to the destination but the buyer handles import clearance and duty. A buyer who assumes “the seller paid the freight, so the seller owns the problem” will discover the difference at the worst possible moment.

Insurance follows the same logic. Where the term does not oblige the seller to insure, the buyer must arrange cover – and cover should start at the point risk transfers, not at the point the goods arrive.

Choosing a Term: The Decision Sequence

Work backwards from capability rather than forwards from price:

• Do you have a forwarder and broker? If yes, FOB puts you in control of the expensive leg and gives you visibility. If no, a delivered term is safer even at a higher price.
• Can you act as importer of record in the destination? If not, DDP or a similar arrangement may be necessary, with the documentation consequences accepted.
• Is the lane volatile? Where freight rates are moving fast, the party that controls the booking controls the cost. FOB lets a buyer use their own rate agreements.
• Do you need the import paperwork for tax recovery? If import VAT is recoverable, the buyer generally needs to be the importer, which rules out seller-paid duty terms.

Technical Background

The terms themselves are published as a standard set of rules, described under Incoterms, and they allocate tasks between buyer and seller rather than transferring ownership. Where the seller is obliged to deliver goods to a carrier, the bill of lading is the document that evidences receipt and contract of carriage. The clearance step that most often stalls a first-time importer is handled by a customs broker acting for the importer of record.

What to Put on the Purchase Order

Specify the term with the named place in full: “FOB Shenzhen” rather than “FOB”, because the named port decides who pays inland haulage and where risk transfers. Add the Incoterms edition year if your contract templates do so, state who is importer of record, and state whether insurance is required and at what coverage level.

Then reconcile it once per supplier per year against what actually happened on invoices. Freight invoices that do not match the term are the clearest evidence that someone is paying for something the purchase order assigned elsewhere.

Terms interact with customs valuation and duty, covered in duties and de minimis for bulk shipments, and with landed cost, discussed in where margin actually goes. Choice of transport mode is the other half of the decision in air versus sea freight.

FAQ