The main incoterms a merchandiser meets and who pays for what under each one

This page names the main incoterms a merchandiser meets on an export order, and explains what each one makes the factory pay for and what it makes the buyer pay for

This page is for a merchandiser or shipping clerk at a garment factory, or a buyer's own merchandiser, who must know which incoterm a quotation or a purchase order is written under, and what that one term actually decides: who pays for freight, who pays for insurance, who pays import duty, and at which exact point the goods become the buyer's own risk. This is chiefly a money-flow skill: reading three letters on a purchase order and knowing, without asking anyone, which costs already sit inside the quoted price and which costs still have to be added. Without this skill, a factory can quote a price that looks competitive on paper but secretly leaves out a cost it was actually supposed to carry, or a buyer's merchandiser can build a landed-cost estimate that is wrong because it double-counts a cost the factory already paid for.

You need: no previous lesson. A basic sense of how an export order is quoted and confirmed is useful but not required.

By the end of this lesson you can:

• name the four incoterms a garment merchandiser meets most often, and state what each one covers;
• explain the one moment in a shipment's life where risk passes from seller to buyer, for each of these incoterms;
• read a purchase order's incoterm and state, without checking anything else, who pays for sea freight and who pays for duty;
• tell an incoterm's effect on the FOB price apart from its effect on who carries the risk.

Not covered here: how to book a shipment with a freight forwarder (Lesson 2), how to choose between a full container and a shared container (Lesson 3), and how to read a bill of lading's own status (Lesson 4).

Words you will meet in this lesson

An incoterm fixes, for one named point in a shipment, which costs the seller has already paid inside its price and which costs the buyer must still add, and it fixes exactly where risk of loss passes from seller to buyer

An incoterm is a short, standardised term, published by the International Chamber of Commerce and used the same way by exporters and importers worldwide, that fixes two things for a single named point in a shipment: which costs the seller has already carried inside its quoted price, and where responsibility for the goods passes from seller to buyer. An incoterm is not a shipping method, and it does not decide whether the goods travel by sea or by air; a shipment can go by sea under FOB or by air under the same FOB rule. What an incoterm decides is the split of cost and risk between the two named parties, at a fixed point that both sides agree to before the order is confirmed.

The same four incoterms apply to almost every order, but which one an order is actually quoted under, and how far the seller's own cost reaches, differs by buyer, market and product

Northline Apparel asks Delta Garments to quote Order A both FOB and CIF, and Mona has to show what changes in the price and what does not

Northline Apparel asks Delta Garments to quote Order A, 15,000 pieces of a basic cotton T-shirt, under two incoterms: FOB, Delta Garments' own port, and CIF, Northline Apparel's own named port. Mona, the merchandiser at Delta Garments, already has Order A's own fixed FOB price of USD 3.20 per piece. Her task is to show Sara, the buyer at Northline Apparel, exactly what CIF adds to that price, and to confirm that nothing about the garment itself, its fabric, its making cost, or its profit, changes between the two quotations. Only the freight and insurance line changes; everything Delta Garments already builds into its FOB price stays the same under either incoterm.

Order A's CIF price is its own fixed FOB price plus sea freight and insurance, with every step shown

The freight and insurance figures above are illustrative, since actual freight rates change by route, season and carrier; what stays fixed is the method, FOB price plus freight plus insurance equals CIF price, and the fact that the garment's own cost build-up, fabric, trims, making, overhead and profit, is identical under both incoterms.

A four-step method for reading any purchase order's incoterm before quoting or accepting a price

1. Find the three-letter incoterm written on the purchase order or quotation, such as FOB, CIF, EXW or DDP.
2. Name the exact point where risk passes from seller to buyer under that incoterm, using the standard definition, not a guess.
3. List every cost the quoted price already includes up to that risk-transfer point.
4. List every cost the other side must still add from that point onward, such as freight, insurance or duty.

A common mistake is assuming FOB and CIF quote the same price for the same garment

A common mistake, when a buyer compares two quotations from different factories, is assuming that an FOB quotation and a CIF quotation for the same garment should carry the same number, and treating a higher CIF number as proof that a factory is more expensive. An FOB price and a CIF price are never meant to match, because CIF already carries freight and insurance costs that an FOB price leaves for the buyer to add separately. Comparing them without adjusting for freight makes a perfectly competitive FOB factory look expensive next to a CIF quotation, or a CIF factory look cheap next to an FOB quotation that still needs freight added on top.

• An incoterm fixes cost and risk at one named point in a shipment; it does not decide whether goods travel by sea or by air.
• EXW hands over at the factory's own gate; FOB hands over once goods are on board the ship at the seller's own port.
• CIF adds sea freight and insurance to the FOB price but still passes risk to the buyer once goods are on board.
• DDP is the only one of these four where the seller pays even the import duty, all the way to the buyer's own address.
• A CIF price is always higher than the matching FOB price for the same order, by the amount of freight and insurance added.
• A domestic Make to Stock order usually needs no incoterm at all.
• The same four incoterms apply across product families; only the product inside the container changes.

Sara at Northline Apparel emails Delta Garments asking why the CIF quotation for Order A is USD 5,100 higher than the FOB quotation for the same order

Sara at Northline Apparel emails Delta Garments after receiving both quotations for Order A on the same day.

• The FOB quotation, Delta Garments' own port, totals USD 48,000 for 15,000 pieces.
• The CIF quotation, Northline Apparel's own named port, totals USD 53,100 for the same 15,000 pieces.
• Sara's email asks whether Delta Garments has quietly raised its own making cost or profit for the CIF version.
• Mona must reply the same day with a breakdown that shows exactly what the USD 5,100 covers.

The relevant line from Sara's own email:

Has Delta Garments raised its own cost or profit on the CIF quotation? Decide before you open the decision.

Shipment tracker: the columns this lesson fills

This course's shipment tracker is the tool this lesson starts building: one row per shipment, its incoterm, and what that incoterm means each side must pay. This lesson fills the order, the incoterm, and the cost split; later lessons in this course add the booking, the container type, and the tracking status. [Download the tracker](templates/T14-C01-shipment-tracker.xlsx).

Download the Shipment tracker (Excel)

Lesson 2: Booking a shipment with a freight forwarder and confirming a sailing date

Now that you can name the main incoterms and who pays for what under each one, the next lesson shows how to actually book a shipment with a freight forwarder once an order is ready to ship. Back to the course map