Almost every steel contract carries three letters after the price. Those three letters decide who books the ship, who pays the freight, who insures the cargo, and the precise moment the goods stop being the seller’s problem and start being yours. Get them wrong and you can find yourself uninsured over open water, or paying twice for the same leg.
This is a plain explanation of what an Incoterm does, what it does not do, and how the four terms you will meet most often in steel actually behave.
What an Incoterm Does and Does Not Do
Incoterms are a set of eleven standard trade terms published by the International Chamber of Commerce. The current edition is Incoterms 2020, in force since 1 January 2020. There is no 2026 edition, so a contract should always name the edition: CIF Felixstowe (Incoterms 2020).
Each term answers three questions, and only three:
- Who arranges carriage — which party books and contracts the transport for each leg.
- Who bears the cost — where the seller’s costs stop and the buyer’s begin.
- Where risk passes — the exact point at which loss of or damage to the goods becomes the buyer’s.
What an Incoterm does not do matters just as much. It does not set the price, transfer legal title to the goods, decide payment terms, or govern what happens if the material is off-spec. It is not a contract. It is three letters of shorthand that sit inside one.
FOB — Free On Board
The seller delivers the goods on board the vessel at the named port of loading. From the moment the cargo is on board, both risk and onward cost are the buyer’s.
The buyer books the vessel. That is the practical consequence people underestimate: on FOB terms you are arranging ocean freight, which means you carry the freight market and any delay in finding space.
FOB is a sea and inland waterway term only. For containerised cargo handed over at a terminal rather than loaded by the seller, FCA is the correct term. FOB is still routinely and incorrectly used for containers, which leaves a gap between the point the seller hands over and the point risk formally passes.
CFR — Cost and Freight
The seller contracts and pays for carriage to the named destination port. Risk, however, still passes when the goods are on board at the load port.
This split is the single most misunderstood feature of the term. The seller is paying for the voyage, but the buyer is the one carrying the risk during it. If the cargo is damaged mid-ocean, the buyer still owes the full invoice.
Because of that split, a buyer on CFR terms should be insuring the cargo from the load port, not from arrival.
CIF — Cost, Insurance and Freight
CIF is CFR plus insurance. The seller contracts for carriage and also takes out marine insurance for the voyage. Risk still passes on board at the load port, exactly as with CFR.
The detail worth knowing is the level of cover. Under Incoterms 2020, CIF requires only the minimum cover, equivalent to Institute Cargo Clauses (C). That is a restricted set of named perils and it is considerably narrower than the all-risks cover most buyers assume they have. If you want broader cover, the contract has to say so explicitly.
Insurance under CIF must be for at least 110% of the contract value and in the currency of the contract.
DDP — Delivered Duty Paid
DDP is the maximum obligation on a seller. The goods are delivered, cleared for import, with all duties and taxes paid, at the named place — often the buyer’s yard or the site itself. Risk passes only on arrival at that place.
It is the simplest term for a buyer and the most exposed for a seller, because the seller takes on import clearance in a country where it may have no presence. Import VAT is the recurring complication: it is often recoverable by the importer of record, and under DDP that is the seller, who may not be able to recover it.
For that reason many sellers who look like they are quoting DDP are in fact quoting DAP — delivered at place, duty unpaid — with the buyer handling clearance.
The Four Terms Side by Side
| Term | Who books freight | Who pays freight | Where risk passes | Insurance |
|---|---|---|---|---|
| FOB | Buyer | Buyer | On board at load port | Buyer’s choice |
| CFR | Seller | Seller | On board at load port | Buyer’s choice |
| CIF | Seller | Seller | On board at load port | Seller, minimum cover |
| DDP | Seller | Seller | On arrival at named place | Seller’s choice |
Where It Goes Wrong in Practice
- Naming the place loosely. “CIF UK” is not a term. The named port or place has to be precise, because that is the point costs and obligations attach to.
- Assuming CIF insurance is comprehensive. It is minimum cover unless you negotiate otherwise.
- Using FOB for containers. FCA is the correct term and removes an awkward gap in risk.
- Forgetting the edition. Terms have changed between editions. Naming “Incoterms 2020” removes the argument.
- Treating DDP as “no paperwork for me”. Somebody is still the importer of record, and that carries obligations beyond paying the duty.
The Short Version
Read the term as an answer to three questions: who books it, who pays for it, and where does risk pass. On FOB you run the freight. On CFR and CIF the seller runs the freight but you carry the risk from the load port. On DDP the seller carries everything to your gate.
If you are unsure which term serves a particular shipment better, that is a conversation worth having before the contract is signed rather than after the vessel has sailed. Get in touch and we will talk it through.
Related reading: the term you choose shapes the whole journey from mill to site, and where payment is by letters of credit the Incoterm decides which documents you must present.