Incoterms are, at their core, the rulebook for one deceptively simple question: who pays for what, and at what exact point does a shipment become your problem instead of someone else's? Three letters, and genuinely large financial consequences if you get them wrong.
FOB — Free On Board
The seller's responsibility ends the moment goods are loaded onto the vessel at the port of origin. From that point forward, the buyer takes on shipping cost, insurance, and risk. If something happens to the cargo on the voyage, that's overwhelmingly the buyer's exposure — not because it's unfair, but because that's precisely what FOB means.
CFR — Cost and Freight
The seller pays for freight all the way to the destination port, but risk still transfers to the buyer once goods are loaded onto the vessel. The buyer arranges their own insurance for the voyage — the seller is paying to get it there, not insuring it once it's moving.
CIF — Cost, Insurance, Freight
Structurally similar to CFR, with one addition: the seller also arranges at least minimum insurance coverage for the voyage. Cost, insurance, and freight are all handled by the seller up to the destination port — but again, risk still transfers earlier than most people assume, typically at loading, not at arrival.
The confusion that actually costs money
The trap almost everyone falls into: assuming risk transfers at the same point as cost or ownership. It doesn't, and it doesn't transfer "on arrival" just because that seems intuitive. Under every one of these terms, risk generally transfers at the port of loading, not the destination — insurance under CIF exists precisely because the buyer is carrying that risk during the voyage, even though the seller arranged the policy.
If a shipment is damaged or lost at sea under FOB, that loss is the buyer's problem to resolve, full stop. Under CIF, there's at least a policy in place — but disputes over what exactly that policy covers, and whether the incoterm was applied correctly, are extremely common and extremely expensive to untangle after the fact.
The fix is depressingly simple: be specific
The incoterm needs to show up in the SPA with real precision — the named port, and the Incoterms version being used (2020 differs from earlier versions in meaningful ways). "FOB" with nothing else attached is not a complete clause. "FOB [named port], Incoterms 2020" is.
Why this belongs on the deal record, not just the PDF
The incoterm gets negotiated once, early, and then routinely forgotten by everyone except whoever ends up disputing a claim six weeks later. That's the actual argument for keeping it attached to the deal itself rather than buried in a contract nobody re-reads — on CommodityOS, incoterm and origin/destination are stored directly against the deal record, visible to every participant at every stage, not just the two people who negotiated it.
Incoterms exist because "somewhere between the warehouse and your problem" isn't a legally binding clause. Three letters is a lot to carry, but that's the job.
Looking for other terms? See the full Commodity Trading Glossary.