FOB vs DDP for clothing imports: which should you choose?

FOB means the supplier’s job ends when your goods are loaded on the ship at the port of export; you book the freight, clear customs and pay the duty. DDP means the supplier delivers to your door with duty paid, so one price covers almost everything. FOB gives you control, visible costs and the import VAT in your own name. DDP gives you simplicity at the price of trusting someone else’s duty and tax assumptions. For a first small order with no freight forwarder, DDP is usually the easier start; once you ship regularly, FOB is usually cheaper and clearer.

What do FOB and DDP mean under Incoterms 2020?

Both are rules from Incoterms 2020, the set of 11 trade terms published by the International Chamber of Commerce (ICC). A term tells the buyer and seller three things: who pays for each leg of the journey, who does the customs formalities, and at what point the risk of loss or damage moves from seller to buyer. It does not set the price, transfer ownership or say when you pay. Those belong in the sales contract.

• FOB (Free on Board), named port of loading. The seller clears the goods for export and delivers them on board the vessel you nominate. Risk passes to you once they are on board. FOB is one of the four rules meant only for sea and inland waterway transport, so it is written as “FOB Chattogram”.
• DDP (Delivered Duty Paid), named place of destination. The seller carries the goods to the place you name, clears them for import, pays the duties and taxes, and bears the risk until they are ready for unloading there. It works for any mode of transport and is written as “DDP” plus your warehouse address.

Garment suppliers in Bangladesh also use “FOB” as shorthand for a full package price, which is a different idea: a production model, not a shipping term. Our guide to FOB, CMT and full package production covers that meaning. This article is about the shipping term only.

Who pays and who carries the risk at each step?

The quickest way to see the difference is to walk one shipment of t-shirts from a factory near Dhaka to a warehouse in Manchester or New Jersey.

Notice that under FOB the risk moves to you in Bangladesh, weeks before you see the goods. If a container is dropped at the transshipment hub, the claim is on your insurance, not the factory’s. That is why FOB buyers insure the cargo themselves on wider terms than the legal minimum.

Why the same shipment has a different customs value in each market

Duty is a percentage of the customs value, and markets do not agree on what that value includes. This matters for FOB buyers checking their own numbers and for anyone checking a DDP quote.

• United States. U.S. Customs and Border Protection values goods on the price paid, excluding international freight, insurance and other CIF charges. The FOB price is therefore close to the base for duty.
• United Kingdom. HMRC adds freight, insurance, loading and handling up to the point where the goods enter the UK. Duty is charged on roughly the CIF value.

Import VAT in the UK is then calculated on the customs value plus duty plus the incidental costs up to the goods’ first destination in the UK, such as clearance charges, handling and onward transport. So freight increases the VAT bill even when duty is zero. The landed cost calculator works this through for each market.

A worked landed-cost comparison (illustrative figures)

Every figure below is invented to show the arithmetic. None is a quote from us or from any supplier or forwarder. Replace them with your own quotes.

The order: 2,000 cotton t-shirts shipped by sea to the UK. FOB price USD 4.00 each, so USD 8,000 of goods. Assumed forwarder quote for ocean freight and insurance: USD 700. Destination port charges and customs broker: USD 400. Delivery to your warehouse: USD 250. Cotton t-shirts fall under commodity code 6109 10 00 10, which carries a 12% UK third-country duty and 0% for Bangladesh under the Developing Countries Trading Scheme, but only with a valid origin declaration.

Three things come out of this. First, when everything goes right, FOB is cheaper: in this example DDP costs USD 550 more, about 6%, which is what the convenience and the seller’s risk cost. Second, a single missing origin statement costs more than that difference. Under FOB that mistake is yours; under DDP the seller who promised a duty-paid price has to absorb it, which is part of what you are paying for. Third, the DDP figure tells you nothing about VAT until you ask.

What a DDP price can hide

DDP is the simplest term to buy and the easiest to get wrong. Before accepting one, ask these questions.

• Which commodity code and duty rate did you use? A DDP price built on 0% duty is only safe if the origin proof is right. If the seller used the wrong code, the importer of record answers to customs later.
• Who is the importer of record? Under DDP the seller, or an agent acting for it, should be declared as importer. The ICAEW, the accountants’ professional body, warns that many DDP imports are wrongly declared with the buyer as importer, which muddles who owes what.
• Is import VAT included? HMRC’s rule is that only the owner of the goods can recover import VAT, and it has flagged cases where the importer of record claimed VAT it did not own. If a seller pays UK import VAT under DDP and passes the cost to you inside the price, you may be paying 20% you cannot reclaim. Many buyers ask for “DDP, VAT unpaid”, or simply choose DAP, where the seller delivers but you clear the goods.
• Can the seller legally clear goods in your country? The ICC’s own guidance says that if the seller cannot or will not manage import clearance in the destination country, DAP is the more suitable rule.
• What happens to demurrage and storage if the goods are held at the port because paperwork is missing?

When FOB is the better choice

• You already have a freight forwarder, or you are ready to appoint one and compare its quotes.
• You ship full containers or regular LCL loads, where your own freight contract is usually cheaper than a supplier’s marked-up rate.
• You are VAT-registered in the UK or EU and want the import VAT recorded in your name so you can reclaim it.
• You import into the US, where duty is charged on a value that excludes international freight, so the FOB price is close to your duty base and easy to check. Rates and the additional tariffs that apply now are on our page for US brands.
• You want one forwarder to consolidate goods from several suppliers.

One refinement: for containers the ICC recommends FCA rather than FOB, because a container is handed to the carrier at the terminal days before it is loaded. The garment trade still quotes FOB, so agree in writing when your forwarder takes the container over. Our shipping and logistics page explains how that handover works from Chattogram.

When DDP is the better choice

• It is your first order and you have no forwarder or customs broker.
• The order is small enough that setting up your own import costs a large share of the goods’ value.
• You sell online and need a single landed price per piece to set retail prices quickly.
• You are not VAT-registered, so reclaiming import VAT is not an option either way.

Even then, treat DDP as a stage rather than a permanent arrangement. The duty and VAT rules for your market do not change because someone else fills in the forms, and learning them on a small order is cheaper than on a large one. The page for UK brands sets out the UK duty and origin position in full.

What to write into the contract, whichever term you use

1. The term with its version and a named place: “FOB Chattogram, Incoterms 2020” or “DDP [full warehouse address], Incoterms 2020”.
2. The commodity code for each style and the duty rate assumed in the price.
3. Who provides the proof of origin, in which form, and by when.
4. Insurance: who buys it and on what cover.
5. For DDP, who is importer of record, and whether import VAT is included.
6. For FOB, the date and place your forwarder takes the goods over.

What to do next

Run both routes through the landed cost calculator with your own freight and duty figures, then compare the result with any DDP price you have been offered. If the gap is small, DDP may be worth it for a first order. If it is large, ask what it covers. When you are ready, send us your styles, quantities and delivery address and we will quote FOB, CIF or DDP side by side, with the commodity codes and duty rates written on the quote.