A shipping agreement when sellers are only responsible for making products available at designated locations and buyers are responsible for shipping costs and risks
Over 1.8 million professionals use CFI to learn accounting, financial analysis, modeling and more. Start with a free account to explore 20+ always-free courses and hundreds of finance templates and cheat sheets.
Ex Works (EXW) is one of the International Commercial Terms (Incoterms), in which buyers are responsible for the shipment and subject to risks. It is a commonly used shipping agreement. In addition to EXW, another ten Incoterms describe the responsibilities between sellers (or shippers) and buyers (or consignees) in terms of the shipping process.
Ex Works (EXW) is a type of shipping agreement for international trading, published by the International Chamber of Commerce (ICC).
According to the EXW terms, sellers are only responsible for making products available at designated locations, and buyers are responsible for shipping costs and risks.
Under EXW terms, buyers can benefit from full control over the shipping process and slightly cheaper products, but it might be offset by the cost of customs clearance and export licenses.
Understanding Ex Works
Incoterms refer to a set of globally recognized trade terms that clarify the obligations of buyers and sellers. They are published by the International Chamber of Commerce (ICC) to facilitate international trading.
The diagram above shows the buyer’s scope of responsibility across a shipping process under the EXW terms or FOB terms. According to the EXW terms, sellers are only responsible for making products available at designated locations. At the same time, buyers must pay transportation costs and are responsible for the shipping risks.
The EXW agreement is favorable to sellers with minimum obligations. The seller only needs to package and label the products and make them ready for shipment at a predetermined location, which usually is a port nearby. If there is paperwork required for shipment, such as export licenses, the seller also can facilitate the buyer to settle the paperwork.
There are more burdens on the buyer’s side. The buyer is responsible for the transportation costs (including the cost of paperwork). After getting access to the products at a certain spot, the buyer bears the subsequent risks.
Several risks exist in loading and unloading the products, passing the customs, and storing the products. The buyer can ask the seller to load the products at the designated location, but the seller is not obligated to do so since it is not within the seller’s scope of responsibility.
Ex Works (EXW) vs. Free-on-Board (FOB)
Free-on-board (FOB) is another type of Incoterms, which is also the most commonly used one. Under the FOB origin or FOB shipping point terms, the buyer takes ownership of the products and bears the risks as long as the seller has shipped the products from the specified “shipping point.” Under the FOB designation terms, the risks and ownership remain at the seller’s side until the buyer has received the products.
Both FBO and EXW terms clarify the responsibilities and costs in a shipping process between sellers and buyers. However, FBO assigns responsibilities between the seller and buyer more evenly than EXW. Sellers typically offer products at a lower price to buyers if they go for the EXW terms.
Pros and Cons of EXW
To sellers EXW’s advantage is obvious, that they only cover the minimum scope of responsibilities and costs. To buyers, the EXW agreement can also bring benefits. As the shipping costs and responsibilities are on the buyers’ side, they can control the entire shipping process to ensure the products are safe. The shipping method is favorable to subsequent local transportation. Additionally, buyers can also better forecast the costs and avoid sellers charging a higher shipping fee.
One major disadvantage of EXW to buyers is related to customs clearance. According to the EXW terms, sellers are required to facilitate the paperwork for export clearance. If sellers’ information is inaccurate, the buyers are still responsible for the additional cost and results of delays. If the products are chosen for export customs inspection, the relevant costs are still on the buyers’ side.
Furthermore, a seller will usually prefer to apply EXW terms if he does not have an export license, and thus the buyer will be responsible for paying for it. Under the EXW terms, buyers must look for freight forwarders who can offer both the door-to-door service and support customs (export and import) clearance process.
While deciding on the shipping agreement, buyers should consider the freight fees and the benefits and drawbacks of different incoterms to determine explicit and implicit costs.
Take your learning and productivity to the next level with our Premium Templates.
Upgrading to a paid membership gives you access to our extensive collection of plug-and-play Templates designed to power your performance—as well as CFI's full course catalog and accredited Certification Programs.
Already have a Self-Study or Full-Immersion membership? Log in
Access Exclusive Templates
Gain unlimited access to more than 250 productivity Templates, CFI's full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.