How to match the clause to the Incoterm
- Decide the Incoterm first. It sets the point where cost and risk pass to the buyer, and therefore which stages the seller is pricing at all.
- List the stages on the seller side. Work out which of manufacturing cost, local freight, main freight, customs, and handling the seller actually carries. EXW is manufacturing only; DDP is every stage.
- Give each seller-side stage its own benchmark. Manufacturing cost to a materials-and-labor PPI composite, local freight to a trucking PPI plus a diesel index, ocean freight to a container freight index for the route.
- Keep duties on a separate line. Customs duties follow a government tariff schedule, not a market index. Track them separately and update only when the tariff rate itself changes.
- Sum the stages, do not blend. Add the per-stage adjustments together. Indexing the whole landed price to one blended number hides which stage drove the change.
A landed price is not one number
A goods price that lands at a buyer's door is built from several stages stacked on top of each other: the manufacturing cost at the factory, local freight to the port, international freight, customs and duties, and service or handling fees. Each stage moves on a different driver. Manufacturing cost tracks a materials and labor index. Freight tracks freight indices. Duties track a government tariff schedule, not a market index at all.
One blended "landed cost index" hides all of that. Price each stage against its own real benchmark instead, and sum them.
The Incoterm decides which stages the seller prices
The Incoterm in the contract sets the point where cost and risk pass from seller to buyer. That point decides which of the stages below the seller is even pricing, and therefore which stages need an escalation clause at all.
| Incoterm | Seller prices | Buyer prices |
|---|---|---|
| EXW (Ex Works) | Manufacturing cost only | Everything from the factory gate onward |
| FCA (Free Carrier) | Manufacturing cost, local freight to the named handover point, export customs clearance | Main freight, import customs, remaining delivery |
| FOB (Free on Board) | Manufacturing cost, local freight, export customs, loading | Main freight, import customs, delivery |
| CIF (Cost, Insurance, Freight) | All of the above, plus ocean freight and insurance to the destination port | Import customs, delivery from port |
| DAP (Delivered at Place) | Everything through delivery to the named place (not unloaded) | Unloading, import customs clearance and duties |
| DDP (Delivered Duty Paid) | Everything, including import duties | Nothing, price is fully landed |
Under EXW, the seller only needs to escalate one thing: manufacturing cost. Under DDP, the seller is carrying market risk across every stage in the table above, and the escalation clause needs to cover all of it.
Match each stage to its own benchmark
| Stage | Typical benchmark |
|---|---|
| Manufacturing cost | A materials and labor PPI composite specific to the goods, see the relevant vertical guide |
| Local or inland freight | Trucking PPI, matched to the specific move (see the inland freight guide), plus a diesel fuel index |
| Ocean freight | A container freight index such as Drewry's World Container Index or the Freightos Baltic Index, where the shipment's route is covered |
| Customs and duties | The statutory tariff rate for the goods' classification, not a market index |
| Service and handling fees | A freight-forwarding or logistics services wage index, or a fixed per-shipment fee |
Duties do not escalate like the rest
Customs duties are set by a government tariff schedule, not a market index: most commonly as a percentage of declared value, but some tariff lines use a fixed amount per unit or weight, or a mix of both, so check the specific classification rather than assuming ad valorem applies. Whichever form it takes, the duty does not move with a market index. It only changes when the government changes the rate, and that change is a policy event, not a monthly data release. Do not attach a duty line to an index-based escalation clause. Track it separately, and update it when the tariff schedule itself changes.
A worked example
A DDP contract lands a shipment at $80,000: $50,000 manufacturing cost, $8,000 local freight (split origin and destination), $15,000 ocean freight, $5,000 duties, $2,000 handling. Over one review period, manufacturing cost rises 4% ($2,000), ocean freight rises 12% ($1,800) because of a capacity crunch, and local freight is flat. Duties and handling do not move under the escalation clause at all. The total adjustment is $3,800, driven almost entirely by ocean freight, a fact a single blended index would have hidden.
Structure the clause to match the Incoterm
Decide the Incoterm first, then build the escalation clause only for the stages that Incoterm puts on the seller's side. A DDP contract needs the full multi-stage composite above. An EXW contract needs one line. Pricing more stages than the Incoterm actually assigns to the seller creates a clause that adjusts for costs the seller was never carrying in the first place.