01 Jun How To Avoid The Seven Most Common Incoterms Mistakes
What are Incoterms?
Officially known as international commercial terms, incoterms were published by the International Chamber of Commerce to help facilitate commerce around the world. Incoterms are globally recognized to help prevent misunderstandings in foreign trade contracts by clarifying the obligations of buyers and sellers. This ensures both parties are aware of the responsibilities, costs, and risks associated with the process of transporting goods.
Incoterms are mainly classified into two categories. The first classification applies to any mode of transport, while the second classification only applies to sea and inland waterway transport.
Group 1 Incoterms: Apply to Any Mode of Transport
- CPT: Carriage Paid To
- CIP: Carriage and Insurance Paid To
- DAT: Delivered at Terminal
- DAP: Delivered at Place
- DDP: Delivered Duty Paid
- EXW: Ex Works
- FCA: Free Carrier
Group 2 Incoterms: Apply to Sea and Inland Waterway Transport
- CFR: Cost and Freight
- CIF: Cost, Insurance, and Freight
- FAS: Free Alongside Ship
- FOB: Free on Board
When you learn more about foreign trade, you will gain a better understanding of incoterms and how they affect your shipments, responsibilities, and risks.
The Seven Most Common Incoterms Mistakes
1. Using the Wrong Incoterms
It may seem simple, but this is one of the most common errors people make. Make sure you understand which incoterms are the most appropriate for your shipments. Don’t depend on anyone to inform you, as it is likely that you will end up spending more, and taking on more risks.
2. Using Group 2 Incoterms Instead of Group 1 Incoterms
Misapplication of “sea and inland water only” rules, such as FOB or CIF, can expose the exporter to unnecessary risks. The primary risk is at the point of origin. The responsibility is officially transferred under FOB when the cargo is loaded onto the vessel. However, it is common practice for shippers to hand over their cargo or containers to a carrier at the terminal who will load them onto the vessel.
In this scenario, instead of FOB, use FCA, CPT, and CIP, which are more suitable alternatives that will reduce risks. The risk of your container is transferred at the origin when it is handed over to the carrier at a predetermined location.
3. Confusing Ownership and Risk
The passing of title (ownership) from the seller to the buyer is not regulated by Incoterms. Incoterms only cover the risk during the delivery process and cost distribution depending on the obligation. Make sure to specify ownership in your contract when the title changes.
4. Using DDP Without Knowing Import Regulations
Another typical mistake that sellers make is using DDP without considering whether they understand and can complete the necessary formalities in the buyer’s region, such as paying VAT or GST.
DDP requires the seller to cover all the costs and duties relating to the import process. This means unexpected costs and delays could occur without proper knowledge of the destination’s import guidelines. Therefore, it is crucial to understand the relevant import regulations of the buyer’s country.
5. Misunderstanding CIF & CIP
Under CIF (Cost, Insurance, and Freight) and CIP (Carriage And Insurance Paid To), the seller must provide insurance coverage. When using these rules, the seller arranges insurance in the buyer’s name, and the seller needs to cover a minimum of 110% of the total shipment value. However, these incoterms often cause confusion and the cargo may end up without insurance.
Therefore, make sure the obligations of both parties are transparent, insurance coverage is adequate, and meets the contract’s specifications.
6. Having Unspecified Locations
Many people are unaware that the rules of Incoterms allow you to specify locations. If you don’t specify a detailed and complete address, it may result in conflicts as it allows the carrier to choose any delivery point within the area covered by the general location provided.
Many incoterms rely on an exact named place, terminal, or port, and at these points, the risk and responsibility are transferred. As a consequence, it’s crucial that you are specific with the places or addresses so that if something happens, both parties know the exact location when the incident occurs and whose responsibility will be.
7. Undetermined Paying Party for Terminal Handling Charges
This is important for those incoterms that state that the seller is responsible for the cargo beyond the port of shipment. If the seller doesn’t specify who will pay for the terminal handling charges, it could lead to extra costs and time.
It is recommended that you outline the party who will be responsible for the terminal charges when making a contract in order to avoid unnecessary complications, delays and extra costs.
If You Need Help with Incoterms
As you enter the world of logistics, it can be challenging to keep track of all the incoterms and use the right incoterm for the specific situation. As a logistics NVOCC service provider, we at SFI know all you need to know about incoterms. Book a shipping order with us and never worry about incoterms anymore. We’ve got you covered.