How to avoid the seven most common Incoterm mistakes

Incoterms (International commercial terms) are the world’s essential terms of trade to sell goods. Despite its importance and the potential consequences a misuse may bring, many buyers and sellers remain unaware of some of the critical responsibilities of each Incoterm. We are taking a look at the most common mistakes when it comes to Incoterms and how you can avoid them.

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Entering the world of global trade and ocean shipping means understanding your roles and responsibilities in importing or exporting goods – and that requires an understanding of Incoterms. Incoterms are rules that define the terms of trade for the sale of goods all around the world, especially when you are planning to ship ocean freight.

As you explore the world of logistics and international trade, you will become more confident with Incoterms and how different ones will impact your cargo, your responsibilities, risk, and your bottom line.

“We know that customers who are new to logistics often struggle to fully understand what Incoterms are when starting to ship internationally. We have tried to highlight some common mistakes we have seen in the past and also tried to explain how to avoid them.”

Jesper Frandsen
Global Commercial Implementation Manager at Twill

As there are some common mistakes that we at Twill frequently encounter, we want to share them with you to get you started on the right foot:

1. Using the wrong Incoterms

It seems obvious, but it is essential! Make sure you know what Incoterm is best for your cargo – and don’t rely on someone else to tell you. You could end up paying more or opening yourself up to more risk than necessary. If you want more clarification on specific Incoterms, head over to our quick guide, showing you which Incoterm might be the best for your cargo.

2. Using FOB or CIF for containerized cargo

A common mistake is to use a traditional “sea and inland waterway only” rule such as FOB or CIF for containerised goods, instead of the “all transport modes” rule. This exposes the exporter to unnecessary risks.  The main risk involved lies at the port of origin. Under FOB, the risk is officially transferred when the cargo is loaded on board the vessel. However, it is common practice for shippers to hand over the cargo to the carrier at the terminal where it awaits to be loaded onto the vessel.

Instead, use FCA, CPT, and CIP which are the correct alternatives as they are meant for containerized freight. For each of these risk is transferred at the origin when the cargo is handed over to the carrier at the agreed upon location at the origin.

3. Don’t confuse ownership and risk

Incoterms do not regulate the passing of title (ownership) from the seller to the buyer. They only cover the risk during the period of delivery and dividing the costs accordingly. Make sure to define in your sales contract when the ownerships changes.

4. Using Delivered Duty Paid (DDP) without knowing import regulations

Another common mistake is to use DDP without thinking through whether the seller can undertake all the necessary formalities in the buyer’s country, e.g. paying GST or VAT.

DDP requires the seller to cover the import process costs and duties. This means they need to have import knowledge of the destination – which is different for every country or even state within a country. If they don’t know this, it could lead to added costs or delays. Accordingly, the seller must know specific import regulations.

5. Misunderstandings with 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 it has to cover a minimum of 110% of the total shipment value. Confusion often happens with these Incoterms, and the cargo may end up without insurance.

Therefore, make sure that you know your responsibilities and those of your partner. We recommend you check whether the insurance coverage is sufficient and matches the requirements of the commercial contract.

6. Not being specific when naming places or destinations

Many people are not aware that Incoterms rules allow locations to be specified. Failure to specify a full address may cause dispute, as it allows the seller to choose any delivery point he wishes within the general location provided. This may not be convenient for the buyer, especially if he must spend extra time and money transferring the cargo to his originally intended final location.

Many Incoterms rely on an exact named place, terminal, port etc. and at these stages, the risk and responsibility change hands. Therefore, it’s crucial to be specific when naming these places and/or addresses so that if something happens, both parties know exactly whose hands the cargo was in.

7. Not determining who pays the terminal handling charges

This is especially important for those Incoterms where the seller is responsible for the cargo beyond the port of shipment. Not determining who is paying the terminal handling charges can be troublesome and cost you extra time and money.

We recommend that you outline who is handling charges when you agree with your contract – so you can avoid complications, delays and unforeseen costs!

Curious about more tips and tricks?

As you enter the world of logistics, it can be hard to keep track of all the Incoterms and what they mean for you. Even the most seasoned logistics experts can lose track sometimes! As a digital logistics services dedicated to small and medium-sized businesses, we at Twill know all you need to know about Incoterms.

That’s why we have compiled essential information in our Incoterms guide. So, you can have it on hand when entering the world of ocean shipping. Check our dedicated Incoterms page now to download your guide.

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