Incoterms, or International Commercial Terms, are a vital part of international trade agreements. Introduced by the International Chamber of Commerce (ICC), these terms simplify shipping practices and allocate responsibilities between buyers and sellers. Consequently, there is complete clarity in cross-border transactions and no one ever has any problems.
We wish.
All logistics professionals will know that incoterms can bring their own difficulties. Mistakes in incoterm usage can lead to costly delays, financial losses, and disputes. In this article we will explore eight frequent incoterm mistakes and provide actionable solutions to avoid them, ensuring smoother international trade movements.
1. Lack of clarity on customs responsibilities.
There can be delays at customs because of unclear incoterms in trade, where a clear process has not been agreed.
An example of this could be a supplier for a UK company opting to use DDP (Delivered Duty Paid) incoterms, with every intention of being helpful to the buyer. DDP of course means that the seller takes on all responsibility for delivering the goods to the buyer, including customs procedures.
However, if the supplier is not established in the UK, for example, it will be significantly more difficult for them to clear the goods on entry into the country. Finding a broker willing to act on behalf of a company without a UK presence would be challenging. It would make much more sense for the UK-based firm to clear the goods for entry into the UK.
“In customs, something that shippers really need to consider is their incoterms, because they can cause significant issues and delays at the border. So shippers need to carefully consider the incoterms in use and whether they are best suited to the customs part of transaction.”
Jamie Craig, WTA Customs Specialist
2. Misunderstanding the transfer of risk vs. transfer of ownership.
A frequent source of confusion is mistaking the transfer of risk with the transfer of ownership. Incoterms only dictate the point at which the risk transfers from seller to buyer, not the ownership of the goods. Confusing these two aspects can lead to disputes, particularly if the goods are damaged during transit.
Clearly differentiate between the transfer of risk and ownership in your contracts to avoid this mistake. Incoterms will dictate when the risk is transferred, the ownership transfer should be clearly stated separately in the sale agreement.
If you deem it necessary, have a legal team review contracts to ensure these clauses are unambiguous. This will further prevent conflicts which come with financial costs and reputation damage.
3. Overlooking incoterm updates and revisions.
Incoterms are periodically updated by the ICC to reflect changes in global trade practices. Businesses that fail to keep up with these revisions might use outdated terms, leading to misunderstandings and contractual disputes.
A common oversight in the last few years has been the continued use of Incoterms 2010 instead of the updated Incoterms 2020.
Make sure you stay informed of any updates or revisions to the incoterms by subscribing to relevant publications, such as WTA’s Market Update. Ensure that your contracts explicitly state ‘Incoterms 2020’.
4. Failing to specifically mention the named place.
The named place on any contractual agreement needs to be a highly specific destination. Only mentioning a region or town is not specific enough and can cause disputes. For example a delivery location of only "Wythenshaw, Manchester" is insufficient.
A complete address is the only way to avoid discrepancy over this issue.
5. Neglecting the total cost implications.
Some businesses focus solely on the purchase price or sale price, neglecting the total cost implications of the chosen incoterm. Once again, DDP is a good example of this. It might seem advantageous as it puts the requirement of import duty payment on the seller, but it can lead to significantly higher costs for the seller. This needs to be factored into the price of the selling party, or the deal could be completed at a loss.
Put simply, the incoterms chosen have significant cost implications. Being fully aware of those is key.
Always calculate the total landed cost, which includes the cost of goods, transportation, insurance, duties, taxes, and any other fees associated with the shipment.
Request quotes from freight forwarders on multiple incoterms and consult your finance team to fully understand the cost implications of each one. Choose the one that aligns best with your company’s financial strategy.
6. Inadequate insurance coverage.
Assuming that the incoterm used will automatically provide adequate insurance coverage is a misconception. While terms like CIF (Cost, Insurance, and Freight) and CIP (Carriage and Insurance Paid to) do include insurance, the coverage might not be sufficient for the value of the goods.
In times of increased disruptive weather and security threats to ships, adequate marine insurance is vital.
“Comprehensive marine insurance has never been more important. With the weather becoming increasingly unstable, the prospect of containers being lost overboard or damaged is higher.
The Red Sea diversion in 2024, meaning vessels went around the Cape of Good Hope, has had disastrous consequences for many shippers. That stretch of water is susceptible to strong winds, resulting in an increased volume of containers lost overboard.”
Jade Blackburn, Head of Sales, WTA
Ensure that you fully understand the level of insurance provided under the selected incoterm. If insufficient, then factor more comprehensive coverage that into your costs. It’s also important to verify whether the insurance covers you for the specific risks associated with the route and mode of transport.
7. Failing to determine who is responsible for terminal handling charges.
Terminal handling charges (THC) can be complicated and difficult to navigate. Ambiguity in the responsibilities assigned under incoterms can lead to disputes. Misunderstanding who is liable for loading and unloading goods can result in unexpected costs and delays.
THCs are accrued at all stages of a shipments journey, origin, transhipment and destination. Shippers of certain cargo are more liable for confusion between the responsible party, as they require additional servicing, which comes with costs. Examples include out-of-gauge cargo which requires specialist handling equipment, reefer containers and hazardous goods.
Clearly define all responsibilities in the contract, beyond just stating the incoterm, to avoid issue.
For instance, if using DAP, specify whether the seller is responsible for unloading the goods at the final destination. Having detailed contracts and clear communication between all parties involved in the shipment can prevent such misunderstandings.
8. Inadequate communication and coordination.
Even when the correct incoterm is chosen, and each parties priorities are clearly outlined, poor communication and coordination between the buyer, seller, and logistics providers can lead to mistakes. This is particularly pertinent when there is a significant time difference between the parties.
It could be as simple as failing to notify the buyer of the goods’ arrival, leading to storage costs at the destination. But there’s a whole host of potential for unwanted costs.
Ensure you establish robust communication channels and protocols between all involved. The implementation of a supply chain visibility tool, with a live chat function, such as the WTA Platform can assist massively. With these tools established, all relevant stakeholders will be notified the moment some asks a question or provides an update on a shipment.
Regular coordination meetings or calls can also help in keeping everyone aligned and can quickly address any issues that arise.
Incoterms play a crucial role in international trade, ensuring that the responsibilities and risks associated with shipping are clearly defined. However, the common mistakes outlined above can lead to significant financial and operational setbacks if not properly addressed.
By staying informed about Incoterm updates, understanding the implications of each term, and ensuring clear communication and agreement between all parties, businesses can avoid these pitfalls and ensure smooth, efficient international transactions.
For guidance on incoterms, and indeed any aspect of international trade, reach out to our experts today.
