Only 15% of companies choose the Incoterm that best suits their needs, according to data from the International Chamber of Commerce (ICC). In this guide we provide you with an overview of Incoterms, detect the most frequent errors and offer the main keys to help you select the Incoterm you need for each commercial operation.
What are Incoterms?
Incoterms (International Commerce Terms) are three-letter commercial terms used in international trade to define the obligations and responsibilities of both buyer and seller.
They were created by the ICC in 1936 and have been regularly updated since then with the aim of providing a common language throughout the world, reducing uncertainty in commercial transactions and clarifying the roles of all parties involved in the export and import process.
As a private law regulation, its use is voluntary and subject to acceptance by both parties. However, if it is decided to include it in the contract of sale, it becomes mandatory and companies that do not comply will be sanctioned.
What are Incoterms for?
Incoterms simplify commercial transactions and regulate the following aspects in order to avoid misunderstandings between the parties to a contract for the sale of goods:
- The place of delivery of the goods
- When the risk in the goods passes.
- Who contracts and pays for transport and insurance.
- What documentation each party must complete.
What are the new features of Incoterms 2020?
The latest update of the Incoterms came into force in January 2020. In this latest edition, the 11 existing Incoterms have been reorganised and divided into two groups, depending on whether they apply to all types of transport or only to maritime transport.
In addition, the 2020 edition represents these changes in practice compared to the 2010 Incoterms:
- The term DAT (Delivered At Terminal) is renamed DPU (Delivered at Place Unloaded).
- In the term FCA (Free Carrier), the willingness of the parties to issue/apply for a bill of lading has been clarified with the mention of "on board", which can be confusing when using documentary means of payment.
- The insurance cover of the terms CIP (Carriage and Insurance Paid to) and CIF (Cost, Insurance and Freight), where the seller is obliged to insure for the benefit of the buyer, has also been clarified.
What are the most common mistakes when choosing an Incoterm and how to solve them?
Exporters, importers, distributors or industrial companies of all sizes and in all sectors are often faced with the dilemma of deciding which Incoterm is most appropriate for each of their activities. Below we list some of the most common cases that cause the most uncertainty among professionals, as well as some recommendations on how to get the most out of these commercial tools.
5 tips to help you choose Incoterms:
- Consider all potential problems: It is very important that we always consider all kinds of unforeseen problems that may arise, such as unexpected costs in loading and unloading, at terminals or from containers. One solution is to make a list of all these potential problems and make sure that the risk is well defined with the other party to avoid any confusion later on.
- It is not enough to use the Ex Works Incoterm: Many exporters who start working with Incoterms decide to use the EXW (Ex Works) rule because they think it requires less knowledge of export procedures and involves less work. However, it is very likely that they will lose out on benefits by using this Incoterm exclusively. It is best to understand all the rules in order to take advantage of the one that best suits the characteristics, interests and agreements of each operation.
- Prioritise the most competitive transport: The choice of Incoterms rule will depend on who is responsible for the transport. In this respect, it is important to consider which actor can obtain the most economical transport rates and to allocate responsibilities on this basis.
- Calculate when risk is transferred: It is important to determine when the risk passes from the seller to the buyer. Some Incoterms allow risk to pass earlier, while others protect the buyer until the goods are physically in his possession. The bargaining power of each party will be the deciding factor in this impulse to allocate responsibility.
- Anticipate any unforeseen customs issues: If the choice of an Incoterm involves customs clearance or duties, it is important to be prepared and understand all the requirements, including any necessary clauses in the contract to clarify and protect against any delays or cost overruns.
These are just some of the basic considerations when using Incoterms. To ensure the success of your next commercial transaction, you should seek advice from a freight forwarder who is experienced in the use of Incoterms, has extensive knowledge of international transport and specialises in customs clearance.
At the Rhenus Group, we are here to answer any questions you may have about Incoterms and to help you throughout your supply chain. Contact an expert.
Would you like to complete this information? Use this link to access the interactive questionnaire developed by the ICC to help you choose the Incoterm that best suits your needs.