INCOTERMS Explained: Avoiding Costly Mistakes in Import-Export Contracts

Presented by Amindus Consulting and Solutions

International trade involves many moving parts, and one of the most critical elements for smooth transactions is the use of INCOTERMS. These standardized trade terms define responsibilities, risks, and costs between buyers and sellers in import-export contracts. Yet, many businesses struggle with their correct application, leading to costly misunderstandings and disputes.

This post explains INCOTERMS in detail, highlights their importance in international trade, points out common mistakes companies make, and offers practical tips to avoid these pitfalls. Real-world examples will help clarify how to use INCOTERMS effectively and protect your business interests.

What Are INCOTERMS and Why Do They Matter?

INCOTERMS, short for International Commercial Terms, are a set of rules published by the International Chamber of Commerce (ICC). They clarify who is responsible for tasks such as transportation, insurance, customs clearance, and risk transfer during the shipment of goods.

Using INCOTERMS correctly is essential because:

• They reduce confusion by clearly defining obligations.

• They allocate costs and risks fairly between buyer and seller.

• They help avoid disputes by setting expectations upfront.

• They streamline contract negotiations by providing a common language.

Without clear INCOTERMS, parties may assume different responsibilities, leading to delays, unexpected expenses, or legal battles.

Overview of Common INCOTERMS

INCOTERMS are updated periodically; the latest version is INCOTERMS 2020. They fall into two main categories based on the mode of transport:

For Any Mode of Transport

• EXW (Ex Works): Seller makes goods available at their premises. Buyer handles all transport and risks.

  
  

• FCA (Free Carrier): Seller delivers goods to a carrier or another party at a named place.

  
  

• CPT (Carriage Paid To): Seller pays for carriage to a destination but risk transfers earlier.

  
  

• CIP (Carriage and Insurance Paid To): Like CPT but seller also pays insurance.

  
  

• DAP (Delivered at Place): Seller delivers goods ready for unloading at destination.

  
  

• DPU (Delivered at Place Unloaded): Seller delivers and unloads goods at destination.

  
  

• DDP (Delivered Duty Paid): Seller bears all costs and risks, including import duties.

For Sea and Inland Waterway Transport Only

• FAS (Free Alongside Ship): Seller places goods alongside the ship at port.

  
  

• FOB (Free On Board): Seller loads goods on board the ship.

  
  

• CFR (Cost and Freight): Seller pays costs and freight to destination port.

  
  

• CIF (Cost, Insurance and Freight): Like CFR but seller also pays insurance.

Each term defines precisely when risk passes from seller to buyer and who pays for what.

Common Mistakes Businesses Make with INCOTERMS

Despite their importance, many companies misuse INCOTERMS. These errors can cause financial loss, delays, or damaged relationships.

1. Using INCOTERMS Without Specifying the Version

INCOTERMS have evolved over time. Using an outdated or unspecified version can cause confusion. For example, INCOTERMS 2010 and 2020 differ in some rules, such as the introduction of DPU replacing DAT.

Tip: Always specify the INCOTERMS version and year in contracts, e.g., "FOB Shanghai Incoterms 2020."

2. Choosing the Wrong INCOTERM for the Mode of Transport

Some INCOTERMS apply only to sea or inland waterway transport (e.g., FOB, CIF). Using these for air or road shipments leads to unclear responsibilities.

Tip: Match the INCOTERM to the transport mode. Use terms valid for any mode when shipping by air or multimodal transport.

3. Ignoring the Place or Port of Delivery

INCOTERMS require naming a precise location (e.g., port, warehouse). Leaving this vague creates uncertainty about where risk and costs transfer.

Tip: Always specify the exact place or port, such as "CIF Rotterdam Port" or "DAP Warehouse Berlin."

4. Overlooking Customs and Import Duties

Some INCOTERMS, like DDP, require the seller to handle import customs and pay duties. Many sellers underestimate this responsibility, leading to unexpected costs.

Tip: Understand who handles customs clearance and duties. If unsure, avoid terms like DDP or clarify responsibilities explicitly.

5. Confusing Risk Transfer with Cost Payment

Risk and cost transfer points differ in some INCOTERMS. For example, under CPT, risk passes when goods are handed to the carrier, but the seller pays freight to destination.

Tip: Know the difference between risk and cost transfer to avoid disputes over damage or loss during transit.

Cargo ship at international port with containers being loaded

Practical Tips to Avoid INCOTERMS Pitfalls

Understand Your Supply Chain

Map out your entire shipping process, including transport modes, customs points, and delivery locations. This helps select the right INCOTERM that fits your logistics.

Train Your Team

Ensure sales, logistics, and legal teams understand INCOTERMS basics and updates. Miscommunication between departments often causes errors.

Use Clear Contract Language

Always include the INCOTERM, version, and exact place of delivery in contracts. Avoid vague terms like "FOB port" without specifying which port.

Consult Experts When Needed

If your trade involves complex routes or customs, seek advice from freight forwarders or trade lawyers to choose the best INCOTERM.

Review Insurance Coverage

Check who is responsible for insurance under your chosen INCOTERM. For example, CIP requires seller to insure goods, while CPT does not.

Real-World Examples of INCOTERMS in Action

Example 1: A Small Electronics Exporter Using FOB Incorrectly

A small electronics company in South Korea sold goods to a buyer in Brazil using FOB without specifying the port. The goods were loaded on a ship in Busan, but the buyer assumed risk transferred at the Brazilian port. When damage occurred during ocean transit, the dispute arose. The seller argued risk passed at loading, but the buyer expected responsibility at arrival.

Lesson: Always specify the exact port and understand risk transfer points.

Example 2: A Textile Importer Choosing DDP Without Customs Knowledge

A textile importer in Germany agreed to DDP terms with a supplier in India. The supplier underestimated import duties and customs clearance complexity in Germany. This caused delays and unexpected costs, hurting the supplier’s profit margin.

Lesson: Sellers should only accept DDP if they fully understand import procedures and costs.

Example 3: Using CIP to Cover Insurance Gaps

A furniture exporter in Italy used CIP terms to ensure insurance coverage during transit to Canada. The seller arranged and paid for insurance, protecting both parties from loss. This clear allocation of responsibility avoided disputes when a shipment was damaged in transit.

Lesson: Use CIP when you want the seller to cover insurance, reducing risk for the buyer.

Final Thoughts on Mastering INCOTERMS

INCOTERMS are powerful tools that bring clarity and fairness to international trade contracts. Using them correctly protects your business from costly misunderstandings and legal disputes. The key is to choose the right term for your shipment, specify details clearly, and understand the responsibilities each party assumes.

Take time to train your team, consult experts when needed, and always include the INCOTERM version and precise delivery location in your contracts. With these steps, you can build stronger trade relationships and avoid common pitfalls in import-export deals.