Incoterms®. "What you do not want is hassle."
- Marco van Hagen
- 7 Jun 2023
- Edited 22 Dec 2022
- 5 min
- Managing and growing
With the wrong use of Incoterms®, an international standard for international delivery terms, you run the risk of financial damage. Like a hefty insurance claim. Sonja van Hall, owner of Jurimpex and teacher at the Hogeschool van Arnhem en Nijmegen (HAN), advises to make very clear agreements in advance. “This prevents a lot of hassle.”
Incoterms® clarify what the rights and obligations of buyer and seller are when executing a purchase agreement. For example, the transport of goods and the goods transport insurance.
EXW is usually FCA
Things often go wrong with Incoterm® Ex Works (EXW). As a seller, you are not obliged to load goods at EXW. But this does happen in practice. The buyer must arrange a truck to pick up goods from the seller. The truck driver then loads the goods onto the truck. Sonja van Hall identifies the main risk. “In many cases, the seller does this themselves. In that case, there is no EXW, but it is better to agree on Free Carrier (FCA). This is the most commonly used Incoterm® by Dutch companies.”
If you apply Incoterms® incorrectly, you run risks, and this can cost you a lot of money. Van Hall mentions three.
1. Huge insurance claim
Damage to goods during transport is not covered by insurance if you act differently than agreed. “In the case of a claim, an insurance company always checks what is agreed on paper. If you deviate from this, the insurer will not pay out," Van Hall warns. “When you agree EXW, but you as the seller load goods into the truck yourself? If the pallet falls during loading and damages the goods, it is unclear who is at risk for this damage. According to the obligation in the Incoterm® EXW, loading the truck is at the buyer's risk. The driver of the truck should have done this for the buyer. Now that this is not the case, the buyer will point to the seller and seller to buyer.”
“You are allowed to do more than you agree in the Incoterms®. It is wise to include in your purchase agreement that this extra service is at the expense and risk of the other party”, Van Hall adds as a tip.
2. Profit margin too low
You also run the risk of a profit margin that is too low. The sales price depends on the agreed Incoterms®. Van Hall explains how this works. “Do you state an EXW price in your quote, but do you deliver Delivered Duty Paid (DDP) in practice? Then, on top of your sales price, there are also transport costs and export and import costs, such as requesting documents. And the import duties are also paid by the seller. This can even cost you your entire profit margin.”
3. Unnecessary delivery of goods
Another risk is that you deliver goods when that is not necessary. During transport, most damage occurs during loading or transferring goods. Does damage arise after you have fulfilled your obligations as a seller? In that case, the buyer must claim the damage suffered from his own insurance company. Or with the carrier. “I see in practice that many sellers still deliver new goods to their buyer, while they actually do not have to do this. This simply saves a lot of money,” concludes Van Hall.
Van Hall illustrates negative effects of an old habit. “When you have used an Incoterm® incorrectly for years, 'common law' arises. If you cannot reach an agreement with your customer, a claim for damages can be brought to court. In extreme cases, a judge will look at what you have done in the past and make a decision based on this. Because of this common law, the court may not judge what is on paper, but what you have actually done in recent years.”
Insurance companies only reimburse damage if you, as the claimant, also bear the risk. When damage is reported, the insurance company always checks the agreed Incoterm®. Payment is only made if the reporter, or claimer is also the risk bearer. It does not matter who pays the insurance, but who runs the risk.
Van Hall gives an example. “In Cost Insurance Freight (CIF) and Carriage and Insurance Paid To (CIP), the seller pays insurance premium on behalf of the buyer. With these Incoterms®, the buyer runs the risk for the most part, so they must claim the damage themselves. The fact that the seller pays the premium is a plaster on the wound for the buyer. The seller goes to their insurance company, but the insurance payment is made to the buyer. Insurance companies have special policies for this.”
Van Hall advises companies to train their personnel on the correct use of Incoterms®. “Not just the sales department, but also employees of the purchasing and logistics department and the back office. This prevents the person who performs according to a contract from running into problems because of what another department did not arrange properly. Everyone hears the same information at the same time during such a training. You avoid hassle with this.”
The best Incoterm® does not exist. But you can have a favourite. According to Van Hall, it is mainly a mix between your customer's wishes and what you want and can offer. “If your customer does not want any involvement with transport, you cannot suggest EXW. Your customer expects more service from you.” In this case, Van Hall advises to consider the 'D-terms'. These are Delivered at Place (DAP), Delivered at Place Unloaded (DPU) and Delivered Duty Paid (DDP). “Providing extra service offers you a competitive advantage.”
The downside of a higher service level is that you have to do more yourself. Van Hall gives an example. “When you deliver to your US customer with DDP, this also means that you have to do the import in the US, taking into account all local legislation. A complicated process with additional administrative burdens. The question is whether you want to and can achieve this.”
Control over transport
Sometimes you do not want to be dependent on your buyer. For example, if you want to get sold goods off your premises quickly. Van Hall explains this. “With EXW or FCA-A, you depend on the time at which your customer arranges a truck to load goods. If it does not arrive or comes too late, you will get a traffic jam on your premises, which you do not want. In this case, it is better to choose an Incoterm® from the 'C-group'." These are Carriage Paid To (CPT), Carriage and Insurance Paid To (CIP), Cost and Freight (CFR) and Cost Insurance and Freight (CIF). “The risk does pass to the buyer, but with your own carrier you keep a grip on the transport.” Incoterms® FCA 2020 has 2 variants. The term FCA-1 is also referred to as FCA-A. FCA-2 is also referred to as FCA-B.
Incoterms® and dropshipping
Do you use Incoterms® for international dropshipping? For example, you buy goods from your supplier in Vietnam and have them delivered directly to your customer in the United Arab Emirates. Using Incoterms® properly is complicated in this case.
You can mirror the Incoterm® that your supplier uses. CIF Buying and CIF selling cannot really go wrong. The seller takes care of the clearance of the shipment and the document for sea transport.
Note: the documents contain the name of your supplier. Your customer sees this and can now order directly from your supplier. Side-lining you with your trade. Van Hall has a tip for this. “Alternatively, you can buy FCA port in Vietnam and sell CIF. In that case, it is better to have the goods collected from your supplier yourself (FCA-A) or have them delivered to his port (FCA-B). You arrange the sea transport, and your name is on the Bill of Lading. That way your customer does not know who your supplier is.”
FOB for container shipments
“Free On Board (FOB) is better suited for bulk and single-piece shipments than for container shipments,” confirms Van Hall. There is a lot of unclarity about this. “With FOB, the seller ensures that they deliver goods on board in good condition. But when goods are in a container, you are not allowed to open it for inspection when it is loaded on the ship. So, the buyer cannot check if the goods were already damaged in the container.” When goods are damaged during transport, with FOB you are not sure where this damage has occurred. Van Hall finds FCA-A more convenient for the buyer and seller in this situation. “The buyer can check the goods before the container closes. And then have the container sealed.”
Video: ICC Incoterms®
Who arranges the transport or documents for customs? You can see how this works in this video about ICC Incoterms®.
Incoterms®, everything you need to know
There are 11 Incoterms® 2020. Do you want to know more about their use? Then read: Incoterms®2020, everything you need to know.