Incoterms: Key Takeaways & Important Things to Remember with Kerri Kwolek

Every international shipment involves multiple steps, costs, changes in ownership, and risks for both importers and exporters. Navigating these variables is a critical part of supply chain management. If it is uncertain which party is contracting transportation or providing cargo insurance, for instance, a shipment could be delayed, damaged, or lost without a clear indication of responsibility.

Thankfully there are standard terms that clarify these roles and responsibilities, called Incoterms®, which are maintained by the International Chamber of Commerce (ICC) and adopted across the globe. But understanding how Incoterms work and determining which one to use may not be as simple as it seems.

Today we are joined by Kerri Kwolek, Director of Risk & Insurance at Expeditors, to discuss navigating these complexities in today’s global supply chain.

What is the main purpose of Incoterms?

Incoterms were first developed to eliminate inconsistencies in language by giving all parties the same definition of specific terms within a trade agreement. Although they are agreed upon between the seller and the buyer, they give all parties to the transaction a clear idea of who is responsible for cost, obligation, and risk. I highly recommend building Incoterms into your contracts and displaying them on your commercial documents.

How many Incoterms are there?

There are currently 11 distinct Incoterms. Out of the 11 Incoterms, 7 are for any mode of transport and 4 are for sea and inland waterway only.   What is interesting about the latter is that they are not recommended for goods in containers. I would encourage you to read the wording in the explanatory notes under section 2 (mode of transport) to better understand and determine what makes the most sense for your company.

Do Incoterms apply to both international and domestic transit?

While the United States has its own set of domestic trade terms (Universal Commercial Code or UCC), Incoterms are widely accepted as the global language. Many companies look to simplify the process for their employees by using a standard set of terms across all their contracts. In domestic situations, Incoterms can still be used, but the import/export clearance responsibility doesn’t apply.

Are there any common mistakes to avoid when using Incoterms?

Once you have chosen the most fitting Incoterm, I would caution not to alter it at all. If you alter or adjust the Incoterm to fit a specific situation, you are assuming that all other stakeholders (freight forwarders, truckers, Customs brokers) will understand and comply with the expectation. This may create ambiguity over time. Let’s say one of the parties moves into a new role or leaves their company. The next person in line may not completely understand what their predecessor signed up for. If the Incoterm is used properly, it will be easy to comprehend.

Making sure that you are using the named place properly is important. Is there more than one place with that name? Do you have more than one facility in that place? Is there any way this can be construed differently and therefore create additional cost? An example we see often is when there is more than one factory in a city, but it is not clear which factory to go to. If the carrier is directed to go to the wrong one, they will charge a dry run fee. While the Incoterms determine who should pay that fee, it’s best to avoid it altogether.

Another consideration should be which party has the best buying power for both transportation and insurance, and who needs to be in control of the supply chain.

Incoterms follow the contract, not necessarily the movement of the cargo. When you have a shipment that is moving from party A to party B, the contract will reflect that, and the Incoterm will apply. Bringing in party C begins to muddy the waters.

Let’s say you (party B) have a contract with your vendor (party A) using the FCA Incoterm. You then sell to your customer (party C) with DAP the term but ask your vendor to ship directly to your customer. Which Incoterm applies to the move from party A to party C? In these cases, rather than using an Incoterm, it may be better to spell out to your vendor what the expectation is (Please send to terminal G in this named port, please only put a packing list on the freight, invoices overhead, etc.).

Be Prepared, Not Surprised

In today’s fast-moving logistics landscape, clarity and preparation are your best defenses. Incoterms are a powerful tool, but only when used correctly and consistently. By understanding their nuances and aligning them with your company’s risk strategy, you can avoid costly misunderstandings and delays.

ECIB is here to help you make informed decisions that protect your cargo and your bottom line. Talk to us today to build a more resilient supply chain.