In February 2011 we will be posting the top most common mistakes companies make when looking at the International Commercial Terms (Incoterms). These posts will appear at regular intervals on Twitter along with tips on using the new the Incoterms 2010 rules.
Common Mistakes:
1. Some companies think that the Incoterms rules show where title/ownership passes. They do not. Incoterms rules only relate to the physical movement of goods and indicate how costs should be divided and where risk passes. The passing of risk has nothing to do with title.
2. If using the FCA term then a place must be named. FCA can limit the seller's responsibilities at their premises or extend them to the port/airport of departure. Buyer beware because if the term is used without a place named then, if a dispute occurs, the seller can chose the delivery point that best suits their purposes.
3. Sellers quote DDP but don't know how to get the goods into the buyer's country. Under DDP the seller must be the importer overseas which can take months of planning and registering the overseas company with the correct authorities. Lack of care when using DDP can leas to extra costs, risks, delays when tax registrations are not in place and disappointed customers.
4. Buyers accept DDP terms but don't check if their foreign supplier is registered as an importer or has sorted out tax issues. By default this can lead to the buyer being named on the import paperwork and receiving bills for taxes, eg VAT/GST when they have no control over the shipment.
5. Exporters think it is easier to sell ExWorks. The goods are handed over to the buyer's carrier at the seller's premises but then the seller is unable to get evidence of export leading to problems with the tax authorities as, without this evidence, it is viewed as a domestic delivery.
6. Using FOB for containerised freight - this is old fashioned and doesn't fit the modern supply chain operations. One issue is that once goods are in a container the seller doesn't know where damage occurs so the "ship's rail" and loading point if useless. Therefore, by default, has risk to the buyer's premises.
7. CIF/CIP - the only two terms that indicate the goods must be insured - but neither party understands that insurance is taken out by the seller in the buyer's name and that the insurance must be for minimum 110% of the shipment value. Can lead to inadequate or no insurance.
8. Using Group C - CFR and CPT especially - misunderstood. Though the seller pays to the arrival point the seller does not have risk of loss or damage. If buyer doesn't understand this and fails to cover the insurable risk can lead to goods damaged during shipment and no claim allowed.
9. Using DAP (and DDU from the 2000 set) without naming a place. If not limited to the place/port of arrival then the seller could find themselves expected to arrange for the goods to be delivered all the way to the buyer's premises - with the extra cost and risk implications.
10. All of the Incoterms rules must have a place named after the 3-letter term. Leaving this vague causes problems. Example - shipping EU to Australia; term CPT Australia - vague place named so seller can choose the most appropriate delivery point. If wrong place - extra transport costs will be the buyers. Australia is a big country so be specific.
Common Mistakes:
1. Some companies think that the Incoterms rules show where title/ownership passes. They do not. Incoterms rules only relate to the physical movement of goods and indicate how costs should be divided and where risk passes. The passing of risk has nothing to do with title.
2. If using the FCA term then a place must be named. FCA can limit the seller's responsibilities at their premises or extend them to the port/airport of departure. Buyer beware because if the term is used without a place named then, if a dispute occurs, the seller can chose the delivery point that best suits their purposes.
3. Sellers quote DDP but don't know how to get the goods into the buyer's country. Under DDP the seller must be the importer overseas which can take months of planning and registering the overseas company with the correct authorities. Lack of care when using DDP can leas to extra costs, risks, delays when tax registrations are not in place and disappointed customers.
4. Buyers accept DDP terms but don't check if their foreign supplier is registered as an importer or has sorted out tax issues. By default this can lead to the buyer being named on the import paperwork and receiving bills for taxes, eg VAT/GST when they have no control over the shipment.
5. Exporters think it is easier to sell ExWorks. The goods are handed over to the buyer's carrier at the seller's premises but then the seller is unable to get evidence of export leading to problems with the tax authorities as, without this evidence, it is viewed as a domestic delivery.
6. Using FOB for containerised freight - this is old fashioned and doesn't fit the modern supply chain operations. One issue is that once goods are in a container the seller doesn't know where damage occurs so the "ship's rail" and loading point if useless. Therefore, by default, has risk to the buyer's premises.
7. CIF/CIP - the only two terms that indicate the goods must be insured - but neither party understands that insurance is taken out by the seller in the buyer's name and that the insurance must be for minimum 110% of the shipment value. Can lead to inadequate or no insurance.
8. Using Group C - CFR and CPT especially - misunderstood. Though the seller pays to the arrival point the seller does not have risk of loss or damage. If buyer doesn't understand this and fails to cover the insurable risk can lead to goods damaged during shipment and no claim allowed.
9. Using DAP (and DDU from the 2000 set) without naming a place. If not limited to the place/port of arrival then the seller could find themselves expected to arrange for the goods to be delivered all the way to the buyer's premises - with the extra cost and risk implications.
10. All of the Incoterms rules must have a place named after the 3-letter term. Leaving this vague causes problems. Example - shipping EU to Australia; term CPT Australia - vague place named so seller can choose the most appropriate delivery point. If wrong place - extra transport costs will be the buyers. Australia is a big country so be specific.
