How Incoterms Impact Costs, Risk, and Control in Global Commerce

Incoterms may look like a jumble of acronyms, but they play a vital role in global commerce. These international trade terms define who is responsible for transportation, insurance, customs clearance, and delivery. Choose the wrong one, and your company could face unexpected costs, delays, or compliance risks. This article breaks down the essentials of Incoterms and shares 9 best practices to help you manage risk and make smarter, more strategic decisions in global trade.

The Sales Agreement and Incoterms

Incoterms are the commercial selling terms between buyer and seller. You need to be familiar enough with Incoterms to intelligently manage your company’s costs, time commitments, and risks when it buys or sells goods internationally.

There are 11 Incoterms. They were developed by the International Chamber of Commerce to outline the responsibilities of buyers and sellers – basically, who pays what and when.

The “what” is the cost of transportation, insurance, customs duties and taxes. Some Incoterms put more onus on the buyer to arrange and pay for transportation and related costs. Some put more onus on the seller. Some represent a fairly equal sharing of responsibilities. It’s a continuum.

Let’s say you want to buy a box of peaches. You can invest the time and money to drive to the farm and pick up the peaches (little risk or transport costs for the farmer); or you can have the farmer deliver the peaches to your front door (very little risk or transport cost for you); or you could buy the peaches from the farmer’s stall at the Market halfway between your house and the farm (shared risk and transport cost).

To protect the peaches if they get dropped, you’ll pay all insurance for the farm pick up; the farmer will pay all insurance for the house delivery; and you’ll each buy insurance to cover your individual trips to and from the Farmer’s Market.
Our peach example doesn’t cover all the scenarios, but you get the idea.
You want to choose the Incoterm that aligns best with your business objective. One choice might be best to achieve the lowest possible cost. Another Incoterm would be best to minimize your time and risk. It depends on what you want to achieve and certain market conditions.

Don’t be intimidated by all the Incoterm acronyms (DDP, CIF, CFR….). Each just represents a point on a continuum of buyer-seller responsibility.

Incoterms: 9 Best Practices

Understanding and optimizing the terms of sale is very important. Follow these 9 best practices to save time, avoid unnecessary freight delays, and reduce your risk.

1. Take responsibility for managing your own international freight shipments. Many importers who allow the seller to route international air/ocean shipments (CFR, CIF, CPT, CIP, DAP, DPU, and DDP terms) experience significant challenges when freight capacity is constrained and supply chain disruptions are common. Sellers sometimes refuse to move the goods, delaying shipments because of freight cost concerns or up-charging buyers for additional freight costs. Even small importers may find that routing their own cargo saves time, money, and customer relationships. Delegating responsibility in an international transaction can be tempting, particularly if you have a lean staff. But it may be better to control your own destiny. Importers new to freight negotiation can partner with a freight forwarder to help with the transition to a new Incoterm.
2. Control customs clearance and final delivery. Port-related delays can really slow down your supply chain. You need to protect yourself from demurrage (charge for space the container takes up at the port if pickup is late), detention (charge for use of container beyond allowed free time), and storage charges. But, as a buyer, it’s hard to do that if you’re not in control of customs clearance and final delivery, as would be the case with CPT, CIP, DAP, DPU, and DDP terms. It’s really a lose-lose scenario for importers: You lack the control to avoid delays, but, as the consignee, you’re responsible for all charges. Consider buying under terms that allow you to closely control your exposure to these unplanned expenses (FOB, for example).
3. Get internal alignment on purchase terms. Often, the Purchasing Department will decide on the terms of sale without truly understanding the logistics and compliance implications of that decision. Organize a cross-functional team to set standard Incoterms for your company’s international purchases. Ensuring alignment between compliance, logistics, sales, and purchasing teams avoids unanticipated costs, delay,s and lower-than-expected margins on customer sales.
4. Be clear about payment terms in your purchase order. Many buyers assume that Incoterms cover the method or timing of payments, or when title or ownership of the goods passes from seller to buyer. This is not the case. One common misconception is that Incoterms are the contract between buyer and seller and that, if you buy FOB (Free On Board), title to the goods transfers when those goods are on board the vessel. No. Incoterms only establish who pays what and when and who assumes the risk. Be sure to cover payment terms and ownership transfer clearly in your purchase order.
5. Understand who is obligated to insure the goods while in transit. Be sure your company has proper cargo insurance to cover your risk. A seller working under CIF terms (Cost, Insurance and Freight), for instance, is obligated to insure the goods to the destination port but may not purchase coverage commensurate with the cost of the goods. Don’t make assumptions that your risk is covered.
6. Specify the port or place when opting for terms like DAP (Delivered at Place). “DAP New York,” for example, refers to a very wide area.
7. Be cautious before selecting DDP terms (Delivered Duty Paid). Under this term, the seller is responsible for international shipping, customs clearance, duty payments, and local delivery at the destination. Global trade compliance and dealing with Customs requires expertise. Think through whether the seller can satisfy all import formalities. Likewise, opting for EXW (Ex Works) makes you, the buyer, responsible for picking up freight and all export procedures at origin. Do you have the expertise and resources to manage this process from thousands of miles away?
8. Think through all paperwork requirements. If the terms of sale put the onus on you, the importer, to clear customs, specify which documents must be provided by the seller to facilitate export and import procedures. Let’s say a pair of shoes requires a special Fish and Wildlife certificate. Make sure the seller provides this certificate so you can clear Customs without delay. If you overlook this step, you could find yourself paying for goods you can’t get your hands on.
9. Use a checklist to spell out the details associated with the agreed term of sale. Incoterms are handy abbreviations, but it’s wise to detail which party is responsible for each cost and compliance element. This way, there’s no room for confusion. It ensures that both parties will be satisfied with the transaction, setting a solid foundation for future sales. Lack of consistency and clarity can result in higher costs, delays, and, in some cases, both the buyer and the seller paying for the same charges (it happens!).

While sometimes confusing, Incoterms can be a strategic advantage for best-in-class importers and exporters. Managing Incoterms in advance, through a clearly communicated, companywide policy, is the best way to ensure your company is controlling costs and optimizing margins.

Using Incoterms Strategically in Global Commerce

In the fast-moving world of global commerce, Incoterms give you a clear framework to manage shipping costs, risk, and control. When chosen wisely, they help align internal teams, avoid costly missteps, and keep your international transactions running smoothly. The right Incoterm strategy—backed by the support of a freight forwarder like Dimerco—can give your business the edge it needs to compete and thrive on a global scale.