7.1 Incoterms & liability

Incoterms are more than just shipping instructions; they establish the fundamental framework for financial liability. They define the precise point where risk, cost, and legal responsibility transfer from the supplier to the buyer. Failing to establish this clear boundary can result in hidden logistics costs that erode margins or, in unfortunate cases, uninsured inventory loss during transit.

The mechanics of liability

Incoterms govern three primary areas:

1. Carriage: Who is responsible for paying the freight forwarder?
2. Risk: If the shipment is damaged, whose balance sheet absorbs the loss?
3. Clearance: Who acts as the Importer or Exporter of Record (IoR/EoR)?

It is important to distinguish Title Transfer (ownership) from Risk Transfer. You can own the inventory (Title) while the supplier still holds the transit risk (Incoterm), or vice versa.

Routing logic

To better control landed costs and insurance visibility, establish standard rules based on geographical lanes.

Scenario a: long haul / international (e.g. china → EU)

• Standard Term: FCA (Free Carrier) [Named Port/Airport].
• The Protocol: The supplier manages export customs clearance and hands the goods over to your designated forwarder.
  • Control: You select the carrier and the route. This allows you to consolidate materials from multiple vendors into single, more efficient shipments.
  • Risk Management: You control the insurance policy from the handover point, ensuring you know exactly what coverage is in place.
  • Why not EXW (Ex Works)? Under EXW, the buyer is technically responsible for export customs clearance in the origin country. In many regions, this requires specific local licenses you may not possess, leading to stranded freight. FCA ensures the supplier handles their local export compliance.
  • Why not CIF (Cost, Insurance & Freight)? Suppliers providing insurance often purchase basic coverage that covers total loss only, rather than partial damage or mishandling. It is generally safer to manage insurance internally for critical electronics.

Scenario b: domestic / regional (e.g. germany → france)

• Standard Term: DAP (Delivered at Place) [Your Warehouse].
• The Protocol: The supplier manages the truck or courier. You assume risk only when the delivery arrives at your receiving dock.
  • Efficiency: For regional deliveries, the administrative overhead of booking your own freight often outweighs the cost savings. Allowing the supplier to manage the logistics is usually more efficient.
  • Exception: If the shipment involves highly sensitive or high-value capital equipment, consider using FCA to ensure your specialized carriers handle the transport.

Understanding “free freight”

Suppliers offering “Free Shipping” (often under C-terms or D-terms) generally bake the estimated freight cost into the unit price, frequently including a margin buffer.

• The Guideline: If you have negotiated, competitive corporate freight rates, request the unit price without freight and purchase under FCA.
• The Exception: If the shipment volume is negligible (e.g. a small < 5kg parcel), accepting DAP/DDP can bypass the administrative effort of booking.

Common routing traps

The DDP (delivered duty paid) tax issue

Under DDP, the supplier pays import duties and VAT on your behalf.

• The Risk: If the supplier is not a registered entity in your country, they typically cannot reclaim the import VAT. They will likely bury this non-recoverable cost in your unit price.
• The Consequence: You effectively pay the VAT twice (once hidden in the price, and potentially again if customs rejects their filing).
• The Guideline: Avoid using DDP for commercial inventory. Acting as the Importer of Record (IoR) allows you to control your tax reclamation process.

Double freight payment

When a quote is based on FCA terms, but the commercial invoice includes a separate line item for “Shipping & Handling,” you may be paying for freight twice (once to your forwarder, once to the supplier).

• The Action: Periodically audit invoices against the agreed Incoterms. For FCA shipments, query any added freight charges on the commercial invoice.

Pro-Tip: When negotiating FCA from major hubs (e.g. Shenzhen or Hong Kong), define the handover location precisely (e.g. “FCA Hong Kong Consolidator Warehouse”). A vague “FCA Hong Kong” might allow the supplier to deliver the goods to a distant port location, causing your forwarder to charge you an unexpected “local pickup” fee.

Final Checkout: Incoterms & liability

Parameter	Recommended Standard	Key Consideration
International Hubs	FCA (Named Port/Airport)	Avoid EXW due to Export License Requirements
Regional/Domestic	DAP (Your Dock)	Supplier retains transit risk
Cargo Insurance	Buyer-Managed Policy	Target coverage ≥ 110% of Invoice Value
Import Customs	Buyer is Importer of Record	Avoid DDP to protect VAT reclaim
Export Customs	Supplier is Exporter of Record	Required for regulatory compliance
Freight Costing	Itemized apart from Unit Price	Promotes transparency