7.1 Incoterms & Liability

Incoterms are not merely shipping instructions; they are the fundamental contract of financial liability. They define the precise coordinate where risk, cost, and legal responsibility transfer from the supplier to the buyer. Failing to define this boundary results in "phantom" margins where hidden logistics costs erode engineering budgets, or worse—uninsured inventory loss occurs in international waters with no clear owner.

The Mechanics of Liability

Incoterms govern three distinct vectors:

1. Carriage: Who pays the freight forwarder?
2. Risk: If the pallet is crushed, whose P&L takes the hit?
3. Clearance: Who is the Importer/Exporter of Record (IoR/EoR)?

Do not confuse Title Transfer (ownership) with Risk Transfer. You can own the inventory (Title) while the supplier still holds the risk (Incoterm), or vice versa.

Standardized Lane Logic

To control landed cost and insurance visibility, apply strict rules based on the lane geography.

Scenario A: Long Haul / International (e.g., China → EU)

• Mandate: FCA (Free Carrier) [Named Port/Airport].
• Logic: The supplier clears export customs and hands goods to your forwarder.
  • Control: You choose the carrier and route. You control the consolidation of materials from multiple vendors into one shipment.
  • Risk: You own the insurance policy from the moment freight is handed over. You know exactly what coverage you have.
  • Why not EXW (Ex Works)? Under EXW, the buyer is responsible for export customs clearance in the origin country. In China, this often requires specific local licensure you do not possess, leading to stranded freight. Use FCA to force the supplier to handle their own export compliance.
  • Why not CIF (Cost, Insurance & Freight)? Suppliers often buy the cheapest possible insurance ("Clause C") which covers total loss only, not partial damage or rough handling. Do not trust vendor-provided insurance for critical electronics.

Scenario B: Domestic / Regional (e.g., Germany → France)

• Mandate: DAP (Delivered at Place) [Your Warehouse].
• Logic: The supplier manages the truck or courier. You only accept risk when the truck arrives at your dock.
  • Efficiency: For short hops, the administrative cost of booking your own freight often outweighs the savings. Let the supplier manage the logistics complexity.
  • Exception: If the shipment is high-value capital equipment, switch to FCA to ensure your specialized riggers/movers handle the transport.

The "Free Freight" Illusion

Suppliers offering "Free Shipping" (C-terms or D-terms) have baked the freight cost into the unit price, usually with a 15–30% margin buffer.

• If you have a negotiated corporate freight rate → Then strip freight from the unit price and buy FCA.
• If the volume is negligible (e.g., < 5kg Parcel) → Then allow DAP/DDP to bypass the administrative cost of booking.

Critical Traps

The DDP (Delivered Duty Paid) Tax Trap

Under DDP, the supplier pays import duties and VAT.

• Risk: If the supplier is not registered in your country, they cannot reclaim the import VAT. They will bury this cost in your unit price.
• Consequence: You pay VAT twice (once hidden in price, and again if customs rejects their improper filing).
• Rule: Never use DDP for commercial inventory. Always be the Importer of Record (IoR) to control your tax reclamation.

Double Freight Payment

If a quote is FCA, but the invoice includes a line item for "Shipping & Handling," you are paying for freight twice (once to your carrier, once to the supplier).

• Action: Audit 10% of invoices against Incoterms. If FCA, reject any freight charges on the commercial invoice.

Pro-Tip: When buying FCA from Shenzhen/Hong Kong, specify the handover location precisely (e.g., "FCA Hong Kong Consolidator Warehouse"). If you just say "FCA Hong Kong," the supplier may deliver to the wildest edge of the port, forcing your forwarder to charge you a "local pickup" fee.

Final Checklist