Incoterms: Implementation Best Practices in International Shipping

Incoterms: Implementation Best Practices in International Shipping

Implementing Incoterms effectively requires more than inserting a three-letter rule into a sales contract. It requires aligning the chosen term with commercial objectives, transport modality, insurance strategy, customs responsibilities and the operational capabilities of both buyer and seller. The following best practices help parties use Incoterms to reduce risk, avoid cost surprises, and streamline cross-border logistics.

1. Specify the Incoterms edition and the precise named place

Incoterms are periodically updated by the ICC; the most widely used edition since 2020 is Incoterms 2020. Always state the edition to remove ambiguity (for example, "CPT Chicago Incoterms 2020"). Equally important is the exact named place or point of delivery: "FOB Shenzhen Port" differs materially from "FOB seller’s terminal Shenzhen." The named place determines where costs and risk shift.

2. Match the term to the transport mode and supply chain complexity

Choose rules designed for the transport in use. For multimodal shipments, prefer rules for any mode of transport (EXW, FCA, CPT, CIP, DAP, DPU, DDP). For pure sea transport, sea-specific rules (FOB, CFR, CIF, FAS) may be appropriate. Consider intermediaries (freight forwarders, NVOCCs) and whether the seller or buyer is better positioned to arrange certain legs of the journey.

3. Clarify customs and clearance responsibilities

Misunderstanding who handles export or import clearance causes delay and extra cost. Under many Incoterms (e.g., DDP), the seller is responsible for import clearance and payment of duties; under others (EXW, FCA) these duties fall to the buyer. Confirm which party holds the necessary licenses, authorizations and customs brokerage arrangements.

4. Align insurance requirements with risk allocation

Some terms require the seller to procure insurance (CIF, CIP). Note that the required level of cover differs: under Incoterms 2020, CIP obliges the seller to obtain insurance providing cover typically equivalent to Institute Cargo Clauses A (broader coverage), whereas CIF typically involves minimum cover similar to Institute Cargo Clauses C. Parties should specify the desired insurance level and beneficiary (who may be the seller’s insurer but for the buyer’s benefit) to avoid gaps.

5. Confirm documentation responsibilities

Specify who will obtain and pay for transport documents (bill of lading, airway bill), export and import permits, inspection certificates and commercial invoices. For documentary sales (letters of credit), confirm which documents the issuing bank will require and ensure the Incoterm chosen supports obtaining those documents (for example, EXW may not permit the seller to obtain an onboard bill of lading).

6. Address packaging, marking and unitization

Even when Incoterms assign transportation and risk, the seller typically remains responsible for appropriate packing to protect goods during the intended transport mode. Agree on packing standards, handling marks, and any requirements for refrigerated or hazardous goods that could affect carrier acceptance and insurance coverage.

7. Use clear, complementary contract clauses

Incoterms do not cover payment, transfer of ownership, warranties, force majeure, or liability limits. Add explicit clauses governing payment terms, title passage, inspection and rejection procedures, claims handling, and dispute resolution. For example, if CIF is used, include a clause requiring the seller to provide a marine insurance policy or certificate that names the buyer as beneficiary and specifies the agreed scope of cover.

8. Plan for contingencies and claims

Identify who will handle claims for cargo loss or damage, how claims will be documented, and the timeframe for reporting. Because risk and cost transfer points vary, the responsible party for claims may differ depending on where and when damage occurred. Document the claims process and required evidence (photos, survey reports, signed delivery receipts).

9. Avoid common drafting mistakes

• Avoid using Incoterm abbreviations without the edition and place (e.g., do not write simply "FOB" — write "FOB Port of Santos Incoterms 2020").
• Do not assume Incoterms control insurance beyond what is explicitly required — expressly define insurance scope if higher cover is needed.
• Avoid mixing sea-only rules with multimodal shipments.

10. Train commercial, operations and legal teams

Misapplication of Incoterms commonly stems from limited internal understanding. Regular training for sales, procurement, logistics and legal staff ensures consistent use. Use checklists that include the selected Incoterm, edition, named place, insurance obligations, and documentation responsibilities before signing contracts or booking shipments.

Practical example:

A European seller and an American buyer agree "CIP New York Port Incoterms 2020." The seller arranges and pays for carriage to New York and procures cargo insurance providing broad cover for the buyer’s risk until delivery. The buyer handles import clearance and local delivery inland from the New York port. Because CIP requires robust insurance under 2020 rules, the seller and buyer must confirm the insurer and policy wording to ensure sufficient cover and correct beneficiary designation.

In Short

Choosing the right Incoterm is the starting point; clear specification, complementary contractual language, and operational alignment convert that choice into reliable, low-risk execution. With these best practices, Incoterms become a practical tool that helps commercial partners allocate responsibility clearly and execute international shipments with predictable risk and cost outcomes.