In cross-border transactions, commercial contracts can quickly become a tug-of-war over which party will make payment of import duties and taxes, who arranges transport of the goods, and who carries the risk when things go wrong. Instead of the parties fighting out these issues, Incoterms (International Commercial Terms) can do the heavy lifting instead. First published in 1936 by the International Chamber of Commerce (ICC), Incoterms have been at the backbone of international trade by providing a reliable framework for commercial and construction contracts involving procurement. The latest issue of the Incoterms was published in 2020.
Incoterms in Commercial and Construction Contracts
Commercial contracts often include clauses relating to delivery, transport arrangements, insurance, and risk transfer. In construction projects, these provisions are particularly important, as the timely arrival of equipment and materials often determines whether construction projects stay on schedule and within budget.
Rather than drafting bespoke clauses, parties usually incorporate these internationally accepted rules that provide clarity on the aspects surrounding the allocation of costs, transfer of risk, and the responsibilities of the parties in the procurement process.
Risk Allocation through Incoterms
Each Incoterm sets out the precise point at which the risk and responsibility for the goods transfer from the seller to the buyer. The following examples illustrate the manner in which Incoterms are commonly applied in practice within commercial contracts:
- Carriage Paid To (CPT) – The risk in the goods transfer to the buyer once the seller deliver the goods to the carrier.
- Delivered At Place (DAP) – The seller covers all the risk of transporting the goods until the goods are made available at the destination, which excludes customs charges and taxes. .
- Delivery Duty Paid (DDP) – The seller bears all the costs and risks involved in bringing the goods to the place of destination, which includes customs charges and taxes.
By selecting the correct Incoterm, parties are able to ensure commercial viability and transparency in the procurement process, and alignment with the other provisions in the contract. Ultimately, the inclusion of the correct Incoterm minimises the possibility of disputes between the parties and assists preventing any delay in the project timeline by ensuring goods are delivered timeously.
Strategic Role of Incoterms
Incoterms, in practice, govern more than just risk and delivery of the goods. Incoterms play a vital role in project management, logistics, customs process, and financial arrangements in relation to the party’s commercial strategy.
In large construction and mining projects, the choice of Incoterm can significantly affect the cashflow of the project. For example, under DDP the seller bears all the cost regarding the delivery, customs, and taxes which places a significant financial burden on the seller which may increase the purchase price of the goods. In contrast, under DAP the buyer retains responsibility over customs clearance, which allows for greater control over local tax incentives and exemptions that may apply.
Conclusion
Incoterms remain one of the most effective tools for reducing uncertainty in cross-border transactions. When used correctly, they not only allocate risk and responsibility but also support project cash flow, safeguard timelines, and align procurement with broader commercial objectives.