The importance of incoterms for Effective Project Management

One of the biggest challenges I had, when I started working on Supply Chain Projects, was understanding all the terminology of this new sector, which was also full of acronyms, different concepts, and fascinating operational elements that I wanted to understand very soon.

During this process, I came face to face with Incoterms. I saw them in the negotiations, in the contracts, and in the invoices. They followed me everywhere, so I decided to approach them and look for different ways of understanding them.

In this article, you will find some ideas about incoterms and some considerations that I hope will also help you in your journey to understand the importance of incoterms in all our projects.

What are Incoterms?

Incoterms? is an abbreviation for “International Commercial Terms.” Incoterms are a set of rules established by the ICC to establish who’s responsible for shipping, insurance, and tariffs in a contract between a buyer and a seller. They quickly define who will pay for what.

What should you know about incoterms?

?·????????Ex Works (EXW) – The seller makes the goods available at its location, so the buyer can take over all the transportation costs and also bears the risks of bringing the goods to their final destination.

·????????Free Carrier (FCA) – The seller hands over the goods into the disposal of the first carrier. After the buyer takes over all the costs, the risk passes when the goods are handed over to the first carrier.

·????????Free Alongside Ship (FAS) – The seller must place the goods alongside the ship at the named port, the risk of loss or damage to the goods passes when the goods are alongside the ship, and the buyer bears all the costs from that moment on.

·????????Free on Board (FOB) –The seller must load the goods on board of the ship, nominated by the buyer. Cost and risk are divided when the goods are actually on board.

·????????Cost and Freight (CFR) –Seller must pay the costs and freight to bring the goods to the port of destination. Although, the risk is transferred to the buyer when the goods are loaded on the ship.

·????????Cost, Insurance and Freight (CIF) –It’s exactly like CFR except that the seller must in addition procure and pay for the insurance.

·????????Carrier and Insurance Paid to (CIP) –The seller pays for the carriage and insurance to the named destination point, but risk passes when the goods are handed over to the first carrier.

·????????Delivered Duty Paid (DDP) –The seller is responsible for delivering the goods to the named place in the country of the buyer and pays all costs in bringing the goods to the destination.

Why is important for Project Managers to understand incoterms?

As has been mentioned, the delivery conditions or incoterms define the different responsibilities between the supplier and the client in relation to the supply of materials, therefore they influence the project in the following way:

1.??????Project scope definition: Depending on the delivery condition defined for the project, our delivery responsibility can go from our factory to the customer's office, passing through different intermediate points, and can include more or fewer customs formalities, if any.

2.??????Costs associated with delivery. At the time that there are variations in the scope to be considered, there are variations in the cost of the project.

3.??????Risks associated with delivery. The greater our involvement in transport, and the later we transfer responsibility for this to the client, the greater the risks that we must assume, both economic and delays.