From Quotation to Contract: The Impact of Incoterms on Supplier Proposals

Introduction: 

International trade is a complex procedure, because moving goods across borders have many steps. Like who pays for each step? Who carries the risk if something goes wrong? These are critical questions.

Suppliers send you a price quotation, which is actually a trade rule. This rule is called an Incoterm. Incoterms stand for International Commercial Terms. They are essential for every single proposal. They make clear the seller’s and buyer’s duties. Misunderstanding of these terms can cause waste of time and money. It can ruin a good business deal. But learning these terms is a smart business move.

What Incoterms Really Are?

Incoterms are standard rules, which are created by The International Chamber of Commerce (ICC). They have been updated time by time. The newest set is Incoterms 2020. These rules are globally accepted. They create a common language for shipping.

Taking them as standardized shortcuts, making clear three main things in any sale.

1. Cost: Who pays for freight, insurance, and duties?
2. Risk: At what exact point does the seller stop being responsible for damage or loss?
3. Responsibility: Who must arrange shipping documents and customs clearance?

A quote is a promise. An Incoterm shows how far that promise goes. It tells you exactly what the quoted price includes. The Price Tag (The Cost Factor), 

The Incoterm has chosen, will directly affect the price. A supplier can quote a very low price. But that low price might mean you handle all the shipping fees.

Consider two extremes:

1. EXW (Ex Works)

The supplier’s responsibility is minimal. They prepared the goods ready at their factory simply. They do not load the truck. They do not handle export paperwork. All costs, risks, and responsibilities transfer to the buyer immediately. This makes the initial product price low. The buyer must then pay for everything else.

2. DDP (Delivered Duty Paid)

The supplier’s responsibility is very high. They handle everything. They pay for shipping, insurance, and all import duties. They deliver the goods right to the buyer’s door. This makes the quoted price much higher. It is an all-inclusive price. The buyer has almost no work to do.

Most proposals fall in the middle somewhere.

The difference between EXW and DDP is massive. You cannot compare a quote under EXW with a quote under DDP. These two are completely different services. Suppliers must be clear about terms they use. Buyers must compare offers who are using the same Incoterm. This ensures a fair comparison.

Impact on Risk and Responsibility

The cost is just half a story. Risk transfer is the most vital part of Incoterms. This detail tells you who suffers financially if the goods are lost.

The moment of risk transfer is defined precisely. It is often different from the moment that cost transfer happens.

For example, consider CPT (Carriage Paid To). The seller pays for the freight. The cost transfer happens at the final destination. But the risk transfers much earlier. Risk transfers when the goods are handed to the first carrier. If the ship sinks later, the buyer pays for the loss. This is a crucial distinction.

A supplier’s proposal must state clearly the Incoterm. If it says “FOB Shanghai,” the seller’s risk ends when the goods are loaded onto the vessel in Shanghai. If it says “DAP New York,” the seller’s risk continues until the goods arrive in New York.

A Deeper Look at FCA Terms

Let us focus on one common and flexible rule. This rule is Free Carrier, or FCA.

FCA terms are very popular today. They are great for the containment of goods. They also work for all modes of transport. This includes air, road, or sea shipping.

What does the seller do under FCA?

• The seller handles all packaging.
• The seller completes all export customs clearance.
• The seller delivers the goods to a named place.

This place is usually a freight forwarder’s warehouse. Sometimes it is the seller’s own premises.The buyer chooses this location. 

• The seller delivers the goods to the carrier, nominated by the buyer. Once the goods are handed over to the buyer’s carrier, the seller’s job is mostly done.

The risk transfers at this point. Once the goods are given to the carrier, the buyer takes the risk. After this point, all costs belong to the buyer. This includes the main freight cost and insurance.

FCA is often better than EXW for buyer. Why? 

Because the seller handles the export customs. Export customs can be tricky. FCA balances risk for both parties in a perfect way. It gives the buyer control over the main transportation contract. This control can lead to lower freight costs for the buyer.

Suppliers: Choosing the Right Term

If you are a supplier, choose your Incoterm wisely. It affects your liability. It shapes your profit margin.

• Match your capabilities: Only quote DDP if you truly understand import rules in the buyer’s country.
• Control your environment: Use terms like EXW or FCA if you want minimal responsibility. This lets the buyer to manage the complicated journey.
• Know your customer: Larger buyers often prefer to manage logistics themselves. They might ask for FCA or FOB. Smaller buyers often want DDP for simplicity. They prefer one price.

Always include “Incoterms 2020” in your proposal. For example: “FCA Chicago (Incoterms 2020).” This avoids all confusion about older rules.

Buyers: Understanding Your Quote

If you are a buyer, be proactive. Never accept a quote without an Incoterm.

Ask for specifics: 

Make sure the supplier names the precise place. “FCA Hamburg” is vague. “FCA Terminal 2, Hamburg Port” is clear.

Calculate true cost: 

If the quote is EXW, add the cost of shipping, insurance and, import duties. This gives you the true landed cost.

Control the risk: 

Understand when the goods become your problem. Arrange insurance to cover your goods from that moment of transfer.

From Proposal to Final Contract

The Incoterm in the proposal must move to the contract. Do not change it later. If the proposal said FOB, the final contract must also say FOB. If the contract uses a different term, the original quote is invalid.

Using Incoterms correctly will prevent arguments. It clarifies delivery. It secures payment. These three-letter rules are small. But they hold enormous legal weight. They are the foundation of successful global commerce. Make sure your proposals are built on a solid foundation.