What is the relationship between incoterms and prices on the commercial invoice?

Exporters and importers use Incoterms very often on their of the daily language, as a delivery term is one of the key elements of international trade transactions. 

Almost every sales contract or proforma invoice contains an incoterms clause such as FOB New York Port, Incoterms 2010, CIF Dammam Port, Saudi Arabia, Incoterms 2010 etc. 

Furthermore, incoterms and prices shown on the commercial invoices have strict relationship. 

Delivery places of the goods, the party who pays for the freight costs and insurance premium are the main incoterms related determinants of the prices.

Today I would like to explain the relationship between incoterms and prices on the commercial invoice

Relationship between delivery place and commercial invoice prices 

Different incoterms define different place of deliveries. 

For example, according to Ex Works, the delivery place is exporter’s premises such as exporter's factory or warehouse.

Delivery place defined under Free on Board incoterms is on board of the vessel at the port of loading. 

For this reason, even if an exporter sells the same goods to the same importer with the same conditions, he should be selling the goods with different prices if selected incoterms changes from EXW to FOB, or vice versa.

Let us have a look at the situation in more detail with an example:

Example: Changing Prices From Ex Works to Free on Board for Cotton Dyed Knitted Fabrics Export From Bangladesh to Jordan

An exporter from Bangladesh has signed a proforma invoice with an importer from Jordan in regards to the sales of cotton interlock dyed knitted fabrics at price of USD 4,80 and 100% cotton interlock white dyed knitted fabrics at price of USD 4,40.

Delivery term is Ex Works Exporters Factory, Bangladesh, Incoterms 2010.

Later on importer informed exporter that the importer would like to buy the goods via FOB delivery terms instead of Ex Works.

Exporter has to change EXW prices to FOB prices. But what are the additional costs that he has to calculate when converting an EXW price into an FOB price.

  1. Export custom operations: Under Ex Works delivery term export custom operations must be handled by the importer, but under FOB delivery term export custom clearance must be made by the exporter. As a result, export custom operations cost would be the 1st article that must be taken into account, when changing EXW prices into FOB prices. 
  2. Internal transport cost from exporters factory to the port of loading: Under Ex Works trade term seller delivers the goods at his factory, but under FOB trade term exporter must pay the domestic transportation cost from his factory to port of loading. 
  3. Port of Loading Expenses: Under FOB trade term exporter must pay the expenses at the port of loading such as port surcharge, equipment charge, terminal handling fee, port licence fee, security charge levy etc. 
  4. Shipped on Board Cost: Shipped on board cost is the cost that exporter has to pay in order to load the container on board a vessel from the port of loading terminal. 
  5. Bill of Lading Issuance Cost: Almost all carriers or freight forwarders demand a fee in order to print a bill of lading. This must be paid by the exporter under FOB deliveries.

Once the exporter calculates the additional costs that he has to cover when changing prices from EXW to FOB, he concludes that FOB prices should be as follows:

  • Cotton interlock dyed knitted fabrics at price of 4,80 USD Ex Works => 4,95 USD Free on Board 
  • 100% cotton interlock white dyed knitted fabrics at price of 4,40 USD Ex Works => 4,55 USD Free on Board

How to Change FOB Prices to CFR

Relationship between freight cost and commercial invoice prices

Paying party of the freight cost also changes the prices on the commercial invoices, even if all other variables stay unchanged.

For example, under FOB incoterms importer should be paying the freight cost, freight collect, whereas under CFR incoterms exporter should be paying for the freight cost, freight prepaid

Once again I would like to claify the situation with an example:

Let us assume that an exporter would like to change price offer from FOB to CFR. 

How could this exporter change FOB prices into CFR prices?
  • Freight Cost: The only difference between FOB prices and CFR prices is the freight cost. If you add freight cost to Free on Board sales, you reach Cost and Freight sales term.

How to Change CFR Prices to CIF

Relationship between insurance premium and commercial invoice prices

Insurance premium could be paid either by the exporter or importer. 

For example, under CFR incoterms importer should be paying the insurance premium, on the other hand under CIF incoterms exporter should be paying for the marine insurance premium. 

I would like to show you how to concert CFR prices into CIF prices with the following example:
  • Insurance Premium: The only difference between CFR prices and CIF prices is the insurance premium. If you add insurance premium cost to Cost and Freight sales, you will reach Cost, Insurance and Freight sales term.