Start from your cost delivered on board, add the margin you need and you get the FOB price. Adding freight gets you to CFR, and with insurance, to CIF.
Goal: Calculate the FOB price with a margin on price, add freight and insurance to get CFR and CIF, and tell margin from markup.
The export price is built from the cost, but it is not decided by cost alone. Start from the cost of leaving the order on board (topic 4-1), add the margin you need and you get your FOB price. FOB (Free On Board) is the price with the goods already loaded on the vessel, at the port of shipment. From there you can also offer CFR or CIF.
Each term changes what your price includes. CFR (Cost and Freight) is FOB plus the freight to the port of destination. CIF (Cost, Insurance and Freight) is CFR plus cargo insurance. In FOB, CFR and CIF, risk passes to the buyer when the goods are on board at the port of shipment, even though in CFR and CIF you pay the freight to destination. And under CIF you only have to take out the minimum insurance: Institute Cargo Clauses (C), for 110% of the contract price.
Margin and markup are not the same. Margin is calculated on the selling price; markup, on the cost. If you add 20% to the cost, your real margin is 16.7%, not 20%. To achieve a margin on the price, use this formula: price = cost ÷ (1 − margin). With a cost of US$ 100 and a margin of 20%: 100 ÷ 0.80 = US$ 125. A markup of 25% gives the same result.
Insurance has a catch. The premium is charged on 110% of the CIF value, and that value already includes the premium. That is why the formula is: CIF = CFR ÷ (1 − 1.10 × premium rate). Ask your insurance broker or your freight forwarder for the rate. For freight, ask your freight forwarder or the shipping line for a current quotation and note until when it is valid.
Before sending the quotation, compare your price with the market. Keep three references: your floor price (the cost plus a minimum margin), your target price (the one you want to achieve) and the market price (what buyers pay at the destination and what your competitors charge). If your target is above the market's, improve your offer (topic 2-3) instead of lowering the price blindly. Leave room to negotiate (topic 4-4) and quote in dollars, with the Incoterm®, port and validity date.
If your cargo goes in a container and you hand it to the carrier at a terminal, the ICC recommends FCA, CPT or CIP instead of FOB, CFR or CIF, which were designed for cargo placed on board the vessel. Many buyers still ask for FOB, CFR or CIF, and that is why they are the terms in this topic. To review the eleven Incoterms® rules, use the site's Incoterms guide.
| Term | What your price includes | Insurance you must take out |
|---|---|---|
| FOB | Cost and margin, with the goods loaded on board at the port of shipment | None; the buyer decides |
| CFR | FOB plus freight to the port of destination | None; the buyer decides |
| CIF | CFR plus cargo insurance | Minimum: Institute Cargo Clauses (C), for 110% of the price |
Result: FOB is US$ 6.40 per shirt (US$ 76,800 for the order) with a 20.2% margin; CFR rises to US$ 78,900 and CIF to US$ 79,204.94. A weaker dollar cuts the margin and forces a review of the price.
30/01/2020
In the general procedure DESPA-PG.02 “Definitive Export”, version 7 (Resolution 024-2020, published on 30/01/2020 and amended later, among other dates in 2022), SUNAT establishes that the Incoterm is a mandatory data item of each declaration. A DAM can cover several invoices only if they all state the same Incoterm. If freight is itemized on the proof of payment and differs from the transport document, the freight from the transport document and the resulting FOB are declared.
Even if you invoice in CFR or CIF, declare the resulting FOB, keep the transport document and group in one DAM only invoices with the same Incoterm.
Source: SUNAT – Procedimiento DESPA-PG.02 Exportación definitiva (versión 7)
2020
The Incoterms® 2020 of the International Chamber of Commerce (ICC) are a set of eleven three-letter rules used in sales contracts since 1936. The ICC explains that in CIF the default insurance cover is that of the Institute Cargo Clauses (C), while CIP requires a higher one, that of the Institute Cargo Clauses (A) or similar. A seller on CIF terms complies with basic insurance; if the buyer wants more cover, it is best to agree it in writing.
If you quote CIF, your insurance is the minimum; if the buyer needs more cover, agree that cover before closing the price.
Source: ICC – Incoterms® 2020
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