There are many costs incurred in an export transaction, which are not applicable to domestic sales.
It is recommended that a costing sheet is prepared to ensure that all cost items relevant to the export transaction are itemized and included. This will ensure that a correct quotation can be prepared accurately and quickly.
Generally, export costing should include the manufacturing cost and any additions or modifications to products, special packaging, ingredients, formula or specification modification, quality control, export administration, freight, distribution and marketing.
Also there are special costs applicable to particular industries, which should not be overlooked. In addition, costs of premiums for credit risk insurance, foreign exchange risk, loss of interest when providing credit terms, bank charges, agents' commissions, training customers’ or agents’ personnel, bid and performance bonds and other bank guarantees may have to be taken into consideration when preparing a quotation.
Export costing should not be confused with pricing. The following definitions indicate the differences:
- Costs: are the total of all expenses associated with producing and selling a product overseas.
- Price: is the amount for which the exporter sells the product and is determined by the exporter’s marketing strategy.
- Margin: is the difference between the total cost per unit and the export selling price; and is determined by the exporter’s corporate objectives.
COSTS ASSOCIATED SPECIFICALLY WITH EXPORT DOCUMENTATION, TRANSPORT AND INSURANCE INCLUDE THE FOLLOWING:
- Customs clearance (EDN): obtaining the Export Declaration Number issued by the Indian Customs Service and any other export permit or license from regulatory authorities.
- Certification/ Legalization: certification/legalization of documents and preparation costs (eg.State Chamber of Commerce, embassies, company staff costs; courier satchels, etc.)
- Inspection costs: of arranging and supervising inspection of goods if required. Note: Whether the exporter or importer is responsible for the payment of inspection fees should be established when preparing the quote.
- Cartage: to wharf or airport—delivery by road to the container depot or airport, eg. cost of road haulage by a contractor or cost of exporter’s own transport.
- Packing/labor costs: it is the exporter’s responsibility to include export packaging as part of the export price. However, on some occasions special packing requirements are prescribed by the importer. In this case, the additional costs incurred may be added to the pricing structure.
- THC (Terminal Handling Charge) / Port Service Charge (PSC): these charges are made by port authorities for use of their facilities. They are normally included in the freight rate charged by the shipping company and paid on the shippers’ behalf to the port authorities. Occasionally, for charter vessels, etc. the charges will have to be paid direct to the port authority by the shipper.
- Sea or air freight: cost obtained from shipping company, airline or consolidator. Also an allowance for contingencies is recommended. This is to allow for possible rate increases, adjustments to the Bunker Adjustment Factor (BAF)/Currency Adjustment Factor (CAF) percentages or other unforeseen circumstances.
- Marine insurance premium: cost obtained from insurance company or broker.
- Credit risk insurance premium.
Quotations and Pro Forma Invoices
A quotation describes the product, states a price for it, sets the time of shipment, and specifies the terms of sale and terms of payment. Because the foreign buyer may not be familiar with the product, the description of the product in an overseas quotation usually must be more detailed than in a domestic quotation.
The description should include the following 15 points:
- Seller’s and buyer’s names and addresses
- Buyer’s reference number and date of inquiry
- Listing of requested products and a brief description
- Price of each item
- Appropriate total cubic volume and dimensions packed for export (in metric units where appropriate)
- Appropriate gross and net shipping weight
- Trade discount (if applicable)
- Delivery point
- Terms of sale
- Terms of payment
- Insurance and shipping costs
- Validity period for quotation
- Total charges to be paid by customer
- Estimated shipping date from a U.S. port or airport
- Currency of sale
Pro forma invoices are not used for payment purposes. In addition to the 15 items previously mentioned, a pro forma invoice should include two statements—one that certifies the pro forma invoice is true and correct, and another that indicates the country of origin of the goods. The invoice should also be clearly marked “pro forma invoice.”
Pro forma invoices are models that the buyer uses when applying for an import license, opening a letter of credit, or arranging for funds. In fact, it is a good practice to include a pro forma invoice with any international quotation, regardless of whether it has been requested. When final commercial invoices are being prepared before shipment, it is advisable to check with your local Export Assistance Center for any special invoicing provisions that may be required by the importing country.
The most commonly applied terms of sale in the global marketplace are the international commercial terms, or Inco terms. Following are a few of the more frequently used terms in international trade:
CIF stands for cost, insurance, and freight to a named overseas port. The seller quotes a price for the goods (including insurance), all transportation, and miscellaneous charges to the point of debarkation from the vessel. (The term is used only for ocean shipments.)
CFR applies to cost and freight to a named overseas port. The seller quotes a price for the goods that includes the cost of transportation to the named point of debarkation from the vessel. The buyer covers the cost of insurance. (The term applies only for ocean shipments.)
CPT (carriage paid to) and CIP (carriage and insurance paid to) apply to a named destination. These terms are used in place of CFR and CIF, respectively, for all modes of transportation, including intermodal.
EXW (ex works) means “from a named point of origin” (e.g., ex factory, ex mill, ex warehouse); the price quoted applies only at the point of origin (i.e., the seller’s premises). The seller agrees to place the goods at the buyer’s disposal at the specified place within a fixed time period. All other obligations, risks, and costs beyond the named point of origin are the buyer’s.
FAS or free alongside ship, refers to the seller’s price quote for the goods, including the charge for delivery of the goods alongside a vessel at the named port of export. The seller handles the cost of wharfage, while the buyer is accountable for the costs of loading, ocean transportation, and insurance. It is the seller’s responsibility to clear the goods for export. FAS, as the term implies, is used only for waterborne shipments.
FCA or free carrier, refers to a named place within the country of origin of the shipment. This term defines the seller’s responsibility for handing over the goods to a named carrier at the named shipping point. According to Inco terms 2000, the named shipping point may be the seller’s premises. In that case, it is the seller’s responsibility to clear the goods for export from the United States. The term may be used for any mode of transport.
FOBor free on board, refers to a named port of export in the country of origin of the shipment. The seller quotes the buyer a price that covers all costs up to and including the loading of goods aboard a vessel. (FOB is used only for ocean shipments.) As with other “F” terms, it is the seller’s responsibility to clear the goods for export.
Some of the more common terms used in chartering a vessel are as follows:
- Free in is a pricing term that indicates that the charterer of a vessel is responsible for the cost of loading goods onto the vessel.
- Free in and out is a pricing term that indicates that the charterer of the vessel is responsible for the cost of loading and unloading goods from the vessel.
- Free out is a pricing term that indicates that the charterer is responsible for the cost of unloading goods from the vessel.
It is important to understand and use sales terms correctly. A simple misunderstanding may prevent you from meeting contractual obligations or make you responsible for shipping costs that you sought to avoid.