Every export proforma invoice must state an Incoterm — the standardised trade rule that defines exactly where the seller's cost and risk obligations end and the buyer's begin. State the wrong Incoterm and your quoted price will not cover your actual costs. State it incorrectly (without the named place) and your LC payment will be refused.
Quick answer: An Incoterm on a proforma invoice tells the buyer who pays freight and insurance and where risk transfers. The most common are EXW (buyer collects, seller does least), FOB (seller loads at the port, buyer pays sea freight), and CIF (seller pays freight and insurance to the destination port). Always write it with the named place — "FOB Shanghai", not "FOB".
What are Incoterms and why do they matter on a proforma?
Incoterms® (International Commercial Terms) are published by the International Chamber of Commerce (ICC). The current version is Incoterms® 2020. They define three things:
- Who pays for transport — from origin to destination
- Who pays for insurance — during transit
- Where risk transfers — the exact point where loss or damage becomes the buyer's problem
On a proforma invoice, the Incoterm directly determines your quoted price. A CIF quote includes freight and insurance; a FOB quote does not. Getting this wrong means you either absorb costs silently or quote a price the buyer later disputes.
The golden rule: Under Incoterms 2020, the Incoterm must always be written with the named place. "FOB" alone is not valid — write "FOB Shanghai" or "FOB Nhava Sheva (JNPT), India."
The 11 Incoterms 2020 — quick reference
| Incoterm | Risk transfers at | Seller pays | Mode |
|---|---|---|---|
| EXW — Ex Works | Seller's premises | Packing only | Any |
| FCA — Free Carrier | Named place / carrier | Export clearance + delivery to carrier | Any (incl. air) |
| CPT — Carriage Paid To | First carrier (origin) | Freight to destination | Any (incl. air) |
| CIP — Carriage & Insurance Paid To | First carrier (origin) | Freight + full insurance to destination | Any (incl. air) |
| DAP — Delivered At Place | Named destination (unloaded) | All transport; buyer pays import duty | Any |
| DPU — Delivered at Place Unloaded | Named place after unloading | All transport + unloading | Any |
| DDP — Delivered Duty Paid | Named destination (duty paid) | Everything including import duty | Any |
| FAS — Free Alongside Ship | Alongside vessel at origin port | Export clearance + delivery to quayside | Sea only |
| FOB — Free On Board | On board vessel at origin port | Export clearance + delivery on board | Sea only |
| CFR — Cost and Freight | On board vessel (origin) | Freight to destination port | Sea only |
| CIF — Cost, Insurance & Freight | On board vessel (origin) | Freight + minimum insurance to destination | Sea only |
The 5 most common Incoterms on proforma invoices
EXW — Ex Works [Seller's Address]
Write as: EXW Factory Gate, Shenzhen, China
The seller's minimum obligation: make goods available at their premises, packed and ready. The buyer arranges everything — collection, export clearance, freight, insurance, and import. Used when the buyer has their own freight forwarder and wants complete control over logistics costs.
Watch out: Under EXW, the buyer is responsible for export clearance — but in many countries, the exporter (seller) is legally required to be the exporter of record. EXW can create customs complications. Many experienced exporters refuse EXW for this reason; FCA is usually the better alternative.
FOB — Free On Board [Port of Loading]
Write as: FOB Shanghai / FOB Nhava Sheva (JNPT), India / FOB Port Klang, Malaysia
The most common Incoterm for sea freight exports. The seller pays for export clearance and delivery of goods on board the vessel at the named port. Once on board, risk transfers to the buyer. The buyer arranges and pays for ocean freight and insurance from port of loading onward.
Price includes: factory cost + inland freight to origin port + port charges + export clearance
Price excludes: ocean freight, marine insurance, destination port charges, import duty
LC note: The bill of lading must show the exact port name you stated on the proforma. "FOB Shanghai" but goods loaded at Ningbo = LC discrepancy.
CIF — Cost, Insurance and Freight [Port of Destination]
Write as: CIF Rotterdam / CIF Dubai Port / CIF Los Angeles
The seller pays for ocean freight and minimum insurance (Institute Cargo Clauses C) to the destination port. However, risk transfers to the buyer as soon as goods are on board the vessel at origin — even though the seller has paid freight. This is a critical and often misunderstood distinction: CIF is a "C" rule, meaning risk and cost split at different points.
Price includes: everything in FOB + ocean freight + minimum marine insurance
Price excludes: destination port charges, import duty, onward delivery
When to use: when you book and pay for the vessel and want to offer a competitive landed price to the buyer's port. Common in commodity trade (cotton, coffee, steel) and in markets where buyers prefer not to manage freight.
DAP — Delivered At Place [Named Destination]
Write as: DAP Buyer's Warehouse, 123 Industrial Road, Berlin, Germany
The seller delivers goods to the named destination, bearing all transport risk and cost. The buyer is responsible only for import customs clearance and import duty at destination. Used for road freight within Europe, and increasingly for air/courier shipments where the seller wants to control end-to-end delivery.
Price includes: everything in CIF + destination port handling + onward road delivery
Price excludes: import duty and taxes at destination
DDP — Delivered Duty Paid [Named Destination]
Write as: DDP Buyer's Address, Tokyo, Japan
The seller's maximum obligation: deliver goods to the buyer's door, duty and tax paid. This is the most expensive Incoterm for the seller. Used when the seller wants to offer a fully-landed, all-inclusive price and the buyer wants zero logistics involvement. Common for e-commerce B2B and courier shipments.
Watch out: To use DDP, the seller must be able to act as importer of record in the destination country — which requires a local entity or a customs broker with importer-of-record capability. Many sellers cannot legally clear customs in the buyer's country, making DDP impractical without local infrastructure.
Which Incoterm should you use? Decision guide
| Your situation | Recommended Incoterm | Avoid |
|---|---|---|
| Buyer has their own freight forwarder (sea) | FOB | EXW (export clearance issue) |
| You book the vessel, sea freight | CIF or CFR | EXW or FOB |
| Air freight shipment | FCA or CIP | FOB or CIF (sea-only terms) |
| LC transaction, sea shipment | FOB or CIF | EXW (hard to document for LC) |
| Door-to-door within Europe (road) | DAP or DDP | FOB or CIF |
| Offer fully landed price, you can clear customs at destination | DDP | EXW |
| New buyer, want minimum risk for seller | EXW or FOB | DDP (maximum seller risk) |
Incoterms and freight costs — what to include in your price
When you quote on a proforma invoice, your price must reflect the Incoterm. Use this as a checklist:
- EXW price = manufacturing cost + packaging
- FOB price = EXW + inland transport to port + export customs + port loading charges
- CIF price = FOB + ocean freight + minimum marine insurance premium
- DAP price = CIF + destination port handling + onward road delivery to buyer
- DDP price = DAP + import duty + import VAT/GST at destination
If you quote CIF but calculate a FOB price, you will absorb ocean freight without recovering it. Always confirm the freight quote from your forwarder before issuing the proforma under CIF terms.
Incoterms and Letters of Credit
In LC transactions, the Incoterm on the proforma becomes a term of the LC. The shipping document (bill of lading or airway bill) must match the named place exactly. Common LC discrepancies caused by Incoterm errors:
- Proforma says "CIF Rotterdam" — goods shipped via Hamburg — bill of lading shows Hamburg — LC discrepancy
- Proforma says "FOB" without a named port — LC opened with "FOB any Indian port" — bill of lading shows specific port — bank disputes compliance
- Proforma says "CIF" — seller uses air freight — airway bill does not support sea Incoterms — LC presentation rejected
Read the full guide: Letter of Credit and proforma invoice.
Frequently asked questions
What is the most common Incoterm on a proforma invoice?
FOB (Free On Board) is the most widely used Incoterm for sea freight exports, particularly in Asia–Europe and Asia–Americas trade lanes. CIF is the second most common. For air freight, FCA (Free Carrier) is the correct equivalent to FOB.
Can I use FOB for air freight on a proforma invoice?
No. FOB and CIF are sea and inland waterway terms only. For air freight, use FCA (seller delivers to airport/carrier) or CIP (seller pays freight and full insurance to destination). Using FOB for air freight creates ambiguity in shipping documents and can cause LC discrepancies.
What does "FOB" mean on a proforma invoice?
FOB (Free On Board) means the seller's price includes delivery of goods on board the vessel at the named origin port, plus export clearance. Once on board, risk transfers to the buyer. The buyer pays for ocean freight and insurance from that point. You must always name the port: "FOB Shanghai" not just "FOB."
What is the difference between CIF and CFR on a proforma?
Both include the seller paying ocean freight to the destination port. CIF additionally requires the seller to pay for minimum marine insurance (ICC Clause C). Under CFR, the buyer must arrange their own marine insurance even though the seller has paid freight. If the goods are lost at sea under CFR, the buyer bears the loss — they need their own policy.
Can I change the Incoterm after the LC is opened?
Yes, but it requires an LC amendment — which costs money (typically $50–$150) and takes 3–7 banking days. It is far easier to agree the Incoterm on the proforma before the LC is opened. Never change the Incoterm informally via email after the LC has been issued.
Does the Incoterm need to appear on the commercial invoice too?
Yes. The commercial invoice (and in some cases the bill of lading) must state the same Incoterm as the proforma and LC. Any discrepancy — even different capitalisation in some strict bank interpretations — can be used to refuse payment.
Use our free proforma invoice generator with a built-in Incoterms field, or download the export-ready template. For the full export proforma checklist, read the export guide.
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