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Cost, insurance, and freight (CIF) and free on board (FOB) are international shipping agreements used in the transportation of goods between buyers and sellers. They are among the most common of the 11 international commerce terms (Incoterms), which were established by the International Chamber of Commerce (ICC) in 1936.
The main difference is that under CIF contracts, the seller is responsible for the risks and costs of transportation, whereas FOB contracts assign these costs to the buyer. CIF contracts are more expensive, but FOB contracts give the buyer greater control over how their goods are transported and insured.
The specific definitions vary somewhat in every country, but both contracts generally specify origin and destination information that is used to determine where liability officially begins and ends. They also outline the responsibilities of buyers to sellers, as well as sellers to buyers.
CIF is commonly used for large deliveries, including oversized goods, that are shipped by sea. The seller has the responsibility of loading the shipment onto the vessel. The seller covers the cost of shipping and insurance. The seller also obtains the necessary documentation, licenses, and inspections that may be required.
The buyer assumes full responsibility for the goods once they are loaded onto the vessel at the port of origin under a CIF agreement. This includes any expenses incurred at the destination port, such as customs fees.
This means that the buyer may have to assume liability for any extra costs, such as customs fees, and make payment once it reaches the port of destination. The transport carrier turns the transfer documentation for the goods over to the buyer upon payment.
CIF is considered an expensive option when buying goods. That's because the seller may use a transport carrier of their choice who may charge the buyer more to increase the profit on the transaction.
Communication may also be problematic if the buyer relies solely on people who act for the seller. The buyer may have to pay additional fees at the port, such as docking fees and customs clearance fees before the goods are cleared.
Since sellers insure goods during transport in a CIF contract, they generally receive any payouts in case a claim is filed. The same is true for buyers in a FOB contract.
Under a FOB agreement, the supplier assumes responsibility until the goods are loaded onto the shipping vessel. This means they pay for the goods to be transported to the port and onto the vessel. As such, the seller has a limited set of responsibilities under the contract.
The goods are considered to be delivered into the control of the buyer as soon as they're loaded onto the ship. When the voyage begins, the buyer then assumes full liability, including transport, insurance, and additional fees. The buyer is also responsible for unloading the goods from the vessel.
This type of shipping contract is more flexible than a CIF. That's because the buyer can negotiate a cheaper price for the freight and insurance with a forwarder of their choice. In fact, some international traders seek to maximize their profits by buying FOB and selling CIF.
The main differences between FOB and CIF lie in who assumes responsibility for the goods during transit. Under a CIF agreement, the seller assumes the costs and risks associated with transport until delivery, which is when the buyer assumes responsibility. With a FOB agreement, the seller transfers all of the risk and costs to the buyer once the shipment is loaded onto the shipping vessel.
Each agreement has particular advantages and drawbacks for both parties. While sellers often prefer FOB and buyers prefer CIF, some trade agreements find one method more convenient for both parties. For instance:
Buyers generally consider FOB agreements to be cheaper and more cost-effective. That's because they have more control over choosing shippers and insurance limits. CIF contracts, on the other hand, can be more expensive.
Since the seller has more control, they may opt for a preferred shipper who may be more costly. They may also choose higher insurance limits, as they want to ensure that the goods are delivered in excellent condition.
Incoterms are international commercial terms published by the International Chamber of Commerce. They are meant to make foreign trade seamless with clearly defined roles for buyers and sellers in the global market. First developed in 1936, the terms are used by 45 million companies in more than 170 countries. There are 11 Incoterms as established by the last update in 2020.
There are 11 Incoterms as established by the last update in 2020. They are Ex Works (EXW), Free Carrier (FCA), Carriage Paid to (CPT), Carriage and Insurance Paid To (CIP), Delivered at Place (DAP), Delivered at Place Unloaded (DPU), Delivered Duty Paid (DDP), Free Alongside Ship (FAS), Free on Board (FOB), Cost and Freight (CFR), and Cost, Insurance and Freight (CIF).
There are certain situations when CIF is the better option to use when shipping and receiving goods. It's a good idea to use a CIF contract when buyers deal with international suppliers, especially when sellers have easy and direct access to shipping vessels. CIF agreements cut down the need for buyers to take care of logistics in areas where they may not have experience, so all they need to do is simply take possession of the shipment once it arrives. Keep in mind, though, that CIF agreements are normally much more expensive than others.
A free on board contract is much cheaper than a cost, insurance, and freight agreement. That's because buyers have more control over the shipping logistics, including insurance and transport costs. Buyers can sign with the shipper of their choice and take as much coverage as they see fit to insure their shipments.
Whether to go with CIF or FOB will depend on the specific needs of the buyer or seller. While CIF is usually more expensive, it is beneficial for buyers as it places the bulk of the responsibilities on the seller. FOB, on the other hand, gives buyers more control and potential cost savings as it allows them to manage the shipping and insurance themselves.
