Cost, Insurance, and Freight (CIF) vs. Free on Board (FOB): An Overview
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 12 international commerce terms (Incoterms), which were established by the International Chamber of Commerce (ICC) in 1936.
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.
- Cost, insurance, and freight and free on board are international shipping agreements used in the transportation of goods between a buyer and a seller.
- They are part of a set of 11 Incoterms set up by the International Chamber of Commerce.
- Under CIF contracts, the seller assumes responsibility for costs and liabilities until the shipment arrives at the destination, at which time the risk is transferred to the buyer.
- The buyer is responsible for shipping and other costs, as well as insurance as soon as the goods are loaded onto the vessel and during the voyage.
- FOB contracts are generally more cost-effective because buyers have more control over shipping and insurance.
Cost, Insurance and Freight (CIF)
Cost, Insurance, and Freight (CIF)
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, insurance, which amounts to the total cost of the goods plus 10%. The seller also obtains the necessary documentation, licenses, and inspections that may be required.
The buyer assumes full responsibility for the goods as soon as they reach the destination port under a CIF agreement. This means that the buyer may have to assume liability for any extra costs, such as customs fees, and makes 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.
Free on Board (FOB)
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 CIF and FOB 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:
- A seller with expertise in local customs that the buyer lacks would likely assume CIF responsibility to encourage the buyer to accept a deal.
- Smaller companies may prefer the larger party to assume liability, as this can result in lower costs.
- Some companies also have special access through customs, document freight charges when calculating taxation, and other needs that necessitate a particular shipping agreement.
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.
What Are Incoterms?
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 more than six million companies in more than 100 countries. There were 11 Incoterms in use as of 2020.
How Many Incoterms Are There and What Are They?
There were 11 Incoterms as of 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).
When Should I Use 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.
What Is Cheaper, FOB or CIF?
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 are able to sign with the shipper of their choice and take as much coverage as they see fit to insure their shipments.