CIF vs. FOB: An Overview
Cost, Insurance, and Freight (CIF) and Free on Board (FOB) are international shipping agreements used in the transportation of goods between a buyer and a seller. They are among the most common of the 12 international commerce terms (Incoterms) established by the International Chamber of Commerce (ICC) in 1936. The specific definitions vary somewhat in every country, but, in general, both contracts specify origin and destination information that is used to determine where liability officially begins and ends, and 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.
- CIF is considered a more expensive option when buying goods.
- FOB contracts relieve the seller of responsibility once the goods are shipped.
CIF is considered a more expensive option when buying goods. This is because the seller uses a forwarder of his or her choice who may charge the buyer more in order to increase the profit on the transaction. Communication can also be an issue because the buyer relies solely on people who are acting on behalf of the seller. The buyer might still have to pay additional fees at the port, such as docking fees and customs clearance fees before the goods are cleared.
Cost, Insurance and Freight (CIF)
FOB contracts relieve the seller of responsibility once the goods are shipped. After the goods have been loaded—technically, "passed the ship's rail,"—they are considered to be delivered into the control of the buyer. When the voyage begins, the buyer then assumes all liability. The buyer can, therefore, negotiate a cheaper price for the freight and insurance with a forwarder of his or her choice. In fact, some international traders seek to maximize their profits by buying FOB and selling CIF.
With FOB contracts, when the voyage begins, the buyer assumes all liability for the shipped goods.
CIF and FOB mainly differ in who assumes responsibility for the goods during transit. In CIF agreements, insurance and other costs are assumed by the seller, with liability and costs associated with successful transit paid by the seller up until the goods are received by the buyer. The responsibilities of the seller include transporting the goods to the nearest port, loading them on a vessel and paying for the insurance and freight.
In some agreements, goods are not considered to be delivered until they are actually in the buyer's possession; in others, the goods are considered delivered—and are the buyer's responsibility—once they reach the port of destination.
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. A seller with expertise in local customs that the buyer lacks would likely assume CIF responsibility to encourage the buyer to accept a deal, for example. 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.