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 the most common of the 12 international commerce terms (Incoterms) established by the International Chamber of Commerce (ICC) in 1936.1
Definitions vary from country to country, still, both contracts specify origin and destination; information used to outline the responsibilities and liabilities of buyers and sellers.
KEY TAKEAWAYS: Cost, Insurance and Freight, and Free on Board are international shipping agreements. Both agreements determine the responsibilities of the buyer and seller when moving goods internationally. CIF is an expensive option when buying goods. FOB contracts relieve the seller of responsibility after chipping the goods.
When using a CIF agreement, the costs for the buyer are higher. 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.1 Communication can also be an issue because the buyer relies solely on people who are acting on behalf of the seller.
There are some variables that the buyer may or may not incur after the delivery of goods, such as docking and customs clearance fees.
FOB contracts relieve the seller of responsibility, once the goods are shipped. After the goods have been loaded, or “passed the ship’s rail,” the responsibilities are transferred to the buyer.
When the voyage begins, the buyer then assumes all liability.1 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.
Insurance and liability costs associated with successful transit of goods are paid by the seller up until the goods are received by the buyer under the CIF.
The seller is responsible for transporting the goods to the nearest port, loading them on a vessel and covering insurance and freight costs.
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.