CIF vs. FOB: What's the Difference?

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 11 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 (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, and insurance. 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.

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.

Key Differences

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.