Cost, Insurance, and Freight (CIF) and Free on Board (FOB) are two Incoterms created by the ICC to standardise international freight shipping. CIF and FOB Incoterms are very popular for shipping sea cargo. Discover the difference between FOB and CIF and determine which is better for your operations.
CIF and FOB shipping terms are both used for maritime and water cargo. The differences between CIF and FOB shipping terms depend on which type of FOB Incoterm is used, FOB Origin or FOB Destination.
Under FOB Origin, the seller must pack and clear goods for export, transport them to the port of origin and load them on the selected vessel. The seller is liable for the goods until they are available on board the chosen vessel at the port of origin. Although, when using CIF, the risk transfer occurs at the same point, when the goods are loaded on the ship,the seller is obligated to cover freight charges and insurance to the country of destination.
The main difference between CIF and FOB Destination Incoterms is insurance. Under FOB Destination, the seller agrees to deliver the goods to a named location in the buyer’s country and must cover all freight charges. However, unlike CIF, the seller is not obligated to purchase insurance coverage for the cargo. Another crucial difference is risk transfer. Under CIF, the buyer is responsible for goods once they are loaded on the vessel, while under FOB Destination, the seller is responsible for goods until they have been delivered.
Read more about each Incoterm:
For the buyer:
Compared to FOB, CIF is more convenient for buyers since it assumes fewer responsibilities for them. It is an ideal option for buyers who are unfamiliar with shipping overseas. However, the cost of CIF is much higher since the seller will charge a higher price to cover shipping and insurance. Another drawback is having less control over the shipment, which may be problematic in case of any damages and claims.
For the seller:
Using CIF Incoterm for the contract can generate higher margins for the seller as they may add additional fees for freight transport and insurance. However, the higher invoice comes with a higher risk for the seller.
For the buyer:
The main advantage for buyers when using FOB is having more control and thus being able to make cost-effective decisions. Therefore, the buyer may find a freight forwarder with lower prices or insure the shipment with as much coverage as needed. It is recommended for buyers with experience in international shipping and trade.
For the seller:
FOB Incoterm is beneficial for the sellers because they assume less responsibility and do not worry about additional problems. This arrangement costs less to the seller but also brings less profit.
When using FOB and CIF shipping terms, the seller and buyer follow the same rules:
|CIF||FOB – Origin||FOB – Destination|
|Type of transport||Maritime and inland waterways cargo||Maritime and inland waterways cargo||Maritime and inland waterways cargo|
|Packing and inspection||Seller||Seller||Seller|
|Transport to the port of origin||Seller||Seller||Seller|
|Loading the goods on the named vessel||Seller||Seller||Seller|
|Unloading and handling at arrival at the named place||Buyer||Buyer||Buyer|
|Domestic transport to the named destination||Buyer||Buyer||Buyer|
|Risk transfer||Once the goods are loaded on the selected vessel at the port of origin||Once the goods are loaded on the selected vessel at the port of origin||Once the goods arrive at the named destination in the buyer’s country|
|Insurance||Mandatory. Purchased by the seller||Non-mandatory||Non-mandatory|
As you can see, the differences between FOB and CIF depend on the FOB Incoterm being used. We recommend both exporters and importers read or complete guides for more information about FOB, CIF and other Incoterms:
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