Know the Difference Between FOB and CIF Incoterms (2024)

International trade processes can be complex, especially for first-time traders to understand. Even seemingly simple concepts with their abbreviations and variations can baffle novice traders.

One such set of abbreviations are the incoterms set by the ICC that clearly define the roles, responsibilities, duties & accountability of the exporter and importer in any given international trade transaction.

The international incoterms published by the International Chamber of Commerce (ICC) include Free on Board (FOB) & Cost, Insurance & Freight (CIF) incoterms that define the roles and responsibilities of sellers and buyers. Understanding in detail the tasks assigned to each party is crucial to ensure business takes place smoothly.

What is a FOB Incoterm?

Under the incoterm Free On Board or Freight on Board, the seller delivers goods onto a vessel nominated by the buyer at the named port. This named port can be the port of origin or the port of destination.

1. Port of origin:The term FOB origin or FOB shipping point means the buyer is at risk once the seller has dispatched the products from his end. In technical terms, the title and responsibility of the goods are immediately transferred to the buyer after loading goods onto the vessel and signing the bill of lading (BL).

2. Port of destination:On the other hand, the term FOB destination means the seller is at risk of bearing the loss until the products reach the buyer’s port.

The term was originally restricted to goods transported by ship in the US. However, now, the term has broadened and is used for goods transported by land and air too. The FOB incoterms vary from country to country. Thus, the buyer and seller need to make the FOB terms clear in the contract before shipping goods.

Depending upon the FOB, the shipping and insurance costs also vary, making it a crucial factor in determining the cost of sale and purchase.

This article covers FOB incoterms in detail, including the responsibility, roles, and FOB value calculation.

What is a CIF Incoterm?

CIF stands for Costs, Insurance, and Freight. It is an international shipping agreement that represents the charges paid by the seller to cover the shipping costs, insurance, and freight expenses while cargo is in transit. CIF applies only to goods transported by waterways and doesn’t cover other modes of transportation.

Based on the contract, the seller exports goods to the destination port as requested by the buyer and also bears the costs of any damages, loss, and insurance until the shipment reaches the destination port. Besides this, the seller bears other additional costs that may be applicable, such as inspections and rerouting, till goods reach the buyer’s port.

Once goods successfully reach the destination port, the buyer takes complete responsibility for any damages, losses, or additional expenses that might incur till goods are delivered to the final destination.

While this may sound similar to the FOB destination incoterm, under CIF, it is the responsibility of the seller to arrange for freight and shipping in the first place.

This article covers CIF incoterms in detail, including the charges, responsibilities, and duties of the buyer and the seller

Also Read: How International Ocean Freight Shipping Works?

Key Differences

The main difference between FOB and CIF lies in defining the responsibility of the parties during the various stages of transit of the goods. This also includes arranging for freight and payment of insurance and customs costs.

Each incoterm has its own set of advantages and disadvantages depending upon the type and volume of goods transported. For example, FOB gives buyers more control over transit and insurance costs. Conversely, CIF is more useful when sellers have direct and easy access to shipping.

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Choosing Between FOB or CIF

Depending on factors such as the type of goods, the volume, access to vessels, associated risks, insurance charges, and, more importantly, the experience of either of the parties, the buyer and seller may agree upon either CIF or FOB incoterms.

When to Opt for FOB?

Example: A toy manufacturing company based in Mumbai, India, exports toys to a wholesale business based in London, UK. If the FOB stated on the shipping documents is FOB Mumbai (FOB origin), the London-based wholesaler is liable for any damage or loss that may occur while the toys are in transit they’re loaded onto the vehicle.

In this case, the wholesaler in London is responsible for purchasing insurance to cover the costs of any damages that might occur and expenses like taxes, customs duties, etc., at the destination port.

Similarly, if the FOB mentioned in the shipping documents is FOB London, the toy manufacturing company in Mumbai is liable for the damages until the shipment reaches the port in London. However, although the responsibility is with the seller, the arrangements for transport and freight are still done by the buyer.

Under FOB, the buyer assumes the responsibility for the transport cost and also for arranging for freight and transport. It is generally recommended to buy FOB as the buyer controls the freight prices.

When to Opt for CIF?

Suppose ‘company A’ in the US has ordered 1,000,000 units of smartphones from ‘company B’ in the US through a CIF agreement from Busan, a port in South Korea. ‘Company A’ has successfully delivered the order to the US port and loaded the consignment onto the ship for transport.

Once this process is complete, the risk of loss is transferred from ‘company A to company B.’ In exchange, ‘company A’ has purchased insurance and pays for the shipping and other costs until the consignment reaches the buyer’s destination port. The seller also bears any settlement charges before the goods arrive at the destination port.

Buyers generally avoid CIF-based imports as the sellers add a profit margin to the freight and insurance costs. However, in cases where the buyer is new and inexperienced and the seller is a large organization, opting for CIF might be a better choice as the buying company can leverage the negotiating power and seller assume liability for the safe delivery of the shipment.

Also Read:

Costs & Price Value

In terms of expenses borne by the seller, FOB covers expenses such as ex-factory costs of the goods, packaging charges, documentation, loading, and other transportation expenses.

On the other hand, CIF includes FOB charges and freight and marine insurance charges to be borne by the seller.

The buyers and sellers may negotiate the price of the transported goods based on the party that assumes the transportation and insurance charges.

To conclude, there is no hard and fast rule for selecting either FOB or CIF and it heavily depends on the risk appetite & bargaining power of either of the parties over aspects like freight prices & insurance.

As an expert in international trade processes, particularly in the context of incoterms set by the International Chamber of Commerce (ICC), I bring a wealth of knowledge and experience to elucidate the complexities associated with concepts such as Free On Board (FOB) and Cost, Insurance & Freight (CIF) incoterms. My expertise is grounded in a deep understanding of the roles, responsibilities, duties, and intricacies involved in international trade transactions.

Let's delve into the concepts covered in the article:

1. FOB Incoterm:

  • Definition: FOB, or Free On Board, is an incoterm that dictates that the seller is responsible for delivering goods onto a vessel nominated by the buyer at a specified port.
  • Port of Origin: If FOB origin is specified, the buyer assumes the risk once the goods are dispatched, and title transfers after loading onto the vessel.
  • Port of Destination: FOB destination means the seller bears the risk until the products reach the buyer's port.
  • Variations: FOB incoterms may vary from country to country, requiring clear specification in the contract.

2. CIF Incoterm:

  • Definition: CIF stands for Costs, Insurance, and Freight, applying specifically to goods transported by waterways.
  • Responsibilities: The seller covers shipping costs, insurance, and freight expenses until the goods reach the destination port. Additional costs like inspections and rerouting may also be borne by the seller.
  • Transition of Responsibility: Once at the destination port, the buyer assumes responsibility for damages, losses, and additional expenses.
  • Limitation: CIF is exclusive to waterway transportation.

3. Key Differences:

  • FOB and CIF differ in defining responsibilities during transit stages, including freight, insurance, and customs costs.
  • Each incoterm has advantages and disadvantages based on the type and volume of goods transported.
  • FOB provides more buyer control over transit and insurance costs, while CIF is beneficial when sellers have direct access to shipping.

4. Choosing Between FOB or CIF:

  • Factors for Consideration:
    • Type of goods
    • Volume of goods
    • Access to vessels
    • Associated risks
    • Insurance charges
    • Experience of parties

5. When to Opt for FOB or CIF:

  • FOB Example: FOB gives buyers control over transit and insurance costs. The buyer is responsible for insurance, taxes, and customs duties at the destination port.
  • CIF Example: CIF might be suitable when the buyer is inexperienced, and the seller, a large organization, can negotiate terms and assume liability.

6. Expenses and Price Negotiation:

  • FOB Expenses: Include ex-factory costs, packaging charges, documentation, loading, and transportation expenses.
  • CIF Expenses: Encompass FOB charges, freight, and marine insurance charges borne by the seller. Prices may be negotiated based on transportation and insurance responsibilities.

In conclusion, the choice between FOB and CIF depends on the risk appetite and bargaining power of the parties involved, considering factors like freight prices and insurance. There is no one-size-fits-all rule, and the decision should align with the specific circ*mstances of the international trade transaction.

Know the Difference Between FOB and CIF Incoterms (2024)

FAQs

Know the Difference Between FOB and CIF Incoterms? ›

In a nutshell, the major difference between FOB and CIF is in transference of liability and ownership. With FOB, title possession and liability usually shift when the shipment leaves the point of origin. With CIF, responsibility moves to the buyer once the goods reach the point of destination.

What is the difference between FOB and CIF Incoterms? ›

CIF requires the seller to cover the total cost of the goods, freight and insurance. Whereas FOB only requires the seller to cover the cost of loading the goods onto the vessel; the buyer then pays to transport and insure the goods (as well as any other charges incurred once the goods are on board).

What is the difference between CIF and FOB oil? ›

Cost Considerations: CIF terms generally involve higher costs for the seller, as they are responsible for insurance and freight charges. Buyers may negotiate a lower price when using FOB terms, as they assume more responsibility for the goods once loaded.

What is the difference between CIF and FOB reddit? ›

CIF is Cost Insurance and Freight, which means the seller owns the goods and pays all costs associated with delivering the goods until they arrive at the buyers. FOB is Freight On Board, which means the buyer owns the goods as soon as they are put on the buyers truck, and the buyer pays for the delivery costs.

What is the difference between FOB and CFR incoterm? ›

Free on Board means the seller is responsible for the product only until it is loaded on board a shipping a vessel, at which point the buyer is responsible. With CFR, the seller must arrange and pay all costs to ship the product to a destination port, at which point the buyer becomes responsible.

What is the CIF Incoterms? ›

The ICC and Cost, Insurance, and Freight (CIF)

Incoterms are common trade rules developed by the International Chamber of Commerce (ICC) in 1936. 2 The ICC established these terms to govern the shipping policies and responsibilities of buyers and sellers who engage in international trade.

What is the difference between CIF and CIP? ›

CIP vs CIF

The two incoterms are very similar, except that CIP is used for all modes of transport, whereas CIF applies to sea freight only. This also means that for CIF, responsibility transfers at the origin seaport, whereas for CIP it transfers at any agreed-upon location in the origin country.

Which is cheaper CIF or FOB? ›

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.

What is the difference between FOB, CIF, and EXW? ›

Six commonly used terms in international commerce are EXW (Ex Works), FOB (Free On Board), CFR (Cost and Freight), CIF (Cost, Insurance, and Freight), DDU (Delivered Duty Unpaid), and DDP (Delivered Duty Paid). Understanding the nuances of these terms is essential for businesses engaging in cross-border transactions.

Should I sell CIF or FOB? ›

With FOB, title possession and liability usually shift when the shipment leaves the point of origin. With CIF, responsibility moves to the buyer once the goods reach the point of destination. Simply put, on the whole it's recommended that buyers use FOB, and sellers use CIF.

What is the difference between FOB and CIF revenue recognition? ›

Generally, for an FOB agreement, control transfers to the buyer when goods leave port because that is when the customer obtains the risks and rewards of ownership, and often the legal title to goods. For a CIF agreement, however, control usually transfers to the buyer when the goods arrive.

What is the difference between FOB CNF and CIF? ›

The payment and processing of insurance premiums are different: FOB insurance and CNF insurance should be handled by the buyer, and the seller should notify the buyer before shipment; CIF insurance should be handled by the seller and paid for insurance premiums, and the seller should follow the terms and conditions of ...

What is the difference between Incoterms CFR and CIF? ›

CFR is almost identical to the Cost, Insurance, and Freight (CIF) Incoterm. However, the difference is that insurance is mandatory under CIF and must be provided by the seller. On the other hand, insurance is optional for the CFR Incoterm.

What is the difference between FOB and Incoterm? ›

EXW stands for Ex Works, an Incoterm whereby the buyer of a shipped product pays for the goods when they are delivered to a specified location. FOB, or Free on Board, instead shifts the responsibility of the goods to the buyer as soon as they are loaded onboard the ship.

What does CIF stand for in shipping? ›

CIF stands for cost, insurance and freight. The terms specify the division of responsibility between the shipper/supplier and the consignee/buyer in the process of shipping the cargo from one destination to another.

What is the difference between CIP and FOB shipping terms? ›

With CIF, the seller does most of the legwork, taking responsibility for the goods all the way to the buyer's port. Alternatively, with FOB, the buyer assumes full liability for all costs and risks as soon as the cargo is loaded onto the ship. International Trade Administration.

Is CIF higher than FOB? ›

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.

Does CIF include customs clearance? ›

In CIF, the seller is responsible for paying off any duties and clearing the goods for customs when the goods are being shipped from his country. Buyer is responsible for for customs clearance at the destination port, thus he is also accountable for import duties and charges.

How do I convert CIF to FOB? ›

International Trade Quotations and Conversion Formulas among Three Terms
  1. FOB into CFR or CIF. CFR=FOB+F (Freight); CIF=(FOB+F (Freight))/[1- Insurance rate*(1+Insurance markup rate)]
  2. CIF into FOB or CFR. FOB=CIF- I (Insurance) - F (Freight) CFR=CIF- I (Insurance)
  3. CFR into FOB or FIB.

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