Incoterms: FOB or CIF - what to use?
FOB and CIF are very similar in that they both deal with shipping by sea or inland waterway and have similar moments for when the buyer and seller take on risk and obligation. Because of this, exporters, importers, agents, and customs managers often mix the two up, sometimes at their own expense. In this post, we explain what CIF and FOB mean and talk about how they're different, so you can decide which word is best for moving your products across borders.
Find out what Incoterms® 2020 is all about in an easy-to-understand way.
FOB: Free On Board
The seller clears the goods for export and gives them to the buyer when they are on the ship at the port of shipment. From now on, the buyer is responsible for all costs and risks that come with the items. This Incoterm is not used very typically. When it is, companies frequently get it wrong because they confuse it with the local term FOB. Also, this term is only used when the items can be brought directly to the place where they can be loaded onto the ship. Most of the time, they are given to a carrier at a container port, so the title Free Carrier or FCA is more appropriate.
FOB Duties and Who Takes the Risk
Under the rules of Incoterms 2020, the seller has done what they said they would do when
the goods are loaded on the vessel chosen by the buyer
at the agreed-upon port of shipping
on the agreed-upon date or within the agreed-upon time frame.
FOB means that the seller is responsible for loading the goods onto the vehicle, but the buyer is responsible for getting the goods to their final destination.
Once the goods are on the ship, the customer is responsible for them and the seller is no longer responsible for them. From that point on, the buyer pays all costs.
Cost, Insurance, and Freight (CIF)
Cost, Insurance, and Freight (CIF) means that it is the seller's job to make sure that the items are properly packed and put into the vessel they have chosen, or to "procure products so delivered."
The seller is also responsible for paying for freight and insurance to the stated port of destination. Clause C of the Institute Cargo Clauses says that the seller has to pay for the minimum level of insurance.
This word is only used when the items can be moved directly to the spot where they will be loaded onto the ship. Most of the time, they are given to a carrier at a container port, so the name Carriage and Insurance Paid To, or CIP, is a better fit.
Responsibilities of the CIF and Transfer of Risk
CIF means that the seller is in charge of the goods, from where they are made to where they are shipped. On the other hand, the seller could get goods that have already been loaded onto a ship and are on the move. This kind of "string sale," in which a product is sold more than once while it is in transit, is common for goods like wheat.
The seller is in charge of loading properly packed goods onto the ship they have chosen and getting the buyer to the port of destination they have specified. The seller must also get insurance up to the point where the goods arrive.
From the point of origin to the point of destination, the buyer is in charge. It's important that the sales contract make it clear when responsibility changes at the port of destination. Is it part of the job to get things off the ship?
Once the goods are on the ship at the port of shipping, the buyer is responsible for them and the seller is no longer responsible for them.
What's Different About CIF and FOB?
The main difference between Incoterms FOB and CIF is who pays for the goods' main transportation. Under FOB, the cost and risk are both passed on at the point of export. Under CIF, the seller is responsible for the goods until they reach the port of destination. However, the seller is no longer responsible for the goods when they are put on the ship at the port of export.
Under CIF, the buyer takes the risk of loss if the goods are damaged between the port of export and the port of destination. This is true even if the seller has a contract with the ship. But the seller has to make sure the items are covered for the whole trip.
When the contract says FOB, the customer is responsible for transportation costs. When the contract says CIF, the seller is responsible.
FOB or CIF? Which Should You Use?
It all depends. Importers and new exporters may choose F-group terms, but exporters with more experience often choose C-group terms instead. CIF is a C-group term that lets exporters work directly with carriers. All the paperwork, bills of lading, and other information needed for letters of credit are made in one place. Also, using C-group terms gives exporters more power in negotiations, which is especially true if they book a lot of freight.
CIF, like the other four Incoterms 2020 rules for sea and inland canal transport, is best used when the seller has direct access to the vessel for loading, such as with bulk freight or goods that don't come in containers. For most exports, Carriage Paid To (CPT) might be a better choice.
Learn more about the Incoterms 2020 Rules.
If you do a lot of international business, you need to understand the risks and responsibilities outlined in the Incoterms 2020 guidelines. You can't just pick the term you usually use. Start by getting a copy of the Incoterms® 2020 Rules book from the ICC.
Register for a seminar or webinar on the Incoterms® 2020 rules given by Customs Manager to learn more about which term or terms are best for your organisation. You should also read our articles about each of the Incoterms 2020 rules and Incoterms 101:
EXW (Ex Works)
FCA (Free Carrier)
FAS (Free Alongside Ship)
Free on board, or FOB (Free On Board)
CFR (Cost and Freight)
CIF (Cost, Insurance and Freight)
CPT (Carriage Paid To)
CIP (Carriage and Insurance Paid To)
DAP (Delivered At Place)
DPU (Delivered At Place Unloaded)
DDP (Delivered Duty Paid)