FOB Meaning

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CIF vs. FOB: What's the Difference?

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 are among
the most common of the 12 international commerce terms (Incoterms) established by
the International Chamber of Commerce (ICC) in 1936.1 2 The specific definitions vary
somewhat in every country, but, in general, both contracts specify origin and
destination information that is used to determine where liability officially begins and ends,
and outline the responsibilities of buyers to sellers, as well as sellers to buyers.
KEY TAKEAWAYS
• Cost, Insurance and Freight and Free on Board are international shipping agreements
used in the transportation of goods between a buyer and a seller.
• CIF is considered a more expensive option when buying goods.
• FOB contracts relieve the seller of responsibility once the goods are shipped.
CIF
CIF is considered a more expensive option when buying goods. 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. Communication can also be an issue because the buyer relies solely on
people who are acting on behalf of the seller. The buyer might still have to pay additional fees
at the port, such as docking fees and customs clearance fees before the goods are cleared.
Cost, Insurance and Freight (CIF)
FOB
FOB contracts relieve the seller of responsibility once the goods are shipped. After the goods
have been loaded—technically, "passed the ship's rail,"—they are considered to be delivered
into the control of the buyer. When the voyage begins, the buyer then assumes all
liability.2 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.
Key Differences
CIF and FOB mainly differ in who assumes responsibility for the goods during transit. In CIF
agreements, insurance and other costs are assumed by the seller, with liability and costs
associated with successful transit paid by the seller up until the goods are received by the
buyer. The responsibilities of the seller include transporting the goods to the nearest port,
loading them on a vessel and paying for the insurance and freight.2
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.
Some companies also have special access through customs, document freight charges when
calculating taxation, and other needs that necessitate a particular shipping agreement.
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Related Terms
The Seller Pays Cost, Insurance, and Freight (CIF) to Protect Shipments
Cost, insurance, and freight (CIF) is a method of exporting goods where the seller pays
expenses until the product is completely loaded onboard ship.
more
Incoterms Definition
International commercial terms—Incoterms for short—clarify the rules and terms buyers
and sellers use in international and domestic trade contracts.
more
Learn About the Free Carrier – FCA Delivery Option
Free carrier is a trade term requiring the seller to deliver goods to a named airport, shipping
terminal, or warehouse specified by the buyer.
more
Cost and Freight (CFR) Definition
Cost and freight (CFR) is a trade term obligating the seller to arrange sea transportation to a
port of destination and provide the buyer with the documents necessary to obtain the goods
from the carrier.
more
Making Sure You Get the Goods: Delivered Duty Unpaid (DDU)
Delivered Duty Unpaid (DDU) means the seller is responsible for ensuring goods arrive safely
to a destination.
more
Ex Works (EXW) Shipping: When the Buyer Covers Transportation Costs
Ex works (EXW) is a shipping arrangement in international trade where a seller makes goods
available to a buyer, who then pays for transport costs.
more
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CIF vs. FOB: What's the Difference?

Cost, Insurance and Freight (CIF)

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