Cost, insurance, and freight (CIF) Vs Free on Board (FOB)

CIF (Cost, Insurance and Freight) is a shipping agreement where the seller is held responsible for the risks and costs related to the goods in transit. In other words, a CIF agreement makes the seller responsible for the shipment until it reaches its destination. It is the port of destination where the seller’s responsibility ends and is shifted onto the buyer. The buyer is now responsible for the delivery of items from the port of destination to the warehouse.

The seller’s responsibilities included in CIF Incoterms are cargo insurance, freight charges, and other additional fees. The seller is also responsible for obtaining the required licenses, documentation, and inspection. Since the seller has more responsibility and control over the trade in CIF, it lessens the buyer’s burden. However, CIF is expensive for the buyer as the seller controls the entire procedure.

CIF shipping agreement has its pros and cons for the buyer and the seller.

FOB full form in export is Free on Board. This shipping agreement makes the buyer responsible for the shipment the moment it leaves the port of origin.

The buyer looks after all the aspects related to the shipment, like selecting and paying the freight company, insuring the cargo, and other associated costs. The buyer is also responsible for unloading the goods from the ship.

Since the buyer can negotiate the costs related to transportation and insurance, the FOB clause in marine insurance is more flexible and affordable than CIF and other agreements. FOB contract also allows the buyer to cut costs by giving up some protections or insurance.

However, sellers may feel reluctant to take such risks as this may impact the quality of customer experience.

FOB also comes with several advantages and disadvantages. Let’s take a look at them.

The key difference between FOB and CIF is the party responsible for the goods during transit.

In CIF, the seller takes up the responsibility for transportation and assumes the costs and risks associated with goods like insurance and freight until delivery. However, FOB makes the buyer responsible for the costs and risks associated with the goods once loaded onto the shipping vessel.

This agreement relieves the seller of any liability once goods have “passed the ship’s rail”. It is the buyer who takes up the responsibility after that.

Most buyers choose a FOB agreement as they find it more cost-effective. They enjoy more control over choosing freight companies and insurance limits.

On the other hand, a CIF agreement can be costlier as the seller has more control over things. The seller may choose a costly freight company and a higher insurance limit to ensure the goods reach the destination without any risks.

CIF and FOB have unique advantages for buyers and sellers, and no option can be considered better. The one you pick for your business may depend on your specific requirements and risk preferences.

If you are a seller with know-how in local customs, you can bear the CIF responsibility. This can help you gain a competitive edge and encourage the buyer to accept the deal.

However, as a small vendor, you may want larger buyers to take responsibility for the shipment. In this case, you can choose a FOB agreement to lower costs.

If you are a buyer who lacks expertise in handling the shipment, CIF Incoterms may be a better choice to reduce your burden.

FOB agreement, on the other hand, can reduce your burden if you are a seller. It relieves you of all responsibilities as soon as the goods leave the point of origin.

However, customer service is key to building long-term relationships with customers. While a CIF agreement may involve more costs and time, it makes the entire process seamless for the buyer.

Understanding the differences between CIF and FOB agreements is crucial for international traders. While CIF places the burden of transportation and insurance on the seller, FOB puts the entire onus on the buyer once the goods are loaded on the vessel.

Analysing the pros and cons of both shipping agreements can help you make an informed decision that aligns with your risk appetite and trade goals.

Goods lost or damaged during transit can be a nightmare for any business owner. It is essential to buy marine cargo insurance to ensure the goods reach the point of destination safely on time.

Tata AIG offers a customisable marine insurance policy that will keep your cargo and vessel secure against unfortunate circumstances during their journey to the destination.

What should I opt for - FOB or CIF?

This may depend on whether you are a buyer or seller and your specific needs and risk preferences.

However, as an umbrella recommendation, opt for FOB if you are a buyer and CIF if you are a seller. While CIF allows sellers to maintain a higher profit, FOB offers increased control to buyers and saves money.

What is the difference between CIF cost and FOB cost?

FOB agreements are usually cheaper from a buyer's perspective. This is because they have more control in choosing the freight company and insurance limits. On the other hand, CIF agreements can be costlier as the seller has more control over the shipment.

Does FOB include insurance and freight?

Considering the costs borne by the seller, FOB includes expenses like ex-factory costs of the goods, packaging charges, loading, documentation, and other transportation expenses. CIF, on the other hand, involves FOB costs as well as freight and marine insurance costs.