When entering into a shipping agreement regarding goods to be transported by sea, the buyer and seller must decide which terms of sale to use. Incoterms, established by the International Chamber of Commerce (ICC), help to clarify and define the various rules for each party’s obligations, risks, and costs. They are updated every ten years or so, with the most recent version, Incoterms 2010, released in January, 2011.
There are two categories of incoterms: General Transport and Sea and Inland Waterway Transport. The latter contains four incoterms:
- Free Alongside Ship (FAS)
- Free on Board (FOB)
- Cost and Freight (CFR)
- Cost, Insurance and Freight (CIF)
A detailed explanation of each incoterm is provided in our previous blog post, Incoterms Demystified. Since we are looking at the advantages of FOB over CIF, let us take a quick look at what each entails.
Free on Board
The seller pays for transportation and loading costs, and clears the goods for export. The seller also takes responsibility for loading the goods onto the ship. Once the goods are onboard, risk and costs are divided between the buyer and the seller.
Cost, Insurance and Freight
The seller pays costs, including freight and insurance. But as soon as the goods are loaded onto the ship, all risk transfers to the buyer.
Why ship FOB?
For most shippers, FOB is the most frequently recommended term of sale. Why? Because it allows for greater control over both the freight itself and the freight costs.
When the customer can select their own freight carrier, they ultimately have more control over the shipment, having the ability to choose the route taken, and the transit time. They then have the benefit of working with one company throughout the transportation process. That means one central point of contact for any questions or problems that may arise. Working with one company further ensures that the carrier will be working with the customer’s best interests in mind, since their sole purpose is to get the freight to the specified destination.
Compare this to CIF, where the customer relinquishes any control over the shipment, while acquiring most of the risk. The supplier handles every aspect of the shipment until it arrives at the destination port. This means they can use their preferred carrier and they can set the transit times. If a shipment is delayed, there is no recourse for the customer. Since the transportation is beyond the customer’s control, and multiple companies may be used for different stages, it can be difficult to obtain information about the status of the cargo. After all, the customer is not the carrier’s client; there is no obligation to meet their needs. Furthermore, the goods are only insured to the point of arrival at the destination port. The customer must be ready, however, to handle customs and fees as soon as the shipment arrives in the US.
From the buyer’s perspective, any shipping terms that give them control are preferable. FOB not only provides greater control over the shipping process than CIF does; it also gives better control over the related shipping costs and, in turn, the overall cost of the goods. For the majority of buyers, it is the sensible option.
Have you experienced the advantages of shipping FOB or ran into issues shipping CIF? Share your story in the comments below!