What Are Incoterms?
Incoterms (International Commercial Terms) are a standardized set of trade rules published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers for the delivery of goods — specifically, who pays for freight, who arranges insurance, and critically, where risk transfers from seller to buyer.
The current version, Incoterms 2020, contains 11 rules divided into two groups: those applicable to any transport mode, and those specific to sea and inland waterway transport. FOB and CIF belong to the latter group and are the most widely used in FCL ocean freight.
FOB – Free On Board
Under FOB (named port of shipment), the seller's responsibility ends once the goods are loaded aboard the vessel at the origin port. From that moment, all costs and risks transfer to the buyer.
Seller's responsibilities under FOB:
- Packing, labeling, and preparing the goods for export
- Export customs clearance and export duties
- Delivery to and loading onto the vessel at the named port
Buyer's responsibilities under FOB:
- Ocean freight from origin port to destination
- Marine cargo insurance (optional but recommended)
- Import customs clearance, import duties, and taxes
- Inland delivery at destination
Risk transfers: When goods are loaded aboard the vessel at the origin port.
CIF – Cost, Insurance, and Freight
Under CIF (named port of destination), the seller arranges and pays for ocean freight and minimum insurance to bring the goods to the destination port. However — and this is critical — risk still transfers to the buyer when goods are loaded at origin, just like FOB.
Seller's responsibilities under CIF:
- Everything under FOB, plus:
- Paying the ocean freight to the destination port
- Arranging minimum marine insurance (Institute Cargo Clauses C — basic coverage)
Buyer's responsibilities under CIF:
- Import customs clearance, import duties, and taxes
- Inland delivery at destination
- Any additional insurance beyond the minimum provided by the seller
Risk transfers: When goods are loaded aboard the vessel at the origin port — same as FOB.
The Critical Difference: Who Controls the Freight?
This is where it really matters. Under FOB, the buyer selects and contracts the freight forwarder and carrier. Under CIF, the seller controls the shipping arrangement.
| Element | FOB | CIF |
|---|---|---|
| Who pays ocean freight | Buyer | Seller |
| Who arranges freight | Buyer | Seller |
| Who arranges insurance | Buyer | Seller (minimum) |
| Risk transfer point | On board at origin port | On board at origin port |
| Buyer visibility of freight cost | Full (buyer pays directly) | Limited (bundled into price) |
Which Is Better for Importers?
Most experienced importers prefer FOB for the following reasons:
- Control: You choose your own freight forwarder and can negotiate competitive rates directly.
- Transparency: You see exactly what freight costs — under CIF, sellers often build a margin into the freight component.
- Better insurance: You can arrange comprehensive marine insurance suited to your cargo value and risk appetite, rather than relying on the seller's minimum coverage.
- Relationship building: Managing your own forwarder builds institutional logistics knowledge over time.
CIF may be appropriate when you're a smaller buyer without established forwarder relationships, or when the seller has strong logistics leverage on a specific trade lane.
A Note on EXW and DAP
Two other commonly used terms worth knowing:
- EXW (Ex Works): The seller does almost nothing — the buyer collects from the seller's factory. Maximum responsibility for the buyer.
- DAP (Delivered at Place): The seller delivers to the named destination, with the buyer only responsible for import duties. Maximum responsibility for the seller.
Conclusion
For most FCL shipments, FOB is the preferred term for buyers who want control over their logistics costs and cargo visibility. Always specify Incoterms clearly in your purchase contracts and communicate them explicitly with your freight forwarder to ensure everyone knows who is responsible for each leg of the journey.