A comparative study between CIP terms and FOB terms (2024)

FAQs

A comparative study between CIP terms and FOB terms? ›

Cost allocation

With CIF, the seller does most of the legwork, taking responsibility for the goods all the way to the buyer's port. Alternatively, with FOB, the buyer assumes full liability for all costs and risks as soon as the cargo is loaded onto the ship. International Trade Administration.

FOB, FREE ON BOARD FOB price, all costs and risks borne by the shipper before the cargo passes through the ship's rail. CIF, COST INSURANCE FREIGHT plus insurance, all costs of goods to the port of destination, the insurance is borne by the shipper. C&F, CFR COST AND FRIEGHT have the same meaning.

CIP vs CIF

The two incoterms are very similar, except that CIP is used for all modes of transport, whereas CIF applies to sea freight only. This also means that for CIF, responsibility transfers at the origin seaport, whereas for CIP it transfers at any agreed-upon location in the origin country.

Buyers generally consider FOB agreements to be cheaper and more cost-effective. That's because they have more control over choosing shippers and insurance limits. CIF contracts, on the other hand, can be more expensive. Since the seller has more control, they may opt for a preferred shipper who may be more costly.

CIF requires the seller to cover the total cost of the goods, freight and insurance. Whereas FOB only requires the seller to cover the cost of loading the goods onto the vessel; the buyer then pays to transport and insure the goods (as well as any other charges incurred once the goods are on board).

For the importer, CIP may seem to be one of the best shipping solutions available because it requires the seller to do most of the organising and pay for most of the costs associated with moving and insuring goods. The buyer only pays import duties and for the cost of unloading the goods at their location.

The seller is obligated to hand over any documents or information needed to enable the successful import, at the cost of the buyer. Import duties and taxes also need to be paid by the buyer. Same as with CPT, the Buyer is responsible for the goods as soon as they are loaded on the first carrier.

Compared to CFR and CIF, CIP and CPT impose relatively less burden on importers. This is because the exporter bears the cost of transportation to the point of destination, and the importer only bears the cost of customs clearance/insurance. The difference is that they can be used in multimodal transportation.

Under CIP freight terms, the seller is responsible and pays for: Packing the goods and reading them for inspection. Export clearance, duties, taxes, permits and documentation at the country of origin.

What are the disadvantages of FOB? ›

The main disadvantage of FOB for the buyer is that they are responsible for any loss or damage that occurs during the transport, and they may face delays or extra charges at the destination port. The main advantage of FOB for the seller is that they have less risk and liability once the goods are loaded on the vessel.

Who Pays Freight for FOB Origin? If the terms include the phrase "FOB Origin, freight collect," the buyer handles freight charges. If the terms include "FOB Origin, freight prepaid," the buyer assumes responsibility for goods at the point of origin, but the seller pays the cost of shipping.

With FOB, title possession and liability usually shift when the shipment leaves the point of origin. With CIF, responsibility moves to the buyer once the goods reach the point of destination. Simply put, on the whole it's recommended that buyers use FOB, and sellers use CIF.

The term "carriage and insurance paid to (CIP)" means the seller will pay freight and insurance when sending goods to the buyer or their representative at a location agreed upon by both parties.

The CIP Incoterm or “Carriage and Insurance Paid to” states that the seller is responsible for bringing the goods to the destination, the cost of international freight, as well as insurance costs.

Free on Board (FOB) is a shipment term that defines the point in the supply chain when a buyer or seller becomes liable for the goods transported. Purchase orders between buyers and sellers set FOB terms and help determine ownership, risk, and transportation costs.

FOB stands for "Free On Board". There is no line item payment by the buyer for the cost of getting the goods onto the transport. There are two possibilities: "FOB origin", or "FOB destination". "FOB origin" means the transfer occurs as soon as the goods are safely on board the transport.