What shipping terms such as CIF and FOB mean and the pros and cons

Right, here it goes...

There are a total of 11 shipping terms (Incoterms) which define the various responsibilities, costs and risks that are borne by the buyer and seller when goods are traded internationally. I am not going to go through all 11 but I will give a brief overview of the most common:

EXW = Ex-Works: This is where the seller of the goods has no involvement at all with the transportation costs or risks (i.e. damage in transit). They simply make the goods available to the buyer for collection at their site. It is then the buyer's responsibility to collect the goods from the seller and get them back to the UK, the buyer also bears all of the risks from the moment the goods are collected so insurance is advisable. This is quite a common sales term for intra European movements by trailer, but is best avoided for and sea or air freight movements.

FOB = Free On Board: This is where the seller is responsible for the costs and risks of getting the goods on board the ship. Once the goods are loaded on the ship, the costs and risks then transfer to the buyer. So this means the buyer will pay the ocean freight from the port of origin, plus all of the other transport charges, customs clearance cost etc to get the goods back to their site in the UK. Again as the risks pass to the buyer once the goods are on the vessel, insurance is always advisable.

CFR = Cost and Freight: The seller is responsible for the costs (but not the risks) up until the goods arrive in the UK port. The buyer then has to pay all of the costs to get the goods from the port to their premises.

CIF = Cost, Insurance and Freight: This is like CFR but the seller also bears the risks up until the goods arrive in the UK port. Therefore they insure the goods whilst they are on the ship.

DAP = Delivered at Place (formerly Delivered Duties Unpaid): The seller is responsible for getting the goods all of they way from their factory to a named place at destination (usually the buyers premises) but are not responsible for customs clearance or payment of import duty / vat. The seller also bears all of the risks.

DDP = Delivered Duties Paid: This is like DAP but the seller is also responsible for the customs clearance at destination, and payment of duties / taxes. Some small courier shipments will travel this way.

This is just a very brief overview, as to go into real detail and all of the various nuances would take all day. Wikipedia have a good page on Incoterms and some additional resources, however as I am unable to post links you will need to search for it yourselves.

The reason why freight forwarders always bang on about FOB for import shipments all of the time is twofold. Firstly the UK freight forwarder will the one making the money on the freight rather than the Chinese / overseas forwarder, but in addition it is very often much cheaper overall for the importer. This is because many suppliers in China are getting free or even negative ocean freight charges up to the UK. The UK agent of the Chinese forwarder will then make their money back by charging the UK importer extortionate handover / ancillary fees, which can come as a real shock. Therefore if you buy FOB you will at least know your final overall costs and have better control of the shipment.

However I will also say that it is not always the case that FOB will be cheaper, particularly if you are importing from countries other than China. It is sometimes the case that the supplier will just have more buying power and can get better rates. Therefore if you want to be sure of paying the lowest overall costs, ask for both FOB and CIF prices. Then ask a UK forwarder to get you 2 prices, 1 based on the goods being shipped FOB and 1 based on the goods being shipped CIF (you will need to find out from your supplier which service they will use so the forwarder can contact the agent in the UK and find out how much they will charge in handover / ancillary fees). Then add the respective prices together and is should become clear which is best.

Hopefully that covers it and makes things a little clearer for everyone. I'm off for a cuppa!

Important to note that the Incoterm selected does not only put in black and white who pays for what costs, but also who is liable for the goods should they be damaged or lost in transit at any point.

An example - A UK buyer new to importing buys on C&F terms, so 'assumes' as he is paying all costs up to UK Port then the supplier is liable for the goods until they arrive at UK Port. A storm hits the Vessel in the Pacific and some containers are lost overboard. Supplier is liable right? Wrong. C&F does not include insurance so even though teh costs have been prepaid, the buyer has been liable for any damage/loss of the cargo. They should have used CIF terms which includes the insurance.

An extreme example - A container is being loaded on borad a Vessel in Shanghai. As its being lifted on to the ship the crane collapses and the container falls and crashed into the water/dockside. Who is liable? Well under FOB terms for example 'technically' the shipper is liable up to the 'ships rail'. As the container did not cross the ships rail, the supplier would be liable.

Thanks to Reja Worldwide for a very good outline.

I would add one important reservation about FOB in particular. In 22 years of importing from China, I found that Incoterms are quite often either misunderstood or possibly deliberately misused by the sellers.

The worst of these in my opinion is the use of FOB when they should use EXW. The result is often the imposition of inland transit charges and a host of other fees that may be added before the shipment really goes on board.

This happens with air freight as well as sea freight.

It is essential that a buyer should know for certain what all costs will be before placing a firm order. Any costs ex China that may be incurred must be stated in writing, and must constitute part of the order agreement.

Bear in mind that by this means a buyer may ascertain all costs to the point of departure from China, but the supplier is not responsible for quoting costs upon arrival in the UK. Care needs to be taken at this end also to avoid nasty surprises.

Import Expert said:

Important to note that the Incoterm selected does not only put in black and white who pays for what costs, but also who is liable for the goods should they be damaged or lost in transit at any point.

An example - A UK buyer new to importing buys on C&F terms, so 'assumes' as he is paying all costs up to UK Port then the supplier is liable for the goods until they arrive at UK Port. A storm hits the Vessel in the Pacific and some containers are lost overboard. Supplier is liable right? Wrong. C&F does not include insurance so even though teh costs have been prepaid, the buyer has been liable for any damage/loss of the cargo. They should have used CIF terms which includes the insurance.

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I won't go into detail, but under general average provisions, should there be a partial loss of cargo at sea, an uninsured cargo owner may incur losses of severe proportions. No ordinary importer should even contemplate allowing his/her shipment to be sent uninsured.

So great is the potential risk, that it is customary for banks when issuing a letter of credit to require insurance to the value of 110% of the actual shipment value.

There are many potentially costly or even devastating consequences if uninsured.

GraemeL said:

Its hard to 'value' the control FOB gives over CIF. Price isnt everything! My advice is always that there needs to be a really good reason NOT to use FOB. An opt out situation I suppose!

G

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Due to the extortionate fees charged by Chinese agents of a few UK forwarders, quite a few suppliers I work with in China will not offer FOB prices anymore. It's the reverse of the same scam mentioned earlier, except this time after the products are paid for and ready to send under FOB terms, the Chinese agent (partner of the UK forwarder) charges the supplier up to double compared to standard charges.

I now buy from these suppliers under EXW terms, for which I use a Chinese forwarder to send to UK as their local charges are much cheaper than arranging with a UK forwarding agent.

1. for Chinese agents of a few UK forwarders, because do not get more money from UK forwarder, so need add the fee that compare with standard charges. the supplier should confirm the local charges before loaded the goods. other you may control the Chinese agents by UK forwarder.

2. for EXW, the China forwarder already get the many money from sea freight charge, so the local charge is much cheaper.

Hi folks,

Great to see this thread has been helpful to a lot of people We'll be leaving it up as a sticky but closing it to further comments. If you have a question or comment leading on from the advice given, feel free to start a new thread. If you like what people are saying in here, you can show your appreciation through the Thanks button.

Thanks for reading!