Incoterms are published by the International Chamber of Commerce and define, in a three-letter code, where the cost and the risk in an international sale pass from seller to buyer. They do not cover payment terms, title transfer or contract law — a common and expensive misreading.
In commodity trading, three come up more than the rest.
FOB — Free On Board
The seller delivers the goods on board a vessel the buyer has nominated at the named port of shipment. Risk passes when the goods are loaded.
Under FOB, the buyer contracts the carrier. That means the buyer chooses the vessel, controls the schedule and negotiates the freight rate directly — and carries the consequences if the vessel is late, unsuitable or unavailable.
FOB suits buyers with chartering capability or a freight relationship of their own, and buyers who want control over route and timing.
CFR — Cost and Freight
The seller arranges and pays for carriage to the named destination port. Risk still passes to the buyer when the goods are loaded at origin.
This is the split that catches people out: under CFR the seller pays the freight, but the buyer carries the risk during the voyage. If the cargo is damaged in transit, that is the buyer’s exposure even though the buyer never chose the ship.
CFR suits buyers who want the seller to handle carriage but prefer to arrange insurance themselves — often because they have a corporate marine policy at better terms than a one-off certificate.
CIF — Cost, Insurance and Freight
Identical to CFR, with one addition: the seller must also arrange marine insurance to the named destination port.
The insurance obligation under CIF is a minimum cover requirement, not a comprehensive one. Buyers with cargo that is high-value, unusually fragile or moving through a difficult route often arrange additional cover on top rather than relying on the baseline.
CIF suits buyers who want a single delivered figure and do not want to manage carriage or insurance separately.
Why the comparison is not price-to-price
An FOB price and a CIF price for the same cargo are not comparable numbers. The FOB figure excludes freight and insurance; the CIF figure includes both.
To compare them honestly, add your own freight quote and insurance cost to the FOB figure. Buyers who skip that step routinely conclude that FOB is cheaper, then discover the difference at the freight invoice.
How to choose
Three questions usually settle it:
- Do you have chartering capability or a freight relationship? If yes, FOB gives you control and often a better all-in cost. If no, CFR or CIF removes a workstream you are not set up for.
- Do you have your own marine insurance policy? If yes, CFR avoids paying twice. If no, CIF gives you baseline cover without arranging it.
- How much does timing control matter? FOB puts scheduling in your hands. CFR and CIF put it in the seller’s.
There is no term that is universally better. There is a term that fits your capability and your risk appetite, and the cost of getting it wrong is paid in the transit, not at signature.
One practical note
Whichever term applies, name it with the port and the Incoterms edition in the contract — “CIF Port X, Incoterms 2020” rather than “CIF”. A term without a named place is incomplete, and an edition left unstated invites a dispute about which rules apply.