CIF (cost, insurance, and freight) is an Incoterm outlined by the International Chamber of Commerce (ICC) that outlines the division of costs, responsibilities, and risks between the seller and buyer for sea transport. Under CIF terms, the seller must:
- Deliver goods on board the vessel
- Pay freight charges to the agreed destination
- Maintain minimum insurance coverage for the cargo during transit
CIF is mostly used for shipments that aren’t in containers. Knowing the CIF terms makes it easy to determine who will pay what, who will be responsible for what, and what each party needs to do from start to finish.
Essential Elements of CIF Delivery Terms
The main parts of CIF delivery terms are:
- Costs: The seller is responsible for all costs associated with producing and shipping the goods.
- Insurance: The seller is obligated to insure the goods against damage or loss during transit. However, this insurance covers only the minimum amount, and the buyer may request additional coverage.
- Freight: The seller covers the cost of transporting the goods by sea to the port of destination.
Seller’s obligations
In the context of international transport with the CIF Incoterm, the seller must:
- Take care of marking the goods, as well as packaging and labeling them to ensure smooth transport.
- Prepare the goods for collection from the factory according to the mode of transport.
- Load the goods onto the truck.
- Supervise the organization of goods transport from the factory to the port of shipment.
- Take care of customs export duties and formalities, and pay the various taxes required for customs clearance.
- Load the goods onto the cargo ship.
- Assume the cost and organization of maritime transport from the port of departure to the port of arrival.
Buyer’s obligations
In the context of international transport with the Incoterm CIF, the buyer must:
- Unload the goods following their shipment.
- Take care of customs duties and formalities for the importation of goods.
- Ensure the proper organization of the transport of goods to their final destination.
- Unload the goods upon arrival at their final destination.
Application Areas of CIF Delivery Terms
CIF is primarily used for transport by sea or inland waterway. It is the preferred choice for shipping large volumes of goods internationally by sea. It is particularly well-suited to shipping large volumes of goods, such as petroleum, coal, grain and large machinery.
CIF value
CIF is THE reference for global customs. This standardization greatly facilitates trade. Duties are calculated on this uniform basis.
- CIF value calculation: Goods price (FOB) + sea freight + insurance premium. This simple formula applies universally. Adjustments remain marginal.
- Impact on duties: Duties of 10% on CIF value include transport and insurance. The impact becomes significant over long distances. This reality influences pricing strategies.
- Simplified declarations: With CIF, all elements are documented. CIF invoice, bill of lading, insurance policy, etc. Transparency facilitates controls.
How is the CIF price calculated?
When calculating the CIF price, the seller or exporter adds the profit margin, packaging costs, factory loading charges, inland transportation to the port, port fees, customs duties, transportation insurance, and freight charges to the product cost. This is how the CIF price is determined.
CIF Price Calculation: Product Cost + Profit + Packaging + Loading/Unloading + Domestic Transportation + Port Fees + Customs Duties + Insurance + Freight Charges
What are the risks?
Under this Incoterm, the seller is required to obtain marine insurance. However, as the risks are borne by the buyer, this is generally minimal insurance.
It should also be noted that CIF is not possible in several developing countries. These countries require national insurance to cover imports. When exporting goods, it is important to clearly define which party is responsible for unloading costs in order to avoid any disputes.
The CIF Incoterm limits the buyer’s responsibilities, as the seller organises most of the transport. Insurance and related costs are therefore included in the price of maritime transactions. However, be aware of possible complications that may arise after shipment, at which point the risks are transferred to the buyer.
