Free On Board or FOB is a legal term which specifies that the shipper owns the goods while in transit. CIF (Cost, Insurance, and Freight) terms mean that the seller merely assumes responsibility for said goods until they reach the port of destination. DDP (Delivered Duty Paid) refers to the seller paying the duties and taxes of the shipment. These various acronyms are known as INCO terms. Many companies that import merchandise from overseas assume that they will save time and money by letting the vendor select and pay for transportation and duty costs. What buyers often fail to realize is that there are hidden costs associated with importing this way. We have found several primary reasons for our clients to consider changing their terms to Free on Board.
When you buy CIF, you do not control when or how your shipment arrives in the United States. Vendors will use the cheapest possible option and pay no attention to how quickly you get your merchandise. You may want to ask yourself the next time you import this way whether the cost of your own capital or credit is lower than the cost of waiting longer for your goods.
Vendors include mark up on freight costs, and those increases are passed along to you. Free on Board will make it easier for you to count the costs ahead of time, avoiding surprises. Often, Cost Insurance and Freight pricing includes supplier profits on transportation. If the price sounds too good to be true, it probably is.
As the US Importer of Record, you will be held accountable for the accuracy of the ISF form. The penalties incurred can be as high as $10,000 and can even lead to seizure of your shipment. Not having to worry about this particular risk is just one more reason to love FOB.
In the event of damage or loss, questions often come up regarding who is responsible, and while it may ultimately be worked out, a lot of time, effort and energy are lost as a result of these disagreements. Under the Incoterms 2010 standard, which was published by the International Chamber of Commerce, the transfer of risk is clearly defined and can help prevent these costly disputes. Because the owner of the goods is responsible for damage or loss during transport, the point at which the ownership is transferred from the seller to the buyer is of utmost importance.
CIF/DDP can sound cheaper in theory, but the problem is that your vendor determines how and when merchandise is shipped. The freight forwarder selected by the seller will add on additional charges that should have been already included in your price quote. “Destination Terminal Handling Charges” (DTHC) or other handling fees are added on later, and they will claim the charges are for the United States side. This is one of those dirty little secrets in the shipping business.
Buying under Free on Board INCO terms has many benefits over other terms, but the main advantage is better control over both freight and freight costs. Yes, the buyer is responsible for the cost of insurance, marine freight transport, unloading, and transportation from the arrival port to the final destination, but this allows you more control over cost and time frame. Your own freight forwarder, which you will select yourself, will be more likely to have your best interests at heart—not the interests of the supplier or a middleman. A careful review of INCO term rules will always reveal that CIF/DDP terms tend to be advantageous to the seller, whereas Free on Board favors the buyer’s interests. In short, buying FOB whenever importing is better for your bottom line.