Cost and Freight (CFR) Incoterm Explained

Understanding the complexities of freight shipping can get tricky when it comes to international trade. A critical factor in arranging your shipment terms is choosing the right Incoterm.

The Cost and Freight (CFR) Incoterm is a prevalent option for many shippers, but what exactly does that shipping term entail?

In this blog post, we’ll break down everything you need to know about CFR and how it applies to shipping so you can determine whether or not this type of agreement may be right for your business.

What is Cost and Freight (CFR)?

Cost and Freight (CFR) refers to an Incoterm that governs how international shipments are priced and shipped.

With CFR, the seller is responsible for paying for the cost of transportation to get the goods to the port of destination. However, once the goods are buyer takes over and is responsible for risks associated with the transport of the goods from the port of destination to the final destination.

Additionally, unlike the Cost, Insurance, and Freight (CIF) Incoterm, the seller isn’t obligated to purchase insurance.

CFR Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + carriage charges + profit share

Obligations Under the CFR Incoterm

Exporter Obligations

• Packaging and loading
• Delivery and transportation cost
• Export duty and taxes
• Freight charges
• Documentation

Importer Obligations

• Import duty and taxes
• Delivery and transportation from the destination port to the final destination
• Insurance
• Any costs related to the inspection of goods

CFR Point of Risk Transfer

With CFR the seller is responsible for covering the costs of transportation and loading the goods onto the ship. However, the buyer assumes the risk once the goods pass the ship's railing.

In other words, it’s the buyer’s responsibility to insure the goods from when they’re loaded on the ship to the final destination.

CFR Example

Let's say you're a bookshop owner in New York, and you decide to import some books from a publisher based in London. You both agree on a CFR (Cost and Freight) arrangement.

Under this agreement, the publisher in London is responsible for all costs related to getting the books to the ship in London. This includes packing the books, transporting them to the port, and loading them onto the ship. The publisher also pays the cost of the freight charge to send the books across the Atlantic to New York.

Once the books have been loaded onto the ship in London, the risk transfers to you. This means that if anything happens during the sea voyage - for instance, if the ship sinks or the books are damaged - you bear the responsibility and any associated costs.

In this scenario, the publisher might quote you a price that includes the cost of the books, as well as all the costs they've incurred to get the books onto the ship. It's then your responsibility to insure the shipment from the moment it's loaded onto the ship, and arrange for it to be transported from the port in New York to your bookshop.

Benefits and Drawbacks of CFR

For Exporters

• Exporters can add a margin of error and profit to the selling price
• Typically has to pay for transport before payment

For Importers

• Importers know the total cost of goods and freight upfront, which helps in budgeting and price setting
• If the goods are damaged or lost after being loaded onto the ship at the port of origin, the importer bears the risk and they have to take out freight insurance

Is CFR the Right Choice for Your Business?

The decision to use Cost and Freight (CFR) as your trade term of choice depends entirely on your company's specific needs and circumstances.

While CFR provides certain benefits such as cost transparency and simplified shipping logistics, it also comes with its own set of challenges including division of risks and potential unforeseen costs.

If you're an exporter, CFR allows you to control the freight charges and choose the most economical method of transportation. However, you bear the risk until the goods are loaded onto the ship, and dealing with export regulations can be complex.

On the other hand, if you're an importer, CFR provides clarity on the total cost of goods and freight upfront, aiding in budgeting and price setting. You also don't have to arrange for shipping or worry about transportation risks until the goods reach the destination port. Yet, you'll be responsible for all costs and risks associated with unloading the goods and transporting them to their final location.

In essence, there isn't a one-size-fits-all answer to whether CFR is the right choice for your business. However, building a solid understanding of what it entails can undoubtedly aid in making strategic decisions that promote successful international trade.

CFR FAQ

What is the difference between CFR and FOB?

CFR (Cost and Freight) and FOB (Free on Board) are both trade terms used in international shipping, but they allocate costs and risks differently between the buyer and seller. Under FOB terms, the seller is responsible for the goods until they are loaded onto the ship. The buyer takes over responsibility for the cost and risk once the goods pass the ship's rail at the port of origin. In contrast, under CFR terms, the seller assumes all costs and risks until the goods have been delivered to the destination port. This includes transportation and freight costs. The buyer is then responsible for unloading costs and any further transportation.

What is the difference between CFR and CIF?

The main difference between CFR (Cost and Freight) and CIF (Cost, Insurance, and Freight) lies in the insurance of the goods during transit. Under CFR terms, the seller is responsible for arranging and paying for the transportation of the goods to the destination port, but not for insuring the goods during transit. With CIF, the seller has the same responsibilities as with CFR, but in addition, they also have to provide insurance for the goods during transit. This means that if the goods are lost or damaged during transportation, the insurance will cover it.

What is included in Cost and Freight?

In a Cost and Freight (CFR) agreement, the following are typically included:

• The cost of the goods
• All charges for packing the goods for export
• Freight charges for transporting the goods to the named port of destination
• Any export duties or taxes

However, the buyer is typically responsible for the cost of unloading the goods at the destination port, import duties or taxes, and any further transportation costs.

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