Cost and Freight – Meaning, Obligations, and Use

Cost and Freight, or popularly called CFR, is one of the most popular shipping terms. It is one of the Incoterms that helps in international trade and specifies the rights and obligations of the parties to the transaction. Basically, in a CFR agreement, the seller needs to deliver the goods on board at the port of departure but has to pay for transporting the goods till the port of destination. Also, the seller has to clear the cargo for export.

Of course, in such an arrangement, the transportation cost till the port of destination in the buyer’s country is borne by the seller. However, the obligation of the seller vis-a-vis the passing of the risk is over, or the risk passes to the buyer once the seller delivers the consignment onto the vessel at the departure port. This is what makes CFR different from other Incoterm as in the case of CFR, the risk transfer point and the cost transfer point are different.

Once the goods arrive at the port of destination in the buyer’s country, the buyer has the responsibility for all the costs as well as risk (that has already been passed on to him). All these costs may include the cost of unloading, further transport costs, import clearances, inspection for import clearances, taxes and duties, etc.

In CFR, there is no obligation for either party to take insurance. Experts, however, recommend shipping cargo with insurance. Either buyer or seller can ensure the full cargo and transportation with a single policy. Or, each party can buy insurance to cover their part of the transportation. Whichever insurance option parties go for, it is crucial to clearly specify that in the sales contract. So that there is the clarity with regard to responsibility and cost on the one hand. And on the other hand, the consignment does not travel without insurance at any stage.

Cost and Freight – When to Use?

In international trade, buyers and sellers can use CFR only in the case of ocean or inland waterway transport. A seller usually agrees to the CFR agreement if they have direct access to the ship.

Also, parties should use this term for bulk cargo or non-containerized goods. Because in case of container shipments or containerized consignments, the goods need to be delivered by the seller at the container yard rather than at the port of departure. In the case of containerized cargo, the parties can use the CPT (Carriage Paid To) contract.

CFR is very similar to CIF. The only difference between the two is that in the latter, insurance is mandatory, and it is the responsibility of the seller to take the insurance. In the case of CFR, however, insurance is not mandatory. Between the two, experts recommend CFR over CIF if the buyer can get better insurance and at an affordable rate.

FAS (Free alongside ship) and FOB (Free on board) are the two other Incoterms that are similar to CFR with minor differences. Under FAS, the seller has to deliver the cargo at the port of destination and next to the vessel (alongside the ship at the port dock or near to ship’s lifting tackle). The buyer has an obligation to load the cargo onto the ship. FOB is the same as FAS, with the only difference being that the seller is also responsible for loading the cargo onto the ship.

Obligations of Buyers and Sellers

Below are the responsibilities of the seller in a Cost and Freight contract:

  • Keeping the goods ready along with the invoice and relevant documents.
  • Ensuring that the goods are packed and marked properly.
  • Arranging export licenses and clearing the customs formalities.
  • Making an arrangement and paying for pre-carriage, as well as loading charges.
  • Ensure delivery of the consignment onto the ship at the designated port of departure, as per the choice of the buyer.
  • Acquiring the delivery proof and keeping it secure.
  • Bearing -shipment inspection cost, if any.
  • Paying for international freight.

Below are the responsibilities of the buyer in a Cost and Freight contract:

  • Paying for the cargo as per the terms of the agreement.
  • Making arrangements for onward carriage once the goods arrive at the destination port.
  • Unloading the goods at the destination port.
  • Responsible for clearing import formalities and paying relevant duties.
  • Bearing the pre-shipment inspection cost at the time of import clearance. 

Cost Obligations in Cost and Freight

In a CFR contract, responsibility for the following costs remains with the seller:

  • Cost of loading the goods at the first carrier and then onward carriage cost till the departure port. 
  • Paying depot charges, documentation charges, as well as duty charges.
  • Bearing export customs charges for clearing the customs.
  • Payment of all costs for loading the consignment to the vessel. 
  • Bearing the freight charges for delivering the goods at the port of destination.

In a CFR contract, the buyer is responsible for the following costs:

  • Paying for import customs clearance.
  • Arranging for unloading of goods and paying for unloading charges at the destination port in the buyer’s country.
  • Arranging for further loading and carriage of the goods till the final destination and to bear all such costs. 

A point to note is that insurance cost is optional in CFR. Both parties can take insurance for their part of transportation, or one of the parties can take the full insurance.

Final Words

Cost and Freight is one of the most popular Incoterm as it evenly distributes the responsibilities between the buyer and the seller. Also, this Incoterm is unlike many other incoterms as it has a different risk transfer point and cost transfer point. CFR takes care of all the processes in shipping, but like many others, insurance is optional in this also. Thus, buyers and sellers need to be cautious when taking insurance and make sure to include its details in the agreement.

Read more about other Incoterms.

Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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