What is Cost and Freight?
Cost and Freight (CFR) is an Incoterm used in maritime shipping and international trade. Under this term, the seller assumes responsibility to arrange and pay for the transportation of goods to a specified destination port. But, the risk of loss or damage to the goods is transferred from the seller to the buyer as soon as the goods pass the ship’s rail in the port of shipment.
What is Coat and Freight (CFR) in Shipping?
Cost and Freight is one of 11 incoterms defined by the International Chamber of Commerce. It’s written into a contract to ensure that both buyers and sellers have clearly defined roles and responsibilities to ensure a smooth shipping process. Here is a breakdown of how the Cost and Freight Incoterm affects both parties:
Seller’s Responsibilities under CFR:
- Goods, commercial invoice, and documentation: ensuring the products are as per the contract and providing all required commercial documentation.
- Export packaging and marking: proper packaging for overseas transport, ensuring goods’ safety, and labeling/marking them accurately for shipment identification.
- Export licenses and customs formalities: acquiring necessary permissions for overseas shipment and fulfilling any export-related customs requirements.
- Pre-carriage and delivery: arranging the transportation of goods to the agreed shipping point or port.
- Loading charges: paying all fees associated with loading the goods onto the ship.
- Delivery to the port of destination: taking responsibility for safely transporting the goods to the specified port of arrival.
- Proof of delivery: providing documentation that verifies the successful delivery of the shipment.
- Cost of pre-shipment inspection (for export clearance): assumes the costs for inspections prior to the shipment and makes sure that it is ready for the export.
Buyer’s Responsibilities under CFR:
- Payment for goods as specified in the sales contract: completes the payment on time, based on the contract terms.
- Risk starts with onboard delivery: risk of loss or damage begins when the goods are loaded on the ship.
- Discharge and onward carriage: the unloading of the goods at the destination port.
- Import formalities and duties: handling all import-related documentation, customs requirements, and payment of all taxes or duties.
- Cost of pre-shipment inspection (for import clearance): bearing any inspection costs to meet the import requirements and ensure the goods’ readiness for local distribution.
Pros and Cons of CFR Shipping
CFR serves as a standardized contract term, especially when ocean freight is the chosen mode of transport. It has both advantages and challenges for both parties.
Pros for the Buyer
One of the primary benefits of CFR shipping for buyers is the ease it brings to the entire shipping process. Buyers do not need to take on the coordination of complex shipping logistics. Instead, the seller takes charge of arranging and paying for the transportation of the goods to the designated destination port. This significantly reduces the administrative burden on the buyer, allowing them to focus on other aspects of their business.
Furthermore, the allocation of risk in CFR shipping favors buyers. Sellers are responsible for the goods until they are loaded onto the ship at the port of origin. This means that, during the critical phase of transportation from the seller’s location to the ship, the responsibility for potential loss or damage lies with the seller. This arrangement can provide buyers with a heightened sense of security, as they know that the goods are in the care of the seller until they have been loaded onto the vessel.
Pros for the Seller
For sellers, CFR shipping offers certain advantages as well. By taking charge of the transportation process, sellers can ensure that the goods are appropriately packaged and handled during transit. This can contribute to maintaining the quality and condition of the products, enhancing customer satisfaction upon delivery.
Moreover, the risk allocation in CFR shipping also benefits sellers. As sellers are accountable for the goods until they are loaded onto the ship, they have the opportunity to exercise greater control over the safety and handling of the products during the critical initial phase of transportation. This can lead to reduced disputes or claims related to damage or loss during transit, fostering positive relationships with buyers.
Cons for the Buyer
One notable disadvantage for buyers in CFR shipping is the limited control they have over the shipping process. Since the seller manages the transportation logistics, buyers might find themselves with minimal visibility into the intricacies of the shipping timeline and progression. This lack of oversight could potentially lead to uncertainties and difficulties in planning, particularly when timing is of the essence.
Furthermore, CFR shipping exposes buyers to the risk of incurring subsequent costs after the goods have been unloaded at the destination port. These additional expenses could encompass various aspects, including transportation-related charges like demurrage and detention. Additionally, buyers might need to contend with customs fees or unanticipated charges that could significantly impact the overall cost of the transaction. These unforeseen costs can potentially strain the financial aspect of the deal for the buyer.
Cons for the Seller
Sellers using CFR shipping also encounter certain drawbacks. One notable concern is the potential for misunderstandings or disputes arising from the limited control they have over the goods once they’ve been loaded onto the ship. Any incidents or issues during the sea voyage that are beyond the seller’s control can result in reputational damage and potentially lead to disagreements with buyers.
Moreover, sellers shoulder the responsibility for ensuring the proper loading of goods onto the ship. This could involve costs associated with specialized packaging or handling to ensure the goods’ safety during transit. These additional expenditures could impact the profitability of the transaction for the seller.
Differences Between Cost and Freight and Cost, Insurance, and Freight
Cost and Freight (CFR) and Cost, Insurance, and Freight (CIF) are similar Incoterms. It’s important to understand the differences when choosing the best one to include in your contract. The primary difference between CFR and CIF is that CIF includes insurance coverage. There are also differences when it comes to risk, cost, and documentation. Here is a complete breakdown.
- CFR: the seller is not required to provide or pay for insurance. The risk transfers to the buyer once the goods are loaded onto the ship. If the buyer wants insurance coverage, they need to arrange it themselves.
- CIF: as suggested by its name, CIF includes insurance coverage. The seller not only pays for the cost and freight but also provides insurance for the goods during their transit to the port of destination. The insurance is meant to be in the buyer’s favor, and the seller typically provides a minimum coverage, so buyers may still need to get additional insurance.
Risk Transfer Point:
- CFR: risk is transferred from the seller to the buyer as soon as the goods are loaded onto the ship at the port of origin.
CIF: the point of risk transfer is the same as in CFR (once the goods are loaded onto the ship). But, since the seller provides insurance in CIF, the buyer has a level of protection during the main carriage. Still, this protection is based on the terms of the insurance coverage provided.
Responsibilities and Costs:
- CFR: the seller is responsible for all costs until the goods reach the port of destination, excluding insurance. Once the goods are at the destination port, all additional costs, such as import duties, unloading, and further transportation are paid for by the buyer.
- CIF: the seller bears the costs of freight, as well as the insurance premium. But, similar to CFR, once the goods reach the port of destination, all further costs are shouldered by the buyer.
- CFR: the seller must provide the necessary documentation for exporting the goods and arrange the contract of carriage.
CIF: in addition to the standard export documentation and the contract of carriage, the seller must provide proof that an insurance policy has been taken out.