Cost and Freight – What is it?
Cost and Freight, or CFR is an integral element in today’s international trade. A common incoterm pricing mechanism in which the seller has a responsibility to get the goods from their warehouse to the destination port. Consequently, this includes paying for transport and customs.
Cost and Freight Price
CFR stands for Cost and Freight – it is a legal term used in international shipping which translates into the seller assuming more responsibility for the delivery of goods and needs to pay for transport to an agreed port.
Furthermore, the seller will also need to pay for delivery of goods and export, up until the point the goods are loaded on board the ship.
Origins of the Term
The reason that we sometimes hear the phrase Incoterms is because the International Chamber of Commerce (ICC) created the International Commerce Terms – Incoterms.
Moreover, the reason for the differences of terms is that each one governs the requirements of shipping that falls to buyers and sellers in cross-border trade.
CIF, CFR, and FOB are all agreements that are widely referred to as separate incoterms. A major advantage of these incoterms is that it allows international trade to progress in a formalized manner which includes contract formats that are clear and understood no matter what language.
Cost and Freight
CFR explains how the seller has more responsibility for the transportation involved in a transaction. In contrast to a FOB where the seller is responsible for delivery of the goods to the port of origin; they will then be transported.
For a CFR trade, the Exporter will arrange and pay for transportation to the destination port which is specified by the buyer. Furthermore, exporting company will arrange and fund the transportation that is set out by the purchasing party.
In relation to liability and the ultimate responsibility, the purchaser will take this on when the ship arrives in the destination port. Any costs beyond this fall under the liability of the buyer.
CFR In Practise
CFR is strictly associated with goods transported by sea, so our example will have to companies; A based in London, UK. And B, based in Hog Kong, China.
- Company A is purchasing 1000 units of mobile phones from Company B.
- Company B is required to facilitate the carriage of goods by sea to the destination port, and also provide Company A with the necessary documents that will enable the goods to be taken off the ship.
- With this Incoterm, Company B would not, however, have to cover the goods with marine insurance to protect against loss or damage.
- So Company B arranges shipment from Hong Kong to the Port of London along with producing Company A with the documents needed.
- Company A then collects the goods in London and assumes all responsibility for the transportation of the goods from there.
For information on other Incoterms, take a look at our Incoterms 2020 Guide.