A Guide to Shipping Terms and Incoterms
It is important to have an understanding of cost and freight (CFR), cost, insurance and freight (CIF) and Free on board (FOB). There is much talk in the trade world about incoterms and how something is shipped; these terms have their own nuances.
It is important to first note the difference between the shipping terms CFR and CIF. The main variance is that under CIF; the exporter or seller is required to provide a minimum value of marine insurance for the products that are shipped.
Incoterms – What are they?
The reason that we sometimes hear the term Incoterms mentioned is that the International Chamber of Commerce (ICC) created the international commerce terms, and these have been known as Incoterms.
The reason for the differences of terms are that each one sets out an agreement which governs the requirements of shipping that falls to buyers and sellers in cross border trade. The three types of shipping outlined above; being CIF, CFR or FOB are all agreements that are widely referred to as separate incoterms.
One of the main reasons for these widely agreed Incoterms is that it sets a framework on which international trade can progress in a formalized way and allows contract formats that are clear and understood across many languages.
Cost and Freight
The term CFR means that the seller has more responsibility; they will pay for and arrange transportation. This can be contrasted with a seller under an FOB shipping transaction; where the seller is merely responsible for delivery of the goods to the port of origin; they will then be transported.
In relation to a CFR trade, the exporter will pay for and arrange transportation to the port of destination that is specified by the receiving party. The exporting company will arrange and fund the transportation that is set out by the purchasing party. In relation to liability and ultimate responsibility, the purchaser will take on the responsibility when the ship has docked in the port of destination. The further costs that will include further transportation and the unloading of the vessel will be beared by the buyer.
Cost, Insurance and Freight
As touched upon above, the difference is minimal between a CIF agreement and CFR agreement. The seller assumes the responsibility for all of the arrangement and transportation costs for shipping products to the agreed upon destination port. The buyer will then assume all further responsibilities, including those relating to cost once the ship has reached port.
There is a difference between CFR and CIF, which is that there is one additional responsibility on the seller. During the shipping process, the exporter of goods will be obliged to provide a minimum amount of marine insurance cover on the product that is being sold. This amount is usually agreed between the importer and exporter.
How does FOB fit in?
FOB is a term, which means that the seller only pays for product transportation up to the shipment or export port. They will also pay for the loading costs onto the vessel. Thus, the buyer or importer will assume the burden of cost for marine freight transport, unloading of goods, insurance and any costs when the products reach the destination port.
FOB is usually characterised by the idea that it is a shipping term where the costs, responsibilities and risks are split equally between the importer and exporter. It is seen to allow a clear split of responsibility, as post loading onto vessel, the buyer is responsible for any costs and risk involved on the onward shipment. FOB also allows the buyer more control in managing costs.
The aim of all of the terms is to clearly set out the division of labour and fees in shipment between the consignee (typically the buyer) and the exporter (supplier).