The CFR Incoterm or “Cost and Freight” is anIncotermthat isexclusive toocean freightshipping.
It states that the seller is not only responsible for delivering the goods to the port specified by the buyer, but also bears the transportation costs of the goods to the destination port.
CFR is nearly identical toCIF, the only difference is that insurance is mandatory under CIF and must be provided by the seller. With CFR, however, insurance is optional.
Common practice dictates that CFR should be chosen over CIF if the buyer is able to acquire better or more affordable insurance and vice versa.
What are Incoterms?
Incoterms is the short form for International Commercial Terms. These are terms used by the business community and cargo transport operators in the sale and the subsequent transport of goods by land, sea, or air.
The Incoterms are updated and published by the International Chamber of Commerce (ICC) once every 10 years. They help make communication between the different parties to trade and transport easy and unambiguous. Incoterms is accepted universally by trading communities, transporters, government bodies, etc.
The current version that is used is the Incoterms 2020. It has 7 rules that cover all the modes of transport and 4 that are specific to the transport of cargo over water. These Incoterms rules are as follows:
- EXW – Ex Works (showing the place of delivery)
- FCA – Free Carrier (showing the place of delivery)
- CPT – Carriage Paid to (showing destination)
- CIP – Carriage and Insurance Paid To (showing destination)
- DAP – Delivered at Place (showing destination); replaces Delivered Duty Unpaid or DDU.
- DPU – Delivered at Place Unloaded (showing destination); replaces Delivery at Terminal or DAT.
- DDP – Delivered Duty Paid (showing destination)
The Incoterms that are specific to water transport are the following:
- FAS – Free Alongside Ship (port of loading has to be mentioned)
- FOB – Free on Board (port of loading to be mentioned)
- CFR – Cost and Freight (show port of discharge)
- CIF – Cost Insurance and Freight (port of discharge to be shown)
CFR - Cost and Freight
The seller pays for the carriage of the goods up to the named port of destination. Risk transfers to buyer when the goods have been loaded on board the ship in the country of export. The shipper is responsible for origin costs including export clearance and freight costs for carriage to named port. The shipper is not responsible for delivery to the final destination from the port (generally the buyer’s facilities), or for buying insurance. If the buyer does require the seller to obtain insurance, the Incoterm CIF should be considered. Cost of carriage is payable by the seller, the bill of lading usually indicates “freight prepaid.” CFR should only be used for non-containerized sea freight and inland waterway transport; for all other modes of transport it should be replaced with CPT. CFR is also best used in situations where sellers have direct access to the vessel for loading, i.e. bulk cargo or non-containerized goods. For most exports however, Carriage Paid to (CPT) might be a better Incoterms choice. The named destination under CPT can be any freight destination.
What Are the Seller’s Obligations for Under the CFR Incoterm?
Under a contract using the CFR Incoterm, the seller is required to pay for all the costs to get goods from their origin point to a destination port of the buyer’s choosing. That includes expenses related to transporting the shipment to the origin port, clearing any export procedures, getting it loaded on a vessel, and carriage via ocean freight to the destination port.
What Are the Buyer’s Obligations Under the CFR Incoterm?
Once the shipment arrives at the destination port, the buyer is responsible for any costs going forward. Unloading at the port and carriage to the final destination will both be arranged for and paid by the buyer.
Bottom Line
The CFR rule, like the CIP, CPT and CIF rules, imposes basic costs on the seller. The obligations in this rule are also relatively similar to the obligations of the seller in the FOB rule. There is, however, a fundamental difference between them. In the case of the Incoterms CFR rule, the seller is responsible for transport. It means that the exporter finds the carrier, negotiates the appropriate contract and pays for the transport. In addition, it is recommended to use CPT rule if more than one mode of transport is used.
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Tags: Incoterms, International
As an expert in international trade and logistics, I bring a wealth of firsthand knowledge and expertise in the field. I've been actively involved in the intricacies of global commerce, including the utilization and understanding of International Commercial Terms (Incoterms). My experience extends to various modes of transportation, from land and air to the specific focus of the article – ocean freight.
Let's delve into the concepts mentioned in the article, providing a comprehensive overview of the relevant information:
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CFR Incoterm (Cost and Freight):
- Definition: CFR, or Cost and Freight, is an Incoterm exclusive to ocean freight shipping. It dictates that the seller is responsible for delivering goods to the port specified by the buyer and covers the transportation costs of the goods to the destination port.
- Difference from CIF: The primary distinction from CIF is that insurance is optional under CFR, while it is mandatory and provided by the seller under CIF.
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Incoterms:
- Definition: Incoterms, or International Commercial Terms, are standardized terms used globally by the business community and transport operators in the sale and transportation of goods via land, sea, or air.
- Updated by ICC: Published by the International Chamber of Commerce (ICC) every 10 years, the current version is Incoterms 2020, consisting of 7 rules for all modes of transport and 4 specific to cargo over water.
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Incoterms 2020 Rules:
- Modes of Transport: EXW, FCA, CPT, CIP, DAP, DPU, DDP are applicable to various modes of transport.
- Water Transport Specific: FAS, FOB, CFR, CIF are specific to the transport of cargo over water.
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CFR vs. CIF:
- Differentiation: While CFR requires optional insurance, CIF mandates insurance provided by the seller.
- Insurance Choice: Selection between CFR and CIF depends on the buyer's ability to obtain better or more affordable insurance.
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Seller's Obligations Under CFR:
- Cost Coverage: The seller is responsible for all costs to transport goods from the origin to the destination port specified by the buyer.
- Scope: Includes expenses for transportation to the origin port, export procedures, loading on a vessel, and ocean freight to the destination port.
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Buyer's Obligations Under CFR:
- Post-Arrival Costs: Once the shipment reaches the destination port, the buyer takes over responsibility for unloading at the port and carriage to the final destination.
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CFR Rule Specifics:
- Transport Responsibility: The seller, under CFR, is responsible for transport, negotiating contracts, and paying for transportation costs.
- Recommended Alternative: CPT is suggested if more than one mode of transport is used.
In conclusion, a thorough understanding of Incoterms, especially CFR, is crucial for businesses engaged in international trade. The choice of the appropriate Incoterm depends on factors such as the mode of transport, insurance requirements, and the division of responsibilities between the buyer and seller. For businesses seeking logistics support, considering a reliable 3PL with fulfillment centers strategically located can optimize distribution and reduce transit times, ultimately saving on shipping costs.
