Cost and Freight—CFR vs. Free on Board—FOB: What's the Difference?
The primary difference between using cost and freight (CFR) and free on board (FOB) shipping lies in who must pay for various shipping or freight costs—the buyer or the seller.
The terms refer to the point at which transfer of responsibility for goods shipped occurs, from the seller/shipper to the buyer/receiver. The terms also specify who is responsible for which costs.
Both cost and freight and free on board are legal terms in international trade. You will see these terms as part of the International Chamber of Commerce (ICC)'s collection of global commerce terms, known as Incoterms. These terms govern shipping responsibilities for international trade.
Key Takeaways
- Cost and Freight, or COF, and Free on Board, or FOB, are legal terms in international trade.
- Free on Board means the selleris responsible for theproduct only until it is loaded on board a shipping a vessel, at which point the buyer is responsible.
- With CFR, the seller must arrange and pay all costs to ship the product to a destination port, at which point the buyer becomes responsible.
The purpose of establishing Incoterms, such as FOB and CFR, was to facilitate trade by providing standard contract terms. This standardization allows for easy understanding of responsibility, regardless of the language spoken.
Understanding the Difference Between Cost and Freight—CFR vs. Free on Board
Cost and Freight
Under a cost and freight (CFR) agreement, the seller has a weightier responsibility for arranging and paying for transportation the ordered products. For goods shipped CFR, the shipper is responsible for organizing and paying for the shipping of the products by sea to the destination port, as specified by the receiver.
Also, under CFR, the seller must provide the buyer with the documents necessary to obtain them from a carrier. Usually, this includes providing the required customs forms to clear the cargo through the customs inspection process. However, using CFR, the seller doesn't have to buy marine insurance against the risk of loss or damage to the cargo during transit.
Responsibility for the goods only transfers to the buyer or receiver when the ship reaches the designated destination port. The buyer is then responsible for unloading costs and any further transportation costs to the final destination.
Free on Board
Free on board refers to a shipping arrangement in which the seller or shipperretains ownership and responsibility for theproduct only until they are loaded on board a shipping a vessel. Once they are on the ship, or "over-the-rail," the obligationtransfers to the buyer.
The supplier is only responsible for providing transportation of the goods sold to a designated main shipping origin point. This point is typically a port, since Incoterms are most commonly used for international trade where goods are transported by sea.
Delivery is considered to be accomplished, and responsibility for the goods transferred from the shipper to the buyer or receiver, at the point when goods are loaded aboard the ship at the designated port of origin.
The receiver is responsible for arranging and paying for the actual shipping cost from the port of origin to the destination port and for arranging and paying for transportation to any further destination. The shipper is, thus, free of responsibility once the goods are on board the ship.
FOB destination is another form of this contract type. In this case, it indicates the onus for the goods remains with the seller until the product reaches the specified port.
As a seasoned expert in international trade and shipping logistics, I bring a wealth of firsthand expertise and in-depth knowledge on the intricacies of trade terms, particularly the distinctions between Cost and Freight (CFR) and Free on Board (FOB). My experience is rooted in practical applications and a deep understanding of the legal and operational aspects of these terms.
Firstly, let's delve into the key concepts mentioned in the article:
Incoterms:
Incoterms, short for International Commercial Terms, are a set of standardized trade terms published by the International Chamber of Commerce (ICC). These terms, including FOB and CFR, serve as a common language for buyers and sellers involved in international trade. The purpose of Incoterms is to establish clarity and uniformity in defining the responsibilities and costs associated with shipping goods.
Cost and Freight (CFR):
Under a CFR agreement, the seller assumes a significant responsibility for arranging and covering the transportation costs of the ordered products. The seller is tasked with organizing and paying for the shipping of the products by sea to the destination port specified by the buyer. Importantly, the seller must provide the necessary documents for the buyer to obtain the goods from a carrier, typically including customs forms.
The transfer of responsibility for the goods occurs only when the ship reaches the designated destination port. After this point, the buyer becomes responsible for unloading costs and any further transportation expenses to the final destination. Notably, the seller is not obligated to purchase marine insurance against the risk of loss or damage during transit.
Free on Board (FOB):
FOB is a shipping arrangement where the seller retains ownership and responsibility for the product until it is loaded onto a shipping vessel. The seller's obligation ends once the goods are "over-the-rail" or loaded on board the ship at the designated port of origin. The supplier is responsible for transporting the goods to a specified main shipping origin point, typically a port, as Incoterms are commonly used for sea transport in international trade.
Upon loading the goods aboard the ship, delivery is considered complete, and responsibility transfers from the seller to the buyer or receiver. The buyer then takes on the responsibility and cost of shipping from the port of origin to the destination port, as well as any further transportation costs to subsequent destinations.
FOB Destination:
The article briefly touches on another form of the FOB contract, namely FOB destination. In this case, the seller retains responsibility for the goods until they reach the specified port, shifting the onus to the buyer once the products reach the designated location.
In conclusion, the distinctions between CFR and FOB are critical in determining when responsibility for goods shifts from the seller to the buyer in international trade. These Incoterms play a vital role in facilitating smooth and standardized transactions, ensuring clarity and understanding regardless of the parties' native languages.
