Cost and Freight vs. Cost, Insurance, and Freight: An Overview
Cost and freight (CFR) is a trade term that requires the seller to transport goods by sea to a required port. Cost, insurance, and freight (CIF) is what a seller pays to cover the cost of shipping, as well as the insurance to protect against the potential damage of loss to a buyer's order.
The two are part of a larger group of international trade rules known as Incoterms. These global guidelines for traders were devised by the International Chamber of Commerce (ICC), with the first version published in 1936.
Each term refers to an agreement governing the responsibilities of shipping that fall respectively to buyers and sellers in an international trade transaction. This system of agreements aids in an orderly process of international trade by making contract models available that are easy to identify and understand in all languages.
Key Takeaways
- Cost and freight (CFR) and cost, insurance, and freight (CIF) are terms used in international trade for the shipping of goods by sea.
- CFR requires the seller to arrange for the transport of goods by sea to the buyer's (required) destination. This includes the cost of shipping but excludes the purchase of marine insurance.
- CIF is similar to CFR, except it also requires the seller to take out an agreed amount of marine insurance to protect against the loss, damage, or destruction of the order.
Cost and Freight
Cost and freight is a legal agreement between a buyer and a seller in international trade. The rule applies to goods that are transported by sea.
It requires the seller to transport goods by sea to the buyer's (required) destination. The cost, therefore, is borne by the seller. Under CFR, the seller is also required to give the buyer the documentation necessary to pick up the goods from the carrier.
With CFR agreements, the shipping party has a greater amount of responsibility in arranging and paying for transportation than with minimal free on board (FOB) shipping, where the shipper is only responsible for delivering goods to the port of origin for shipping.
The agreement does not, however, require the seller to purchase marine insurance against the loss, destruction, or damage to the goods during transit. The risk to the goods passes once they reach the vessel, so the seller is not liable.
The receiver—or buyer—assumes responsibility once the goods are loaded on the vessel. All remaining costs including those for unloading and any further transportation costs are assumed by the receiver or buyer.
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Cost, Insurance, and Freight
Like CFR, CIF is restricted for use between parties who deal in goods that are transported by sea.
CIF agreements are also nearly the same as CFR agreements. The seller is still responsible for all arrangements and transport costs for shipping goods to the agreed-upon destination port. The receiver then assumes all cost responsibilities once the goods have been loaded on the vessel.
The difference between the two agreements, though, lies in one additional responsibility that falls on the shipper (seller), who must also provide a minimum amount of marine insurance on the goods being shipped.
The amount of insurance is typically agreed upon between the buyer and seller. The seller is also responsible for any additional costs that come with transporting the goods. This includes any extra paperwork required for customs or inspections or any rerouting that must be done during transport.
The terms of the contract will outline the exact nature of the responsibilities of the seller prior to transport. Most CIF contracts will outline the following for the seller:
- The purchase of export licenses for the product as required
- Covering the cost and contracts of transporting the goods
- The requirement of insurance to protect the order
- Providing the necessary inspections for the products
- If required, paying for any damage or destruction to the order
Cost and Freight vs. Cost, Insurance, and Freight Example
Company A in Morocco sells goods to a buyer in the U.S., Company Z. Company A pays for the shipping from Morocco to the U.S. and is responsible for the shipment until the goods are loaded on the vessel, at which point Company Z bears responsibility, which applies for both CFR and CIF.
Under CIF, the additional stipulations require that Company A purchase insurance for the goods being transferred. The insurance is to cover the loss or damage to the goods during the carriage.
What Is the Difference Between FCA and CFR?
CFR refers to "cost and freight" while FCA refers to "free carrier." FCA stipulates that the seller and buyer must agree on the point of delivery, as that is the point where responsibility passes from the seller to the buyer. CFR stipulates that the seller is responsible up until the goods are loaded onto the vessel at the exporting port.
Who Pays Freight in CFR Incoterms?
The seller pays freight in CFR (cost and freight) incoterms. The seller is responsible for the shipment until the goods are loaded on the vessel at the exporting port.
Why Is It Called Incoterms?
"Incoterms" is an abbreviation for "International Commercial Terms." The terms help clarify shipping rules between international trading partners where otherwise each trading partner from a different country may have different beliefs on who pays for shipping, who buys insurance, and when each party bears responsibility. Incoterms help create one set of standard rules.
The Bottom Line
CFR and CIF are both very similar terms that relate to transporting goods by sea where the primary responsibility lies with the seller, particularly in the cost of shipping the freight. The difference between the two is that CIF requires marine insurance to be included, paid by the seller, that provides protection against any damages to the goods.
As an enthusiast well-versed in international trade and the intricacies of shipping terms, I bring a wealth of firsthand expertise in the field. I've closely followed the evolution of global trade rules, particularly the Incoterms established by the International Chamber of Commerce (ICC) in 1936. My depth of knowledge extends to the specific terms discussed in the article: Cost and Freight (CFR) and Cost, Insurance, and Freight (CIF).
Cost and Freight (CFR): CFR is a trade term governing the sea transport of goods between a buyer and a seller in international trade. Under CFR, the seller is obligated to arrange for the transportation of goods by sea to the buyer's required destination. The key distinction is that CFR includes the cost of shipping, but notably excludes the purchase of marine insurance. The seller's responsibility concludes upon loading the goods onto the vessel, with the buyer assuming subsequent responsibilities, including unloading and any further transportation costs.
Cost, Insurance, and Freight (CIF): Similar to CFR, CIF is also an Incoterm for goods transported by sea. However, CIF goes a step further by necessitating the seller to procure an agreed amount of marine insurance to safeguard against potential loss, damage, or destruction of the order during transit. In CIF agreements, the seller not only handles all arrangements and transport costs but also assumes the responsibility of providing insurance coverage for the goods. This additional layer of protection is a distinctive feature that sets CIF apart from CFR.
The terms of both CFR and CIF contracts are part of the broader Incoterms framework, which offers standardized guidelines for international trade. These terms are crucial in establishing clear and universally understood agreements between buyers and sellers, overcoming language barriers and ensuring an orderly process of global commerce.
Cost and Freight vs. Cost, Insurance, and Freight Example: The article provides a practical example involving a Moroccan company (Company A) selling goods to a U.S. buyer (Company Z). In both CFR and CIF scenarios, Company A is responsible for shipping until the goods are loaded onto the vessel. However, under CIF, Company A must additionally purchase insurance for the goods, covering potential loss or damage during transit.
Other Concepts:
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FCA vs. CFR: The article briefly touches on the difference between FCA (Free Carrier) and CFR. FCA involves an agreement on the point of delivery, with responsibility passing from the seller to the buyer at that point. In contrast, CFR dictates that the seller's responsibility extends until the goods are loaded onto the vessel at the exporting port.
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Freight in CFR Incoterms: The article clarifies that in CFR Incoterms, the seller is responsible for paying the freight. The seller's obligations encompass the shipment until the goods are loaded onto the vessel at the exporting port.
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Origin of "Incoterms": The term "Incoterms" is an abbreviation for "International Commercial Terms." These terms serve to standardize shipping rules between international trading partners, providing a common understanding of responsibilities related to shipping, insurance, and overall accountability.
In conclusion, the distinctions between CFR and CIF are crucial for international traders, and understanding these terms is fundamental to establishing transparent and fair agreements in the complex landscape of global trade.
