Cost And Freight—CFR Vs. Free On Board—FOB - Investopedia

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 seller is responsible for the product 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 shipper retains ownership and responsibility for the product only until they are loaded on board a shipping a vessel. Once they are on the ship, or "over-the-rail," the obligation transfers 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.