What is Cost and Freight (CFR)?
Definition
– Cost and Freight (CFR) is an Incoterm — a standardized international commercial term — used only for goods moved by sea or inland waterways. Under CFR, the seller must arrange and pay for carriage of the goods to a named port of destination, but the risk of loss or damage passes from seller to buyer once the goods have been loaded aboard the ship at the port of shipment. The seller is not required to obtain marine insurance for the transit.
How CFR works — core points
– Scope: CFR applies only to sea and inland waterway transport.
– Seller’s main duties: prepare and deliver the goods, clear them for export, load them on board the vessel, and pay the freight to the agreed destination port.
– Risk transfer: risk shifts from seller to buyer when the goods are placed on board the ship at the origin port (not at the destination).
– Insurance: the seller does not have to buy marine insurance under CFR; if the buyer wants coverage during the sea leg, the buyer must arrange it.
– Legal force: when CFR is specified in the sales contract, it creates binding obligations between the parties under the chosen Incoterms edition.
Related Incoterms (short comparison)
– CIF (Cost, Insurance, and Freight): similar to CFR, but the seller must also purchase marine insurance for the voyage.
– FOB (Free On Board): seller’s responsibility ends when goods are loaded on board the vessel at the port of shipment; buyer arranges and pays for main carriage.
– FAS (Free Alongside Ship) and CPT/CIP: other sea or multimodal terms with different points where risk and cost shift.
Checklist — what each party should confirm before agreeing to CFR
Seller (exporter)
– Specify the exact named port of destination in the contract.
– Arrange and pay for sea freight to that port.
– Prepare commercial invoice, packing list and other export documents; clear goods for export.
– Ensure goods are properly loaded on board at the port of shipment.
– Provide the buyer with transport documents (e.g., bill of lading) required for taking possession.
Buyer (importer)
– Verify the named destination port and arrival estimates.
– Arrange and pay for marine insurance from the moment goods are on board unless otherwise agreed.
– Handle unloading costs at destination port, customs clearance, import duties, and inland transport from the destination port to final location.
– Confirm required documents from seller to take possession (bill of lading, commercial invoice, etc.).
Worked numeric example (simple)
Assumptions:
– Goods value (invoice price): $10,000
– Sea freight charged to seller: $1,500
– Buyer chooses marine insurance costing 0.5% of insured value (applies to buyer’s choice): insurance = 0.005 × $10,000 = $50
– Import duties and port charges at destination (paid by buyer): $600
Step-by-step cash flows and cost to each party:
– Seller pays: cost of goods production or purchase (assume included in $10,000) + $1,500 freight = seller’s extra outlay for shipping = $1,500 (plus whatever the seller’s cost basis is).
– Buyer pays on arrival and to take delivery: invoice $10,000 (paid under sale terms) + insurance $50 + import duties/port charges $600 + inland transport (not shown here).
Risk allocation:
– Any loss or damage occurring after the goods are placed on board at the port of shipment is the buyer’s responsibility (so buyer’s insurance should cover this period if desired).
Practical tips
– Always specify which Incoterms edition governs the contract (e.g., Incoterms 2020).
– Name the precise destination port (avoid vague terms like “nearest port”).
– Make explicit whether the seller will provide the transport documents the buyer needs to clear and take delivery.
– Decide who will arrange insurance and who bears currency and payment timing risks.
Short summary
CFR places the cost of bringing goods to the port of destination on the seller but shifts the transit risk to the buyer once the goods are loaded aboard the vessel at origin. The seller covers sea freight but not marine insurance. CFR is commonly used for sea shipments and should be specified clearly with the chosen Incoterms edition.
Sources
– Investopedia — Cost and Freight (CFR): https://www.investopedia.com/terms/c/cfr.asp
– International Chamber of Commerce (Incoterms rules): https://iccwbo.org/resources-for-business/incoterms-rules/
– Trade Finance Global — Cost and Freight (CFR): https://www.tradefinanceglobal.com/publications/cost-and-freight-cfr-incoterms/
– UPS — Cost and Freight (CFR) (terms overview): https://www.ups.com
Educational disclaimer
This explainer is for educational purposes only and does not constitute legal, tax, or commercial advice. Parties should consult their own legal counsel or trade specialists to draft or review contract terms and to confirm obligations under the applicable Incoterms edition.