Cost and Freight – CFR vs. Free on board – FOB: What’s the difference?
The main difference between using cost and freight (CFR) and free shipping on board (FOB) is who has to pay the various shipping or freight costs: the buyer or the seller.
The terms refer to the point at which the transfer of responsibility for the goods shipped occurs, from the seller / sender to the buyer / recipient. The terms also specify who is responsible for what costs.
Both the cost and the freight and free shipping on board are legal terms in international trade. You will see these terms as part of the International Chamber of Commerce (ICC) collection of global trade terms, known as Incoterms. These terms govern shipping responsibilities for international trade.
- Cost and Freight, or COF, and Free on Board, or FOB, are legal terms in international trade.
- Free on Board means that the seller is responsible for the product only until it is loaded on board a shipping 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 is held responsible.
The purpose of establishing Incoterms, such as FOB and CFR, was to facilitate trade by providing standard contractual terms. This standardization allows easy understanding of responsibility, regardless of the language spoken.
Understanding the difference between cost and freight: CFR versus free on board
Cost and charge
Under a cost and freight (CFR) agreement, the seller has a greater responsibility to arrange and pay for the transportation of the ordered products. For goods shipped CFR, the shipper is responsible for arranging and paying for the shipment of the goods by sea to the port of destination, as specified by the consignee.
Also, according to CFR, the seller must provide the buyer with the necessary documents to obtain them from a carrier. Typically this includes providing the customs forms necessary to clear the cargo through the customs inspection process. However, by using CFR, the seller does not have to purchase marine insurance against the risk of cargo loss or damage during transit.
Responsibility for the merchandise only transfers to the buyer or receiver when the ship arrives at the designated port of destination. The buyer is then responsible for the unloading costs and any other transportation costs to the final destination.
Free on board
Free on board refers to a shipping agreement in which the seller or shipper retains ownership and responsibility for the product only until it is loaded on board a shipping vessel. Once they are in the boat, or “on the rail”, the obligation is transferred to the buyer.
The supplier is only responsible for providing transportation of the goods sold to a designated primary point of origin of shipment. This point is usually a port, as Incoterms are most commonly used for international trade where goods are transported by sea.
The delivery is deemed to have been completed, and responsibility for the goods is transferred from the sender to the buyer or the consignee, at the time the goods are loaded on board the ship at the designated port of origin.
The recipient is responsible for arranging and paying the actual shipping cost from the port of origin to the port of destination and for arranging and paying for transportation to any other destination. The sender is, therefore, free of responsibility once the merchandise is on board the ship.
The FOB destination is another form of this type of contract. In this case, it indicates that the responsibility for the merchandise remains with the seller until the product arrives at the specified port.