CFR Incoterms (Cost and Freight)
CFR defines a split responsibility where the seller pays freight to the destination port, but risk transfers to the buyer once goods are loaded at the origin. Understanding this distinction between cost and risk is essential for proper contract pricing and insurance planning.
Ship's Rail (Origin)
Sea/Waterway Only
Seller Pays
What Are CFR Incoterms?
CFR (Cost and Freight) is an international commercial term that defines specific responsibilities in maritime shipping contracts. The seller pays for transportation costs to the named destination port while the buyer assumes risk once goods are loaded on board the vessel at the origin port.
CFR applies exclusively to sea and inland waterway transport. The term requires sellers to arrange and pay for carriage to the agreed port of destination. Risk transfers from seller to buyer at the moment of loading onto the vessel at the port of shipment—not at the destination.
This creates a crucial split: the seller bears costs further along the supply chain than they bear risk. Understanding this distinction prevents costly misunderstandings about insurance coverage and liability during ocean transit.
Key CFR Components
- Costs: Seller pays freight to destination port
- Risk: Transfers to buyer at ship's rail (origin port)
- Insurance: Buyer must arrange—seller has no obligation
- Documents: Seller provides commercial invoice, B/L, packing list
- Mode: Sea and inland waterway transport only
Key Responsibilities Under CFR Terms
Seller's Obligations
The seller pays freight to destination but risk ends when goods are loaded at the origin port.
Buyer's Obligations
The buyer assumes risk at origin and must arrange insurance to protect cargo during ocean transit.
CFR Cost Distribution
Under CFR, the seller covers costs through ocean freight. The buyer pays for insurance, destination charges, and import clearance.
| Cost Component | Seller Pays | Buyer Pays |
|---|---|---|
| Product Cost | ||
| Export Packaging | ||
| Inland Transport to Port | ||
| Export Clearance & Documentation | ||
| Terminal Handling (Origin) | ||
| Loading onto Vessel | ||
| Ocean Freight | ||
| Marine Insurance | ||
| Unloading at Destination | ||
| Terminal Handling (Destination) | ||
| Import Clearance & Duties | ||
| Delivery to Final Destination |
Understanding CFR's Risk vs Cost Split
Critical Understanding
CFR creates a unique situation where cost responsibility and risk responsibility diverge:
- Seller's costs: Extend to the destination port
- Seller's risk: Ends at the origin port
- Buyer's risk: Covers the entire ocean voyage
Insurance Imperative
Because buyers bear ocean transit risk but don't control the vessel, marine insurance is essential:
- Arrange coverage before goods are loaded
- Policy must activate at ship's rail (origin)
- Typical premiums: 0.2% to 2% of cargo value
Advantages and Disadvantages of CFR
Advantages
Seller Controls Shipping
Sellers maintain control over carrier selection and can negotiate better freight rates through established relationships with shipping lines.
Simplified Pricing
Single price includes goods and freight, making quotes more attractive to buyers who prefer predictable landed costs.
Insurance Flexibility for Buyers
Buyers select their own insurance providers, potentially saving 20-35% on premiums with tailored coverage terms.
Clear Cost Visibility
Buyers receive detailed freight invoices showing exact shipping charges, enabling accurate cost analysis and budgeting.
Disadvantages
Risk Transfer at Origin
Buyers assume risk once goods are loaded—before they have physical control. Cargo remains at buyer's risk for the entire ocean voyage.
Insurance Coordination Required
Buyers must arrange coverage before shipment departure. Delays cause 8% of CFR shipments to sail uninsured.
Hidden Destination Costs
Terminal handling ($150-500/container), customs examination ($200-1,000), and demurrage ($75-300/day) add to landed costs.
Document Delays
Original bills of lading often arrive after cargo, causing storage fees of $50-200 daily and supply chain disruptions.
CFR vs Other Incoterms
| Aspect | CFR | FOB | CIF | CPT |
|---|---|---|---|---|
| Freight Payment | Seller | Buyer | Seller | Seller |
| Insurance Obligation | Buyer | Buyer | Seller | Buyer |
| Risk Transfer Point | Ship's rail (origin) | Ship's rail (origin) | Ship's rail (origin) | First carrier |
| Transport Mode | Sea only | Sea only | Sea only | Any mode |
| Carrier Selection | Seller | Buyer | Seller | Seller |
| Price Includes | Goods + Freight | Goods only | Goods + Freight + Insurance | Goods + Freight |
CFR vs FOB
The key difference is freight payment. Under FOB, buyers arrange and pay for ocean freight. Under CFR, sellers pay freight to destination. Risk transfers at the same point under both terms.
CFR vs CIF
Insurance is the only difference. CIF requires sellers to provide minimum insurance (110% of invoice value). CFR leaves insurance entirely to the buyer, offering more flexibility but requiring proactive coverage.
CFR vs CPT
CPT is the multimodal equivalent of CFR. CPT works for any transport mode (air, road, rail, sea), while CFR is restricted to sea and inland waterway transport only.
When to Use CFR Incoterms
Suitable Trade Scenarios
- Buyers with existing marine insurance policies
- Sellers with dedicated shipping departments
- Bulk commodity trades (grain, minerals, steel)
- Countries with mandatory national insurance requirements
- Products with stable values during transit
Industries Using CFR
- Agricultural commodities: coffee, grain, soybeans
- Steel and metal industries
- Chemical companies (non-hazardous bulk liquids)
- Textile manufacturers
- Mining companies (minerals and ores)
Common Mistakes to Avoid with CFR
Misunderstanding Risk Transfer
Risk transfers at the origin port when goods are loaded—not at destination. This misconception leads to insurance gaps worth thousands in potential losses.
Insurance Coverage Gaps
Failing to arrange marine insurance before loading creates major financial vulnerability. Secure coverage effective from the moment goods cross the ship's rail.
Documentation Errors
Incorrect or incomplete documents cause 60% of CFR disputes. Verify all documents match your purchase order exactly—request drafts 48 hours before shipment.
Cost Calculation Oversights
Actual costs exceed CFR price by 15-20% due to destination charges, import duties, and taxes. Calculate total landed costs before finalizing contracts.
Communication Breakdowns
Poor communication causes 25% of shipment delays. Establish protocols for pre-shipment notifications, loading confirmations, and damage reporting.
Frequently Asked Questions
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