What it means
CFR is one of the Incoterms, a set of standard trade terms published by the International Chamber of Commerce. They tell buyer and seller who arranges and pays for transport, who carries the risk if the goods are damaged, and who handles export and import paperwork.
Using a standard term saves long negotiations and reduces the chance of disputes. Under CFR the seller books the ship and pays the freight to the named destination port, and the seller also clears the goods for export.
The buyer takes over the risk at the moment the goods are loaded on the vessel, and the buyer pays for import duty, local port charges and delivery from the destination port. The split between cost and risk is the part that catches people out.
The seller pays for the journey, but the buyer carries the risk of loss or damage during it, so the buyer needs its own cargo insurance because the seller is under no obligation to provide any. For finance teams, CFR affects pricing, inventory and cash timing.
A CFR price includes freight, so it is higher than a price for the same goods collected at the seller's door, and the buyer usually records ownership and inventory from the point of loading even though the goods have not arrived. One nuance is that CFR is meant only for sea and inland waterway transport.
For containers handed to a carrier at an inland terminal, a different term such as CPT (carriage paid to) is normally more appropriate. A buyer should also confirm the Incoterms edition named in the contract, because the rules are updated periodically.
In practice
Real-world examples.
Example
A furniture retailer buys 20 containers of chairs from a manufacturer on CFR terms. The manufacturer pays the ocean freight, but the retailer buys its own insurance from the moment of loading. When a container is damaged in a storm, the retailer claims on its own policy.
Example
A coffee roaster agrees to buy beans at $5,000 a tonne CFR to its local port. Its finance team compares this quote with a rival who offers a lower price but excludes freight, and discovers that the CFR quote is actually cheaper once freight is added.
Example
A mining equipment exporter sells spare parts to a customer on CFR terms. The exporter's invoice shows the freight as a cost inside the price, and the exporter's accountant recognises the sale when risk passes at loading, as set out in the contract.
Formula
Calculation
CFR price = goods price (ex-works) + export costs + sea freight to the destination port
A seller quotes a buyer in another country for 1,000 machine parts. The parts cost $40,000 ex-works, export clearance and loading cost $2,000, and sea freight to the destination port costs $3,000.
CFR price = 40,000 + 2,000 + 3,000 = $45,000. The buyer then adds its own costs after arrival: cargo insurance of $450, import duty of 5% on the goods, which is 45,000 x 5% = $2,250, and local delivery of $800. The buyer's total landed cost = 45,000 + 450 + 2,250 + 800 = $48,500.Case study
Seen in the real world.
Tidewater Textiles is an illustrative, fictional importer that bought fabric from overseas mills on CFR terms. In one shipment a vessel was delayed and part of the cargo was damaged by water before it reached port. The finance manager assumed the supplier was responsible, because the supplier had paid the freight.
On reading the contract, the team realised that risk had passed to Tidewater when the fabric was loaded. Because it had not bought cargo insurance, it bore the entire $60,000 loss.
Afterwards Tidewater changed its procurement policy so that every CFR purchase automatically triggered an insurance policy. The illustrative lesson is that paying attention to who carries risk matters as much as who pays freight.
Watch out
Common mistakes.
- Assuming the seller carries the risk until the goods arrive, when under CFR the risk passes to the buyer at loading.
- Skipping cargo insurance because the price already includes freight, which leaves the buyer exposed to loss at sea.
- Confusing CFR with CIF, which is similar but obliges the seller to buy a minimum level of insurance for the buyer.
Questions
People also ask.
Who pays import duty under CFR?
The buyer does, together with local port charges and delivery from the destination port.
Can CFR be used for air freight?
No, it is designed for sea and inland waterway shipments, and other terms are better suited to air or multimodal transport.
When should the buyer record the inventory?
Usually when risk and control pass under the contract, which under CFR is at loading, although your auditor should confirm the treatment.
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