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 selleris responsible for theproduct 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 shipperretains ownership and responsibility for theproduct only until they are loaded on board a shipping a vessel. Once they are on the ship, or "over-the-rail," the obligationtransfers 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.
FAQs
Key Takeaways
What is the difference between freight and FOB? ›
FOB Origin, Freight Prepaid: The seller/shipper pays the cost of shipping while the buyer/receiver of goods assumes the responsibility of goods at the point of origin. FOB Origin, Freight Collect: The buyer pays for freight and shipping costs and assumes full responsibility for the cargo.
What is the main difference between FOB and CIF? ›
CIF requires the seller to cover the total cost of the goods, freight and insurance. Whereas FOB only requires the seller to cover the cost of loading the goods onto the vessel; the buyer then pays to transport and insure the goods (as well as any other charges incurred once the goods are on board).
What is the difference between cost and FOB? ›
In summary. Ex-Factory Cost: The cost of the product at the factory, excluding any transportation or associated costs. FOB Cost: The Ex-Factory Cost plus the cost of loading the goods onto the transportation mode, with the buyer responsible for further transportation and associated expenses.
What is the difference between free carrier and free on board? ›
What is the difference between FCA and FOB? FCA is an Incoterm which works for all modes of transport. FOB is only used in waterway shipments. Under FOB, the seller is responsible for loading the cargo onto the vessel, but with FCA, it is the buyer's responsibility.
What is the difference between free on board and shipping? ›
Does FOB Mean Free Shipping? FOB stands for either "free on board" or "freight on board". The term is used to designate ownership between the buyer and seller as goods are transported. FOB does not explicitly mean the transportation of goods is free.
What is the difference between freight-in and freight? ›
Freight-in is the money that the business spends to bring in goods for production purposes. It is reported as a direct expense in the books. By contrast, freight-out is the money spent by the business to ship and deliver finished products to customers.
What is the difference between cost and freight and CIF? ›
However, the buyer assumes responsibility for the goods once the cargo has reached the buyer's port. CIF is different from cost and freight (CFR), which is when the seller is responsible for the shipping and freight costs, but under CFR, the seller is not responsible for obtaining marine insurance.
Who pays freight on FOB? ›
Who Pays Freight for FOB Origin? If the terms include the phrase "FOB origin, freight collect," the buyer is responsible for freight charges. If the terms include "FOB origin, freight prepaid," the buyer assumes the responsibility for goods at the point of origin, but the seller pays the cost of shipping.
Is FOB or CIF cheaper? ›
Compared to FOB, CIF comes at a higher cost for buyers: sellers invoice buyers to cover costs of shipping and insurance. As mentioned, sellers can add additional fees for the service to make a larger profit. Therefor using CIF provided by the seller ends up costing more for the buyer.
EXW stands for Ex Works and is one of the 11 Incoterms® rules. It places minimum responsibility on the seller, who makes the goods available at a location, usually the seller's premises or another named place such as a factory or warehouse. The seller does not need to load goods or clear them for export.
What does ex mill mean in shipping? ›
Meaning “from a named point of origin”; common variations include ex factory, ex mill, or ex warehouse. States that the price quoted applies only at the point of origin (i.e., the seller's premises). The seller agrees to place the goods at the buyer's disposal at the specified place within a fixed time period.
What is the meaning of C&F? ›
C&F means “cost and freight” which means the seller pays for shipping, but not insurance.
Who pays freight on Free Carrier? ›
Under the Free Carrier, or FCA Incoterms® rule, the buyer is responsible for all freight costs.
Who pays for freight allowed? ›
Freight allowed (or collect) is when the buyer, or receiver of goods, pays the freight charges upon delivery of the goods to them. While freight prepaid, the shipper or seller pays all of the shipping costs up until the cargo arrives to the buyer.
What does free freight mean? ›
FOB Destination, freight prepaid.
This add-on means the shipper bears all responsibility for a shipment until it arrives at the destination. In addition, the shipper pays for the shipment, and the receiver is not responsible for the payment of any shipping costs.
Who pays the freight on FOB? ›
Who Pays Freight for FOB Origin? If the terms include the phrase "FOB origin, freight collect," the buyer is responsible for freight charges. If the terms include "FOB origin, freight prepaid," the buyer assumes the responsibility for goods at the point of origin, but the seller pays the cost of shipping.
What does FOB mean for shipping? ›
FOB is a shipping term that stands for “free on board.” If a shipment is designated FOB (the seller's location), then as soon as the shipment of goods leaves the seller's warehouse, the seller records the sale as complete.
What is a FOB short for? ›
FOB is an acronym that stands for “free on board”, which is a shipping term used in retail to indicate when liability and ownership of goods is transferred from seller to buyer.
