Incoterms 2020 rules are the latest revision of international trade terms published by the International Chamber of Commerce (ICC). They are recognized as the authoritative text for determining how costs and risks are allocated to the parties conducting international transactions.
Incoterms 2020 rules outline whether the seller or the buyer is responsible for, and must assume the cost of, specific standard tasks that are part of the international transport of goods. In addition, they identify when the risk or liability of the goods transfer from the seller to the buyer.
In this article, we’re discussing the Incoterm CFR, also known as Cost and Freight.
There are 11 trade terms available under the Incoterms 2020 rules that range from Ex Works (EXW), which conveys the least amount of responsibility and risk on the seller, to Delivered Duty Paid (DDP), which places the most responsibility and risk on the seller. The Incoterms 2020 Rules: Chart of Responsibilities and Transfer of Risk summarizes the seller and buyer responsibilities under each of the 11 terms.
For a summary of Incoterms 2020 and a short definition of each of the 11 terms, read The Beginner's Introduction to Incoterms.
Cost and Freight Responsibilities and Risk
Under the Incoterms 2020 rules, CFR means the seller has fulfilled its obligation when the goods are delivered and loaded on the vessel they’ve nominated at the named port of shipment.
The risk or liability for the goods transfers from the seller to the buyer as soon as the goods are loaded on board the vessel before carriage takes place, and the buyer bears costs from that point forward.
Cost and Freight Transportation Options
The ICC has divided the 11 Incoterms into those that can be used for any mode of transportation and those that should only be used for transport by “sea and inland waterway.” That’s because companies were choosing Incoterms where risk and responsibilities transferred at a point that made no sense in a non-ocean journey.
Under Incoterms 2020, CFR should only be used for sea and inland waterway transport.
Using Cost and Freight
With all of the C-group terms, including CFR, the seller is responsible for contracting international transportation. The named place where the transfer of responsibility occurs is always on the buyer’s side.
Although buyers and less experienced exporters may prefer an F-group term, C-group terms are preferable to more experienced exporters, because they allow you to deal directly with the carrier; documentation, bills of lading, and all the information needed for letters of credit originate from a single place. Additionally, using C-group terms allow you more negotiation power, especially if you book a lot of freight.
That being said, like all four of the Incoterms 2020 rules designed for sea and inland waterway transport, CFR is best used in situations where sellers have direct access to the vessel for loading, i.e. bulk cargo or non-containerized goods. For most exports, Carriage Paid to (CPT) might be a better Incoterms choice.
Learn More about Incoterms 2020 Rules
If you are regularly involved in international trade, you need to understand the risks and responsibilities for each of the Incoterms 2020 rules, not just pick the term you always use. Start by getting a copy of ICC's Incoterms® 2020 Rules book.
For a more detailed understanding of which term or terms make the most sense for your company, register for an Incoterms® 2020 Rules seminar or webinar offered by International Business Training. If you don't want to attend a half-day class, you can get the book provided at these seminars and webinars: Incoterms® 2020 for Importers and Exporters.
If history is any indication, the Incoterms 2020 rules will be around for at least a decade. Now seems like the perfect time to make sure you understand each of the terms, so you can make sure you’re speaking the same language as your international trading partner.
This article was first published in March 2017 and has been updated and revised based on the changes made with the release of the Incoterms 2020 rules.