The difference between cost and freight (CFR) and free on board (FOB) lies in who has responsibility 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.
Basic Shipping Terms
The International Chamber of Commerce (ICC) has established a collection of international commerce terms, known as Incoterms, that govern shipping responsibilities for international trade. The purpose of establishing Incoterms, such as FOB and CFR, was to facilitate trade by providing standard contract terms that can easily be recognized in a variety of languages.
Free on Board
FOB refers to a shipping arrangement where the seller or shipper is only responsible for providing for 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.
Cost and Freight
Under a CFR agreement, the sellerr has a larger responsibility for arranging and paying for transportation. For goods shipped CFR, the shipper is responsible for arranging and paying for transportation all the way to the destination port specified by the receiver.
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.