In Finance, what is Cost and Freight?

Mary McMahon
Mary McMahon

Cost and freight is a term used in shipping contracts to refer to contracts where the seller is obliged to arrange for transport and pay costs to the buyer's port. The seller does not provide insurance for the shipment, nor does the seller arrange for transport to an end destination like the buyer's warehouse. This term is abbreviated as CFR or CNF and is used in many contracts involving agreements to import goods.

Freight and transportation costs add to the cost of goods and services.
Freight and transportation costs add to the cost of goods and services.

This term is an example of an Incoterm. Incoterms are standardized terms and abbreviations adopted by the International Chamber of Commerce. They were originally developed in the early 20th century and they are periodically updated to reflect new developments in the shipping industry. By promoting standardized terms, the International Chamber of Commerce hopes to avoid confusion and disputes with shipping contracts, as all parties are familiar with Incoterms and therefore know what they are agreeing to when they sign a contract.

The buyer is responsible for the costs of transferring goods -- for instance, by train -- once they have arrived at a destination port.
The buyer is responsible for the costs of transferring goods -- for instance, by train -- once they have arrived at a destination port.

When the contract specifies that the seller will be providing cost and freight, it also indicates the port where the goods will be delivered. The seller is responsible for loading the goods, transporting them safely to a port for shipment, and paying all costs associated with moving the goods to the buyer's port. As soon as the goods cross the rail of the ship, however, the buyer is liable for them. If the buyer wants insurance, it must be purchased separately because it is not being provided by the seller under the terms of the cost and freight contract.

Contracts that include cost and freight also include an obligation to generate the proper paperwork and documentation associated with the sale. The seller is responsible for making sure that the paperwork is in order so that the goods can be easily transferred to the buyer. This includes all customs documentation and any other required paperwork. Holdups related to paperwork are the liability of the seller, not the buyer, and sellers are responsible for staying up to date with paperwork requirements to reduce the risk of a problem during shipment.

Once the goods are delivered to the destination port under a cost and freight agreement, further transport is the responsibility of the buyer. Buyers can make a variety of arrangements including switching to rail or truck transport or storing the goods in a warehouse at the port. The seller is not responsible for any damages incurred at this stage, unless the buyer can demonstrate that the seller knowingly provided inadequate packaging that led to damage during handling and transport.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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