Purchase contracts include Incoterms, which carry different responsibilities for both parties of a transaction. Such responsibilities can include transportation costs and insurance, loading and unloading risks, transfer of the ownership of goods, and more. Thus, it should be unquestionable that both parties should fully understand such terms before accepting a contract. But even if such terms are thoroughly understood, preferable contract terms may still vary from case to case. Buyers and sellers alike will need to consider, depending on each individual transaction, which is better; CIF or CFR, CIP or CPT, and so forth.
With that said, since the question between CIF and CFR specifically is quite prevalent, let us explore the matter further.
Incoterms
As mentioned above, Incoterms define buyer and supplier responsibilities. They were issued by the International Chamber of Commerce (ICC) in 2010 – hence the name “Incoterms 2010”. They were subsequently revised in 2013, and are currently set to be revised again in 2020.
Incoterms can be grouped into categories, namely;
- “C” - CFR, CIF, CIP, CPT
- “D” - DAP, DAT, DDP, DDU, DAF, DES
- “E” - EX-WORKS
- “F” - FCA, FAS, FOB
Since each Incoterm carries different implications for each transaction, it is vital that both parties have a good grasp of them. Different Incoterms may include different, unforeseen implications, or better facilitate hidden charges and fees. Should one be wondering if CIF or CFR is better for them, research would be invaluable.
In broad terms, a key difference among many Incoterms lies in the exact point when the transfer of risk occurs. Additional charges and obligations may also vary somewhat across the transportation chain, from the supplier’s factory to shipping to the buyer’s warehouse.
CIF – Cost, Insurance, and Freight
Starting with CIF, it stands for Cost, Insurance, and Freight. In essence, it covers three factors; freight cost, risk transfer, and insurance.
1. Freight cost
Under CIF, freight costs are the seller’s obligation. Namely, the seller must arrange to deliver the goods to the destination port named in the contract, and pay the related costs.
2. Risk transfer
However, any potential risk is transferred from seller to buyer early during the shipment process; namely, when the goods are on board the shipping vessel. Such risks include the risks of damage or loss of the shipment.
3. Insurance
In terms of insurance, the seller is also obliged to pay for insurance cover. It is noteworthy, however, that said insurance is defined as the ICC’s tax payment amount, which is the minimum coverage.
Thus, if the buyer wishes to have more insurance protection, be it due to cargo value or other reasons, it will need to be arranged outside of basic CIF coverage. Namely, it will either need to be expressly agreed to with the seller in the transaction contract, or the buyer will need to make their own additional insurance arrangements.
Thus, to consolidate the CIF template;
- The seller’s costs end at the export port and include export customs, freight, and insurance costs.
- The buyer’s costs begin at the destination port and include import customs and transportation to their warehouse or other desired destination.
- The transfer of risk occurs once the goods are on board the export ship.
- Any additional insurance or other arrangements must be expressly agreed to in advance.
CFR – Cost and Freight
CFR, then, stands for Cost and Freight. Just like CIF, in essence, it also covers three factors; freight cost, risk, and insurance.
1. Freight cost
Freight cost remains the seller’s responsibility under CFR. Thus, the seller is obliged to arrange for and pay the costs and freight of goods to the destination port named in the contract.
2. Risk transfer
Also similarly to CIF, risks are also transferred from seller to buyer early – specifically, once the goods pass the rail of the shipping company’s vessel in the port of shipment. Such risks include the risks of loss, damage, or destruction of goods.
3. Insurance
However, while the two share the similarity of freight cost and risk transfer point, CFR differs from CIF in terms of the insurance. Under CFR, marine insurance is not among the seller’s obligations.
The seller is not liable for damages after the goods have been loaded on the export ship, and insurance costs affect the buyer’s inventory costs instead. Therefore, insurance will be the primary factor to consider when contemplating if CIF or CFR is better or preferable for either party.
To consolidate the CFR template;
- The seller’s costs end at the export port and include export customs and freight costs.
- The buyer’s costs begin at the destination port and include insurance, import customs, and transportation to the buyer’s warehouse or other desired destination.
- The transfer of risk occurs once the goods are on board the export ship.
- Any insurance or other arrangements fall on the buyer and must be arranged in advance. Any arrangements that may concern the seller must be expressly agreed to in advance, within the contract’s terms.
Which is better, CIF or CFR?
Having covered the two terms, then, one must pinpoint the difference in insurance. In short, it is the seller who must ensure the goods under CIF, while that responsibility lies with the buyer under CFR.
Thus, in broad terms, CIF is generally the safer and more time-effective option for buyers, as it reduces insurance arrangement obligations. It might also be preferable for sellers, as offering this premium may make them more appealing to buyers.
However, CFR may also be preferable for either party. A seller may choose to not offer CIF due to such factors as risk assessment. Likewise, a buyer may prefer CFR if they wish to rely on their own insurance company instead of the seller. A notable example of this comes from the relocation industry, where moving companies negotiate insurance and coverage based on each individual contract. Similarly, customers can consider third party options as well.
Lastly, one may be considering such prominent Incoterm options as Free on Board (FOB) instead of either CIF or CFR. In such cases, it is vital to note that the key difference with both is neither insurance coverage nor the point of risk transfer. The risk transfer still occurs once the goods are on board the shipping vessel. Instead, the difference lies in freight costs, in that freight also becomes the buyer’s responsibility. But since FOB is an “F” category Incoterm, instead of a “C” category where CIF and CFR belong to, comparisons on equal terms might be harder to make altogether.
Conclusion
In conclusion, there’s arguably no clear, universally preferable Incoterm between CIF and CFR. CIF might generally be preferable, due to the addition of insurance, but there are cases where either party might opt for CFR instead.
So when considering if CIF or CFR is better, whether one is a seller or a buyer, it might be optimal to consider each individual shipment contract’s unique characteristics. CIF might generally seem more appealing, but CFR is, by all means, a viable option as well.
