March 31, 2023

Should You Let Your Overseas Supplier Arrange Freight? The CIF & CFR Problem Explained

If you import goods into Australia, chances are your supplier has offered to “handle the freight” and quote you a CIF or CFR price. It sounds convenient, and sometimes it genuinely is. But for many small and medium-sized importers, it leads to unexpected costs, limited control, and difficult conversations when things go wrong.

 

This guide explains the four most common Incoterms used in Australian import trade, why CIF and CFR can create problems, and what you should consider before accepting a supplier-arranged freight deal.

What Are Incoterms?

Incoterms (International Commercial Terms) are a globally recognised set of trade rules published by the International Chamber of Commerce (ICC). They define who — buyer or seller — is responsible for freight costs, insurance, and risk at each stage of a shipment.

 

The current version is Incoterms 2020. Choosing the right Incoterm affects your landed cost, your insurance coverage, your legal rights if something goes wrong, and how much visibility you have over your supply chain.

The Four Incoterms Most Commonly Used by Australian Importers

  1. EXW (Ex Works):

Under EXW, the seller’s obligation ends when the goods are made available at their premises. The buyer takes on all costs and risks from that point — including export clearance, origin charges, freight, insurance, and Australian customs.

EXW gives the buyer maximum control but also maximum responsibility. It is rarely practical unless you have a trusted freight forwarder managing the origin side on your behalf.

3. CIF (Cost, Insurance, and Freight):

CIF is similar to CFR, but the seller also procures marine insurance. However, the insurance cover provided under CIF is typically the minimum required by the Incoterms rules (Institute Cargo Clauses C), which covers a limited range of risks. If you need broader cover, you will need to arrange and pay for it yourself.

Like CFR, risk transfers to the buyer at the port of origin, not on arrival in Australia.

Important: Both CFR and CIF are intended for sea or inland waterway freight under Incoterms 2020. For containerised cargo, the equivalent terms are CPT (Carriage Paid To) and CIP (Carriage and Insurance Paid To). Many suppliers and buyers still use CFR/CIF for container shipments in practice, but it is worth being aware of this distinction.

  1. FOB (Free On Board):

Under FOB, the seller delivers the goods onto the vessel at the port of origin. From that point, risk and cost transfer to the buyer. The buyer arranges and pays for the international freight and insurance.

FOB is widely used and strikes a practical balance: the seller handles the export and origin charges, while the buyer controls the freight booking, carrier selection, and insurance. This is the term most commonly recommended by Australian freight forwarders for importers who want cost transparency and control.

Note: Under Incoterms 2020, FOB is intended for sea or inland waterway freight only. For containerised or multimodal shipments, FCA (Free Carrier) is technically more appropriate, though FOB remains common in practice.

4. CFR (Cost and Freight):

Under CFR, the seller arranges and pays for the freight to the destination port. However, risk transfers to the buyer as soon as the goods are loaded on the vessel at origin — not when they arrive. The buyer is responsible for arranging their own insurance and for all destination charges.

The Hidden Cost Problem: A Real-World Example

The following scenario is one we see regularly at Oxen Logistics.

A Melbourne-based importer — let’s call him Mr. Smith — orders goods from a supplier in China. The supplier offers to arrange freight under CIF terms and assures Mr. Smith that his only costs on arrival will be customs clearance and local delivery.

Mr. Smith contacts an Australian customs broker for a quote. The broker quotes for customs clearance and delivery — but as is standard practice, the quote excludes duties, GST, and port charges, as these vary per shipment and are set by third parties.

When the shipment arrives, the final invoice includes import duty, GST on the customs value, and destination terminal handling charges (THC) that were embedded in the shipping line’s bill of lading. Mr. Smith is surprised by the total — it is significantly higher than he budgeted for.

What went wrong — and what Mr. Smith could have done differently

The core issue is not that the charges were unfair — they were all legitimate and disclosed. The problem is that Mr. Smith had no visibility into the freight cost his supplier negotiated, no ability to shop around for a better rate, and no way to verify whether the carrier’s charges were reasonable.

Had Mr. Smith used FOB terms instead, he could have:

  • Obtained competing freight quotes from Australian forwarders before placing the order
  • Chosen a carrier and routing that suited his timeline and budget
  • Arranged comprehensive marine insurance rather than relying on the minimum CIF cover
  • Had a direct contractual relationship with the carrier, giving him legal recourse in the event of loss or damage
  1. Risk Transfer Point:

Both CFR and CIF terms imply that the risk passes from seller to buyer once the goods have been loaded on the vessel at the port of shipment. This means that if any damage, loss, or delay occurs during the main carriage, the buyer has to bear these risks. Despite the seller being responsible for arranging transportation, the risk is transferred to the buyer early, which can result in potential disputes and confusion.

  1. Limited Legal Recourse:

In the event of a dispute or an issue with the carrier, the buyer might face difficulties in legal recourse because the contract of carriage is between the seller and the carrier, not the buyer. This can make it difficult for the buyer to claim compensation in the event of loss or damage to the goods during transportation.

  1. Potential Delays:

Since the seller has the responsibility of arranging transportation, any delays in booking or scheduling the shipment fall on their shoulders. If a seller is not efficient, these delays can impact the buyer’s supply chain and subsequent business operations.

Essential Considerations for CIF and CFR Incoterms

  1. Limited Control for Buyers:

When goods are shipped under CFR or CIF terms, the seller is responsible for arranging and paying for the transportation of goods up to the destination port. As a result, the buyer has limited control over the choice of carrier, shipment routes, or even the cost of freight. This lack of control can cause issues if the goods aren’t transported in the manner that the buyer would have preferred.

  1. Insurance Coverage Limitations:

Under CIF terms, the seller is required to procure marine insurance for the goods. However, the coverage is typically at the minimum level. If the buyer requires a more comprehensive level of insurance, they will have to arrange and pay for it themselves, thus leading to additional costs and efforts.

  1. Hidden Costs:

With CFR and CIF terms, buyers may face unexpected costs. These might include charges at the destination port such as unloading, storage, or customs duties. These costs are not covered by the seller under CFR or CIF terms, which might lead to increased total cost for the buyer.

Our Recommendation for Australian Importers

For most small and medium-sized importers, FOB is the preferred starting point. It lets your supplier handle the export and origin charges — the part of the process they know best — while giving you control over the international freight, insurance, and carrier selection.

If you are just starting out, working with an experienced Australian freight forwarder from the beginning will help you:

  • Understand your true landed cost before placing an order
  • Select the right Incoterm for your situation
  • Arrange appropriate insurance coverage
  • Avoid surprises at the destination port

The right Incoterm is not always the same for every importer or every shipment. If you are unsure, speak with your freight forwarder before confirming terms with your supplier — it is much easier to negotiate at that stage than to unwind a CIF arrangement after the goods are already on the water.

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