Key Takeaways

  • Freight cost includes all expenses related to transporting goods from seller to buyer, including handling, insurance, and documentation.
  • Freight charges vary based on distance, weight, freight class, mode of transport, and Incoterms like FOB or CFR.
  • Common terms like "Cost and Freight (CFR)" or "FOB" define responsibilities and liability between sellers and buyers.
  • Accurate freight documentation—such as bills of lading and freight invoices—is critical for legal clarity and tax purposes.
  • Businesses must understand who bears the risk and cost at each stage of shipment under applicable Incoterms.

One freight cost definition is the amount you pay to transport goods from one place to another, whether by land, sea, or air. Many United States businesses depend on the ability to buy and sell goods from companies in other countries. It is important, therefore, that businesses learn the different ways freight costs can be applied. They also need to know how freight is documented to minimize confusion.

There are a number of expense considerations that go into figuring the cost of shipping from the seller's location to the buyer's outlet. These include:

  • Transportation to the departure location
  • Loading onto the vessel
  • Marine freight transport
  • Unloading
  • Insurance
  • Transportation to the destination location

With the increased demand for freight shipping, more companies set their shipping prices by freight density rather than by weight. They do this because charging by weight limits the amount they can ship and is therefore more expensive, both in terms of money and space. The greater the freight density, the less space it occupies on the carrying vessel. This decreases the transportation costs for each pound shipped.

There are federal and state laws regulating freight costs. These are designed to protect consumers from being overcharged.

Freight Documents

There are two important documents you receive from shippers or logistic companies when you ship goods: the freight bill and the bill of lading.

The freight bill is your invoice. You can use this to pay the bill and keep a record of it.

The bill of lading declares the type and quantity of goods you are shipping. It represents the agreement you have with the shipper to transport these items. The bill of lading shows the weight, value, and description of each item, along with shipping and delivery dates. If necessary, you can use bills of lading in a court of law.

You should store these and any other documents that relate to shipping costs for several years. By keeping these records, you are prepared in case future issues arise.

Understanding Freight Costs in Contracts

Freight costs, from a legal and contractual perspective, encompass all charges related to the transportation of goods. These include expenses for shipping, loading, handling, and insuring cargo while in transit. In many commercial agreements, freight terms are governed by international rules such as Incoterms, which define the responsibilities of the buyer and seller at different stages of the delivery.

For example, under the Cost and Freight (CFR) term, the seller is responsible for delivering the goods to the destination port and paying the shipping charges. However, the risk of loss or damage passes to the buyer once the goods are loaded onto the vessel. CFR applies only to sea and inland waterway transport.

In contrast, Free on Board (FOB) specifies that the buyer assumes responsibility once the goods pass the ship's rail at the port of departure. Such distinctions are crucial in determining not only who pays the freight cost, but also who bears liability for the goods at each stage.

These terms must be clearly outlined in sales contracts and associated documentation (e.g., bills of lading) to avoid disputes over costs or damages.

Types of Freight Charges

There are, broadly speaking, two ways to pay for the transportation of goods:

  • Freight Pre-Paid: The consignor pays the freight and takes ownership of it until the consignee receives it and pays the invoice.
  • Freight Collect: The consignee pays the freight and takes ownership of it when the carrier receives it.

The bill of lading can describe these charges in various ways:

  • Consignee Collects: The consignee pays freight charges and takes care of customs and applicable tax or other forms.
  • Prepay and Add: The consigner pays the freight, perhaps getting a better deal than the consignee might have gotten. The consigner then passes this cost on to the consignee.
  • Third Party: A third party, usually a logistics company, handles payment of freight charges.
  • Cash on Delivery (COD): Upon delivery, the consignee pays the carrier who then pays the consigner.
  • Freight-on-Board, or Free-on-Board (FOB) Origin: At the consigner's dock, the consignee assumes responsibility for the freight and pays all costs.
  • FOB Origin, Freight Prepaid: Same as above, except the consigner pays the freight charges.
  • FOB Origin, Freight Prepaid and Charged Back: Same as above, only the consigner bills the consignee for the freight charges.
  • FOB Destination: At the consignee's dock, the title for goods passes. The consigner takes care of freight charges.
  • FOB Destination, Freight Collect: Same as above, only the consignee takes care of freight charges.
  • FOB Destination, Freight Collect and Allowed: Same as above, except the consignee deducts the freight charges from the cosigner's invoice.

“Freight on Board” is not an indication of who owns the freight. It is an internationally-recognized legal term that says the consigner must transport the freight to the consignee on some kind of vessel.

It describes the point at which the consigner stops being responsible for the freight and the consignee must pay the shipping costs. In an ideal situation, the consigner pays to have the freight delivered to a stated destination. The consignee then covers the cost of transporting the freight from that location to the retail outlet.

The bill of lading states who owns the freight. The terms of sale indicates who is paying the freight costs.

Common Legal Terms Related to Freight

Understanding the terminology used in freight contracts is critical for legal compliance and dispute resolution. Key legal terms include:

  • CFR (Cost and Freight): Seller pays for transport to the named port of destination. Risk passes to the buyer upon shipment loading.
  • CIF (Cost, Insurance and Freight): Same as CFR, but seller also pays for insurance until the goods reach the port.
  • FOB (Free on Board): Defines when responsibility for goods transfers from seller to buyer, often at the port of origin.
  • DDP (Delivered Duty Paid): Seller assumes all costs, including import duties, until goods reach the buyer’s location.
  • Ex Works (EXW): Buyer bears all responsibility and cost once goods are made available at the seller’s premises.

These terms often appear in conjunction with Incoterms published by the International Chamber of Commerce, which provide a standardized framework for interpreting contractual delivery obligations.

Key Factors That Influence Freight Costs

Several variables affect the total freight cost of a shipment:

  • Distance: Longer shipping routes naturally incur higher charges due to fuel and labor costs.
  • Weight and Volume: Carriers may charge by actual weight or by dimensional weight (volume-based pricing).
  • Freight Class: In the U.S., the National Motor Freight Traffic Association assigns freight classes from 50 to 500 based on density, handling, stowability, and liability.
  • Mode of Transportation: Air freight is faster but more expensive; ocean freight is more economical for bulk shipments.
  • Fuel Surcharges and Accessorial Fees: These can include charges for residential delivery, liftgate service, or delivery outside normal business hours.
  • Customs and Duties: For international shipments, import/export duties, taxes, and customs brokerage fees may significantly add to the total freight cost.

Businesses should request itemized freight bills to understand all charges and budget accordingly.

Frequently Asked Questions

  1. What is included in freight cost?
    Freight cost typically includes charges for transportation, fuel, handling, insurance, loading/unloading, and documentation fees.
  2. Who pays the freight cost—buyer or seller?
    Responsibility depends on the contract terms, such as Incoterms. For example, under FOB, the buyer usually pays; under CFR, the seller pays up to the destination port.
  3. What does CFR mean in shipping contracts?
    Cost and Freight (CFR) means the seller covers shipping to the destination port, but the buyer assumes risk once the goods are on board.
  4. How can I reduce freight costs?
    Optimize packaging, consolidate shipments, negotiate rates with carriers, and use transportation management systems (TMS) to compare options.
  5. Why is the bill of lading important in freight transactions?
    It serves as a legal contract, shipment receipt, and document of title, often used in customs clearance and legal disputes.

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