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December 2, 2022

Free on Board (FOB) Incoterm Explained

The world of international shipping can be difficult to navigate, even for those with experience.

Free on Board (FOB) is one of the most commonly used Incoterms, and understanding it can help ensure your business is compliant with international trade regulations while also protecting your interests as a shipper.

Let's break down what Free on Board is, what your obligations under this Incoterm are, look at an example of how it is used in practice, and go over the benefits and drawbacks of FOB.

What is Free on Board?

Simply put, the FOB Incoterm is an agreement between a buyer and seller that the cost of goods sold includes delivery to a specific port where ownership of the goods transfers from the seller to the buyer. In other words, once the goods are placed on the ship and "on board," any risk of damage or loss shifts from the seller to the buyer.

FOB can only be used for shipments using ocean freight. Under FOB terms, the responsibility and cost of the goods are with the buyer from the point when they leave the seller’s premises until they reach their destination port.

What Is the Difference Between FOB Origin and FOB Destination?

There are two types of FOB terms: FOB shipping point (or FOB origin) and FOB destination.

FOB Origin means that the buyer takes ownership of the goods at the point of origin and is responsible for any risks associated with transporting them from there.

FOB Destination means that the seller holds onto ownership until it reaches its final destination and is responsible for risk associated with transit.

Free on Board (FOB) Price Calculation: Product cost + packaging + loading charges + delivery to port/place + export customs charges + terminal charges + loading on carriage + profit share

Obligations Under the FOB Incoterm

Exporter Obligations

  • Packaging and loading the goods as per industry standards
  • Providing necessary shipping documentation for export customs clearance, as well as covering all the export duties and taxes
  • Delivering the goods to a designated port
  • Covering the origin terminal handling charges (OTHC)

Importer Obligations

  • Paying for the cost of goods
  • Covering the freight and insurance costs associated with transportation
  • Handling customs clearance at the port of entry and any import duties or taxes that apply
  • Covering unloading and inland transportation costs to its warehouse or place of delivery
  • Import duties, customs clearance, and any other taxes or fees

FOB Point of Risk Transfer

The point of risk transfer from seller to the buyer depends on whether you're using FOB origin or destination.

Under the FOB Origin, the risk of damage or loss transfers from the seller to the buyer when the goods are loaded onto the transporting vessel at its origin port. This means that any damages, losses, or delays incurred during transit will be borne by the buyer.

On the other hand, under FOB Destination, risk transfer occurs when the goods reach their destination and are unloaded. This means the seller will bear any costs, damages, or losses that occur during transit.

Free on Board (FOB) point of risk transfer and buyer and seller costs and obligations

FOB Example

Let’s say a buyer from the United States is purchasing a container of auto parts from a seller in China. The seller agrees to FOB Origin terms, which means that they are responsible for the costs and risks associated with transporting the goods until it arrives at the port of departure.

The buyer will then be responsible for covering the cost of freight and insurance, as well as the import duties and other taxes associated with bringing the goods into their own country.

Conversely, if the companies agreed to FOB Destination terms, the buyer would pay for the cost of goods and freight, while the seller bears responsibility for delivering them to their destination.

Benefits and Drawbacks of FOB

For Exporters

The primary benefit of FOB shipping is that it helps minimize risk and liability for the exporter. Once the goods are placed on board, any damage or loss incurred during transit is no longer the exporter's responsibility. This means that if something happens to the shipment while it is en route, they will not be liable for any damages or losses suffered.

Additionally, FOB terms can help streamline operations by eliminating unnecessary paperwork and processes related to international shipments. Since the exporter's responsibility ends once they deliver the goods onto the vessel, they don't need to worry about tracking or monitoring shipments as much as they would with other types of shipping agreements.

Regarding drawbacks, there aren't many, but exporters should be aware of the potential for delays in shipment if it is held up at customs or other ports of call.

For Importers

The main benefit of FOB shipping for importers is that it makes it easier to manage costs associated with international shipments. Since the exporter bears responsibility for delivering and unloading the goods at their destination port, the importer only needs to worry about covering freight and insurance costs.

On the downside, however, importers have no control over the timing of deliveries if they agree to FOB terms. This can be an issue if they need to plan for inventory or customer delivery timelines. Additionally, if you're inexperienced, you may not be aware of all the costs associated with international shipping, which can lead to unexpected expenses.

Is FOB the Right Choice for Your Business?

Overall, FOB shipping offers a straightforward way to manage the logistics of international shipments.

Given that it offers many benefits to both exporters and importers, it can be an attractive choice for companies that want to minimize risks and streamline operations. However, it's important to consider your unique needs when deciding if FOB shipping is the right choice for your business.

Our team of experts can help you assess your options and choose the best shipping agreement for your needs so that you can make an informed decision about whether FOB is right for your business. Contact us today to get started.

Free on Board FAQ

Who is responsible for the freight cost when the terms are FOB Shipping point?

The buyer is responsible for paying the freight cost when the terms are FOB shipping point.

Who is responsible for the freight cost when the terms are FOB Destination?

The seller is responsible for paying the freight cost when the terms are FOB Destination.

What does FOB stand for on an invoice?

FOB on an invoice refers to Free on Board, an Incoterm that indicates which party is responsible for paying the cost of transporting goods in international trade.

Does FOB include customs clearance?

No, FOB does not include customs clearance. The buyer is responsible for any customs duties and other taxes associated with bringing the goods into their country.

What is the difference between FOB and FAS?

The primary difference between FOB and FAS is that FOB (Free on Board) requires the seller to deliver goods onto a vessel, while with FAS (Free Alongside Ship), the seller is responsible for delivering goods next to the vessel.

What is the difference between FOB and DAP?

The main difference between FOB and DAP (Delivered at Place) is that with FOB, the seller's responsibility ends once they deliver goods onto a vessel, while with DAP, the seller is responsible for delivering goods to their final destination.

What is the difference between FOB and CIF?

The key difference between FOB and CIF (Cost, Insurance, and Freight) is when the responsibility for the goods transfers from seller to buyer. With FOB, the seller is responsible for all costs up to loading on the vessel, while CIF includes additional services such as insurance and freight during transit.

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