When you're shipping goods, it's important to choose the right delivery method. Free on Board (FOB) and Delivered at Place (DAP) are two commonly confused Incoterms that outline different responsibilities for the buyer and seller.
Both have distinct advantages and disadvantages, making it difficult to decide which is the right fit for your business.
To help you make the best decision, let's take a closer look at the two shipping methods and compare them side by side.
What is Free on Board?
Free on Board is a shipping term that indicates who is responsible for paying transport costs. The FOB point is the location where title of the goods passes from the seller to the buyer.
In other words, it's the point at which ownership of the goods changes hands. This is important to know because it affects who is responsible for paying transportation costs.
There are two main types of FOB arrangements — FOB origin and FOB destination. Under the origin arrangement, the seller pays for transportation costs and assumes all risk until the goods reach the shipping point. At that point, ownership of the goods passes to the buyer, and the buyer becomes responsible for paying transportation costs from that point forward.
On the other hand, under the FOB destination agreement, the buyer pays for transportation costs and assumes all risks until the goods reach their destination. The seller remains responsible for paying transportation costs until delivery is made, at which point ownership of the goods passes to the buyer.
What is Delivered at Place (DAP)?
Delivered at Place (DAP) is a shipping term that indicates the seller is responsible for delivering the goods to a specific location — typically the buyer's doorstep or place of business.
The seller is responsible for all costs and risks associated with delivering the goods to the specified destination, including customs clearance. The buyer does not assume any responsibility until the goods are delivered and accepted.
However, it’s vital to know that DAP does not cover any unload, unpacking, or assembly costs that may be required once the goods reach their destination.
Key Differences Between FOB vs DAP
Now that you have a better understanding of the two shipping terms, let's take a closer look at some key differences between FOB and DAP.
The two main differences between FOB and DAP are the:
- Responsibility for transportation costs
- Point of risk transfer
FOB vs DAP: Transportation Costs
Under FOB arrangements, the buyer or seller may be responsible for paying transportation costs, depending on the agreement.
On the other hand, the seller is always responsible for paying transportation costs under DAP arrangements.
FOB vs DAP: Risk Transfer
Another key difference between FOB and DAP is when risk transfer occurs. As we mentioned earlier, ownership of the goods changes hands at the FOB point. This means that the buyer assumes all risks associated with the goods from that point forward.
Conversely, the risk remains with the seller until delivery is made under DAP arrangements. This means that the seller is responsible for any damage or loss that may occur during transit.
When to Use FOB vs DAP
Now that you know the key differences between FOB and DAP, you may be wondering when to use each shipping method. Both FOB and DAP can be favorable for the buyer because they shift most of the risk to the seller.
However, there are some key circumstances where one shipping method may be more advantageous than the other.
For example, if you're importing goods from another country, you'll likely want to use FOB terms. This is because FOB terms place the responsibility for paying transportation costs on the seller, which is often more advantageous for buyers.
Furthermore, if you're concerned about damage or loss during transit, FOB arrangements may be a better option because they shift responsibility for risk to the seller. It's also generally used when the buyer has a reliable and trusted shipping partner that they've used in the past. In this case, the buyer may feel confident enough to assume responsibility for the goods once they reach the FOB point.
On the other hand, DAP terms may be more favorable if you're importing goods from a country with high transportation costs. This is because the buyer is responsible for paying transportation costs under DAP arrangements, which can save buyers money.
It's often used when the seller wants to ensure that the goods are delivered safely to the buyer. This is typically the case when the buyer doesn't have a reliable shipping partner or when the goods are particularly delicate.
Of course, these are general guidelines — ultimately, it's up to the buyer and seller to decide which shipping method makes the most sense for their particular situation.
Get The Most Out Of Your Shipping Arrangements
Whether you're using FOB or DAP shipping arrangements, it's important to understand your agreement's details. This will help ensure that you're getting the most out of your shipping arrangement and that everyone is on the same page.
Now that you understand the key differences between FOB and DAP shipping arrangements, you'll be able to make informed decisions about which method is best for your needs. Be sure to keep the key points we covered in mind as you move forward with your shipping arrangements. Check out our guide on the difference between CIF and DDP.