What Is the Incoterm FOB (Free On Board)?

What Is FOB in Shipping

The FOB incoterm is a commercial shipping arrangement exclusive to inland waterway freight and ocean transport. Unlike other incoterms set by the International Chamber of Commerce (ICC), the risks and responsibilities under FOB rely heavily on specific terminology. Here are the four different ways FOB is used in shipping:

• FOB Origin, Freight Collect: FOB Origin, or FOB Shipping Point, dictates that the seller’s responsibility ends once the goods are loaded onto the vessel at the point of origin, such as a port. The buyer covers the cost and risks from that point onwards, including the main carriage charges, under Freight Collect (see below).

• FOB Origin, Freight Prepaid: The point of transfer of responsibility is the same while the seller also covers the cost of the main carriage.  

• FOB Destination, Freight Collect: FOB Destination highlights that the seller is responsible for the goods until their delivery to the buyer’s specified destination. The buyer pays for the maritime transport and all subsequent costs.

• FOB Destination, Freight Prepaid: The seller’s responsibility extends till the goods are received at the destination. They also cover the main carriage charges in advance.

Key Features of FOB

Here are the core features of the FOB incoterm:

Seller’s Obligations Under FOB

Under FOB, sellers are responsible for export packaging and marking, handling all export formalities, loading onto the vessel, and notifying the buyer of the successful delivery of goods. However, the precise obligations rely heavily on the terminology used in the sales contract. Generally, sellers assume all costs and risks until the goods are loaded onto the vessel at the origin port. Additionally, under “FOB Origin, Freight Prepaid,” they must also pay for the main carriage transport and assume all risk until the goods reach the buyer’s chosen destination.

Buyer’s Responsibilities

Under FOB, the buyer is generally responsible for the main carriage charges unless Freight Prepaid is specified. They must pay for all costs and bear liability from the point the goods are loaded to their final delivery point. This includes insurance, import customs clearance and taxes, and unloading at the final destination. If FOB Destination is used, then buyers are only responsible for the goods after delivery to their specified destination.

Designated Place for Delivery and Risk Transfer

In FOB Origin, all risk transfers to the buyer when the goods are loaded onto their carrier at the point of origin. In FOB Destination, the delivery point is the buyer’s specified destination. Risk transfers from the seller to the buyer once the goods reach this location.

Advantages of FOB

Here are the primary advantages of using FOB:

For the Seller

• Clear transfer of risk upon goods boarding or at the delivery destination, depending on the term used

• Reduced responsibility post-loading (in case of FOB Origin)

• Flexibility in choosing the level of responsibility over the goods by specifying the precise FOB term

• Easier to ensure quality control under FOB Destination

• Freedom to choose a FOB term that aligns with their cost management strategy

For the Buyer

• Flexibility in selecting the right carrier and choosing the best delivery method

• More control over international transportation and logistics

• Freedom to negotiate the level of responsibility by choosing the precise FOB term

• Enhanced cost efficiency by not having to rely on the seller’s specified delivery method  

• Greater transparency of responsibilities due to clear specification of point of risk transfer

Disadvantages of FOB

Here are the possible disadvantages of using FOB:

Challenges for the Seller

• Possible complications in coordinating with the buyer’s carrier

• Extended level of risk in case of FOB Destination

• Handling all export clearance duties, tax, and other formalities

• Main carriage expenses in case of FOB Prepaid

• Limited control over transport and logistics, making it harder to ensure satisfaction

Challenges for the Buyer

• Responsibility for international shipping logistics

• Assumption of risks and costs once goods board the vessel

• Bearing all import customs clearance formalities, including fees and documentation

• Lack of control over the shipping process in case of FOB Destination

When to Use FOB

FOB only applies to inland waterways and ocean freight. This incoterm should be used for bulk, non-containerized cargo as it is the seller’s responsibility to load the goods onto the vessel. They cannot load containerized cargo as it has to be sent to a container yard, not the origin port. 

FOB is also preferred when there is a specified origin or destination point, leading to clarity in roles and responsibilities. Buyers often consider FOB when they desire flexibility in choosing their own carrier, specifically “FOB Origin, Freight Collect.” This term also appeals to sellers who wish not to undertake additional responsibility and costs.

FAQ

What is the difference between FOB and FAS?

The primary difference between FOB and FAS (Free Alongside Ship) is that in the former, the seller is responsible for loading the goods onto the vessel. In the latter, the seller’s responsibility ends once the goods are placed alongside the vessel.

Who pays the freight shipping charges in FOB Origin?

In FOB Origin, the buyer pays for the shipping if the term “Freight Collect” is specified alongside. In the case of “Freight Prepaid,” the seller will pay for the main carriage even though their liability ends once the goods are loaded onto the vessel.