Free On Board Shipping: Meaning, Incoterms & Pricing

what is fob shipping

In all the rules, the seller bears all risks of loss or damage to the goods until they have been “delivered” in accordance with A2 described above. Despite their convoluted language largely drafted in legal speak, it is the responsibility of all parties involved in a shipment to be sure they understand all incoterms. If these terms are miscommunicated, a simple shipment may turn into a wildly expensive mishap fairly quickly. If the export shipment is sent Freight Collect, the freight charges will be ‘collected’ by the Consignee.

Enhanced control and management

what is fob shipping

The seller does not have the risk beyond the delivery point, so it has no obligation to the buyer to arrange a contract of insurance. This ship’s rail concept was removed in the Incoterms® 2010 version, and now, “on board” is typically taken to mean when the goods are safely on the deck or in the hold. In each of the rules, the buyer must pay the price for the goods as stated in the contract of sale. 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. 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. The point of risk transfer from seller to the buyer depends on whether you’re using FOB origin or destination.

The FOB Incoterm is similar to the FCA Incoterm, the only difference being the risk transfer point upon complete loading of goods is not specifically mentioned in the FCA Incoterm. FOB stands for either “free on board” or “freight on board.” The term is used to designate buyer and seller ownership as goods are transported. Simultaneously, while the treadmills have not yet been delivered, the buyer has now officially taken responsibility for the goods.

What does FOB Mean in Shipping Terms?

In this guide, we’ll explain everything you need to know about FOB shipping point. The most usual such document is the certificate of origin, but in practice, it is unusual for the seller to charge the buyer with the relatively insignificant cost of this. In all rules, there is no obligation from the buyer to the seller regarding packaging and marking. There can, in practice, however, be agreed exceptions, such as when the buyer provides the seller with labels, logos, or similar. FOB, like all the multimodal rules, is suitable for both domestic and international transactions.

  • The seller must also assist the buyer with any information or documents the buyer will need for its import clearance formalities (at the buyer’s request, risk, and cost).
  • 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.
  • The “and allowed” phrase indicates that the seller adds shipping costs to the invoice, and the buyer agrees to pay, even if the seller manages the shipment.
  • This can raise questions about their ability to meet delivery deadlines and is a significant risk for FOB Destination transactions.

Free on Board (FOB) Incoterms 2020 rule – introduction, history, and uses

The entire shipping process, from carrier selection to route decisions, is in the seller’s hands. For FOB Origin, after the goods are placed with a carrier for transport, the company records an increase in its inventory and the seller records the sale. For FOB Destination the seller completes the sale in its records once the goods arrive at their final destination, and the buyer records the increase in its inventory at that time. In this arrangement, the seller retains liability for the goods until they are delivered to the buyer. This means the seller bears the risk of loss, damage, or destruction during transit, which can impact their reputation and profitability.

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Minimizes seller’s risk after shipment

The seller must still (at its own cost) provide the buyer with proof that the goods have been delivered on board, whether that be a mate’s receipt, some other form of receipt, or a transport document such as a bill of lading. The seller must also assist the buyer with any information or documents the buyer will need for its import clearance formalities (at the buyer’s request, risk, and cost). How do the costs and risks get split at the point while the goods are suspended above the ship’s rail?

If the responsible party does not accept liability, should damage or another event occur, that could result in the filing of a claim. As a result, shippers need to understand this term, how it impacts responsibilities and obligations when transporting goods and who is on the proverbial hook. The buyer is not responsible for the goods during transit; therefore, the buyer often is not responsible for paying for shipping costs. The buyer is also able to delay ownership until the goods have been delivered to them, allowing them to do an initial inspection prior to physically accepting the goods to note any damages or concerns. There are many reasons FOB is important to the shipping process, but it becomes most essential in situations where damages occur in the shipping process. In fact, some receiving ports will refuse the delivery of damaged goods in many cases where the FOB does not clearly state where responsibility lies.

By working with an expert, like Cerasis, shippers and receivers alike can rest assured, the process will be handled according to law and within the ICC requirements. Broadly, the use of FOB destination places ownership and assumption of risk on shippers while in transit. In other words, the use of destination means shippers are responsible for a product until received at the destination. Similarly, origin means receivers take responsibility for the product when it is loaded at the point of origin. Although the word free is used in the term, it does not negate the shipping cost for goods. It simply refers to who has the obligation and liability for a shipment while in transit.

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