September 13, 2022
The acronym “FOB” is an internationally accepted incoterm published by the International Chamber of Commerce (ICC). It means “Free on Board,” and it is often used to signify a point in the supply chain where the seller passes ownership to the buyer of the shipment. In every vendor/customer relationship, there should be FOB terms specified in their purchase order.
However, FOB terms only define shipping items specific to transit by sea and inland waterways, and it does not apply to air forwarding shipments, rail, or road transit. FOB specifies that the seller must carry on the loading of goods and the export process following the export country regulations. The distribution of risk and liabilities is done by splitting responsibilities between buyers and sellers regarding the place of origin and destination. Out of all the incoterms, FOB is the most frequently used one.
For the seller, the cost will be the price of goods as decided by both parties. This also includes the inland transit cost of goods until the shipment arrives at the destination port. The buyer will bear all charges after the shipping vessel departs the port, and they will cover freight proceedings after the destination port.
In addition, the buyer will carry out the import customs and duty charges when importing the shipment into the receiving country. The FOB value for the buyer and seller can be calculated per the costs mentioned above and per the FOB rules.
FOB in shipping consists of two types: 1) the FOB shipping point and 2) the FOB destination.
The difference between the two is significant in business and the shipping and logistics industry because it determines who is responsible for paying shipping costs and who will bear financial liability in case of loss, damage, or theft.
FOB Shipping Point - Buyer is responsible for the goods and products from the shipping dock point.
FOB Destination - The seller is responsible for the shipment until it reaches the receiving dock of the buyer.
Freight Paid - The seller will pay the cost of the shipping goods.
Freight Collected - The buyer will pay the cost of shipping the goods.
Freight: Collected and Allowed - The buyer pays the shipping cost but will deduct it from the payments.
Cost, Insurance, and Freight - The buyer gets the responsibility for goods from their point of origin. But the seller will pay for shipping and freight costs.
Under FOB terms, the seller of the shipment clears the goods for export and ensures they are delivered to and loaded onto the vessel for transport at the port of departure. The buyer then takes over the risks and costs, including import clearance, once the shipment is loaded onto the transport vessel at the port of departure.
In summary, FOB does not apply to shipments via air, ground, or rail. It only applies to ocean or inland waterway transport. FOB matters because it indicates when the risk of losses shifts from the seller to the buyer. Especially in international transactions, FOB terms are paramount for the parties involved in the transaction of the shipment, mainly for goods that are delicate or for items that are vulnerable to theft.
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