Free On Board (FOB) in Shipping: Meaning, Incoterms & Pricing

FOB (Free On Board) stands as an essential Incoterm (International Commercial Term) that international traders often use. Under the FOB provision, sellers transfer goods ownership to buyers at a predetermined shipping point.

With FOB (Free On Board), the seller fulfills their duties when their goods reach full loading status upon vessel departure from the shipment port.
The goods pass from seller responsibility to buyer responsibility when they clear the named port's ship rail.

Key Takeaways:

The exporter, who functions as the seller, is responsible for export clearance procedures as well as loading the products and performing cargo transfer to the shipping port.
Importers (Buyers) take ownership responsibility for the goods starting from the time of cargo loading until all responsibilities related to main carriage and import clearance and insurance are complete.

The FOB method assists international traders by clarifying their duties as well as their obligations toward each other, which leads to efficient worldwide business transactions. Defining the delivery point as the port of shipment and understanding cost and danger transfers enables parties to prevent disputes between each other.

Usage of FOB

The FOB agreement is frequently employed throughout ocean and inland water transportation activities. FOB becomes viable when sellers dispatch their goods through maritime transportation. The buyer becomes responsible for all costs and risks at the moment the goods are placed onto the vessel.

Types of Freight on Board (FOB)

The shipping term FOB defines which party between buyer and seller becomes responsible for the goods during shipping activities. There are two main types:

FOB Shipping Point (FOB Origin):

The buyer obtains ownership rights at the time the goods depart from the seller’s geographical position.

During shipping, the buyer is completely accountable for every type of damage or loss to the goods.

When purchasing goods through FOB, the buyer is responsible for the shipping fees.

FOB Destination:

From the point of origin, the seller gains possession of goods as they transfer to the buyer.

During shipping, the seller remains accountable for any product-related destruction and goods disappearance.

Typically, it is the seller who covers delivery costs.

The decision between FOB destination and FOB shipping affects both costs and risk and accounting methods. International trade describes FOB with Incoterms as a standardized system of worldwide shipping guidelines.

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Exporter Responsibility (Seller’s Responsibility)

The exporter (seller) has several obligations when using the FOB Incoterm, which include delivering items to the port of shipment followed by vessel loading responsibilities.
Delivery of Goods: A seller must transfer goods to their shipping port while handling the vessel loading that the buyer selected.

Customs Export Clearance: The exporter needs to conduct all export customs procedures, including foreign customs clearance, within their home country boundaries.
Loading onto Vessel: The seller covers the expenses required for vessel loading, which includes port of shipment terminal handling charges, together with costs for putting the goods aboard.

Risk Until Loading: Through Risk Until Loading, the seller bears complete responsibility for costs alongside all risks that precede vessel loading of the goods. Upon loading of the goods onto the vessel, the buyer becomes responsible for the goods' risks.

Provision of Documents: The seller must deliver documents such as a commercial invoice together with a packing list and certificate of origin to the buyer.

Transportation Costs: The seller must pay all transportation expenses starting from port departure until completion at the shipment port. These charges encompass sea freight costs and terminal fees for both countries, together with import customs clearance expenses.

Importer Responsibility (Buyer’s Responsibility)

Buyers should take custody responsibility as soon as the products are loaded onto the vessel within the shipment port. The buyer’s responsibilities include:

Risk Transfer: After the boats carry the cargo at the port of loading, the risk moves entirely to the buyer, who becomes responsible for any transit harm or damage.
Cost of Freight: The purchaser must bear all costs that arise from ocean shipping freight services between the port of origin and the destination port.
Import Customs Clearance: After ship-to-buk loading at the port of shipment, the buyer must handle customs clearance requirements and must pay both import fees and taxes, along with handling expenses in their destination country.
Insurance: Marine insurance should be arranged by the buyer for the goods starting from ship loading until they reach their intended destination.
Receiving Goods: After delivery to the destination port, the buyer takes over the goods before organizing their eventual transport to the specified address.

International Chamber of Commerce Clarification/Guidance of FOB Incoterm

FOB usage guidelines from the International Chamber of Commerce (ICC) under Incoterms 2020 define several important rules, including these main factors:

Port of Shipment: The exact term FOB needs to be specified at a particular shipping port, such as FOB Shanghai, to establish where the vessel will load the goods.
Freight Costs and Risk: Under FOB, the seller becomes responsible for bearing the freight expenses only until the goods are placed onto the vessel at their designated shipping port. From the time the goods get on the vessel at the designated port, the buyer takes responsibility for the main carriage and specific insurance costs.
Freight Charges: The seller can handle shipping, but the buyer becomes responsible for both shipping expenses and cargo risks from when goods board the vessel according to terms that include freight charges in the price.
Customs and Documentation: The seller must specify all required documents for export, together with documentation requirements during import, which the buyer needs to understand.

Where and When to Apply FOB

Sea Freight: Companies use FOB mainly for maritime transport across seas and inland waterways, particularly in these cases:
Port-to-Port Shipments: One country transports goods to another through maritime shipping methods, which fall under the FOB agreement. FOB applies to shipping operations that link two ports directly without undergoing inland transport before ship loading takes place.

It is important to note that FOB is not suitable for air transport, road freight, or rail transport, as it is specifically related to sea-based shipments.

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Conclusion

FOB (Free On Board) serves as an extensively adopted Incoterm that separates shipping duties between sellers and buyers for transactions across international trade. Applications of FOB work best in deals that use sea transportation because sellers finish their duties after the loading phase at the shipment port, followed by buyers taking over responsibilities and costs.

Frequently Asked Questions

1. What are FOB & CIF?
Under FOB (Free on Board) terms, sellers become responsible only when they perform vessel-loading of their goods. CIF (Cost, Insurance, Freight) mandates sellers to secure transit shipment and insurance services up to the destination port until the buyer takes control.

2. What is an example of FOB?
The U.S. retailer procures electronics from China through Free on Board terms. When Chinese sellers complete vessel loading of goods for U.S. buyers, those buyers take responsibility for paying freight and insurance costs along with import duties after the cargo leaves the departure port.

3. What is FOB cost?
Under the FOB pricing structure, sellers are responsible for paying all costs that happen before ship loading occurs. The cost framework of FOB includes all manufacturing costs along with packaging expenses, transportation fees and export taxes, and loading expenses. The buyer absorbs expenses occurring after the shipment leaves its initial point.

4. Who pays FOB?
The seller, under FOB terms, bears expenses until shipment completion at the vessel. Following the loading of the goods onto the vessel, the buyer takes responsibility for freight expenses, insurance payments, and terminal unloading and destination delivery costs. They simultaneously assume all risks related to the shipped merchandise.

5. How do you calculate FOB?
FOB cost = Cost of goods + Local transport + Export fees + Loading costs. The costs between the supplier warehouse and departure port are explicitly stated to buyers while shipping, insurance, and destination import duties are excluded from this total.