Free On Board (FOB) Explained: What Does Free On Board Mean? Free On Board and Incoterms
One of the most prevalent incoterms used in international shipping is Free On Board (FOB).
Incoterms act as a common language for buyers and sellers across the globe, eliminating ambiguities and ensuring everyone is on the same page.
The latest version, Incoterms 2020 is the current standard used in international contracts. Incoterms 202 comprises 11 incoterms, each applicable to different points in the international shipment process.
What Are Incoterms?
“Incoterms” is the shortened version of “International Commercial Terms.” They are a group of three-letter business terms that were created by the International Chamber of Commerce (ICC) and are used in many international trade agreements.
They define the responsibilities of sellers and buyers in international trade contracts. They clarify crucial aspects like:
Delivery Points
Incoterms specify the exact point at which the seller’s responsibility for the goods ends and the buyer’s responsibility begins. This includes designating the specific location where the goods must be delivered (e.g., port, airport, terminal) and whether the seller is responsible for loading the goods onto the departing conveyance (e.g., truck, ship, airplane).
Risk Transfer
Incoterms establish the precise moment at which the risk of loss or damage to the goods transfers from the seller to the buyer. This is a critical factor as it determines which party is liable for any loss or damage that occurs during transportation.
Incoterms like FOB clearly outline that the risk transfers to the buyer once the goods are loaded onto the ship at the designated port of origin.
Costs
Incoterms clearly state which party handles costs associated with various aspects of the international shipment. This includes costs for transportation (from the origin point to the destination point), loading and unloading charges, customs clearance fees, and insurance.
What does FOB mean?
FOB stands for Free on Board meaning it signifies that the seller is responsible for delivering the goods to a designated port and loading them onto the buyer’s chosen vessel.
Once the goods are safely on board the ship, the risk of loss or damage and all subsequent transportation costs become the buyer’s responsibility.
How is “FOB” Used in Shipping Documents?
The specific port of shipment is typically included alongside the FOB term in sales contracts and shipping documents.
This clarifies the exact location where the seller’s obligations cease and the buyer’s begins.
For instance, “FOB Shanghai” indicates that the seller is responsible for delivering the goods on board the vessel at the port of Shanghai.
Including the port is crucial for determining the extent of the seller’s responsibilities.
In some cases, contracts might specify an even more precise location within the port, such as a particular terminal or berth. This additional level of detail can be helpful in complex situations where there are multiple terminals or berths at the port.
It’s important to note that FOB incoterms meaning can be used for various modes of transportation, not just maritime shipping.
What Are Free On Board (FOB) Terms?
FOB incoterms can be further specified by adding a location, such as:
FOB Origin: The seller’s responsibility ends once the goods are loaded onto the FOB shipping point or the departing vessel at the origin port.
FOB Destination: FOB destination meaning the seller assumes responsibility for all costs and risks until the goods are unloaded at the destination port.
FOB is less common than FOB origin, as most buyers prefer to take control of the goods and manage transportation costs from the origin port onwards.
How to Handle FOB Issues?
Clear communication and a well-defined sales contract is necessary to avoid misunderstandings with FOB terms.
Clearly specify the incoterm and location in the sales contract, which includes mentioning “FOB” followed by the designated port. Be as specific as possible to avoid any ambiguity regarding the delivery point and risk transfer.
Ensure both parties understand their respective responsibilities. Before finalizing the agreement, discuss the free on board incoterms with your buyer or seller to ensure a clear understanding of each party’s obligations concerning delivery, costs, and risk transfer.
Purchase adequate cargo insurance. While FOB transfers risk to the buyer upon loading, unforeseen events can still occur during transport. Both seller and buyer may want to consider purchasing cargo insurance to protect against potential losses or damage.
Maintain open communication throughout the shipping process. Regular communication between seller and buyer is crucial, especially when dealing with complex logistics or potential delays.
What Does FOB Mean Around the World?
FOB is a widely recognized incoterm used in international trade across the globe.
Due to its standardized nature, it facilitates clear communication between international businesses. However, it’s always recommended to double-check local regulations and customs procedures at the origin and the destination ports.
In some cases, there might be slight variations in the interpretation or implementation of incoterms depending on the specific country. Consulting with a freight forwarder or customs broker familiar with the relevant regulations can help avoid any unexpected surprises during the shipping process.
What Is The Difference Between Free On Board (FOB) and Free Alongside Ship (FAS)?
Both FOB and Free Alongside Ship (FAS) incoterms are commonly used in international trade, but they differ in terms of the seller’s responsibility regarding the loading process at the port of shipment.
Under FOB, the seller is obligated to deliver the goods on board the buyer’s chosen vessel. Free on board shipping means the seller is responsible for arranging and paying for the loading process, which includes coordination with dockworkers, use of any necessary equipment (such as cranes or forklifts), and ensuring the goods are safely secured on board the ship.
In contrast, FAS incoterms require the seller to deliver the goods alongside the ship, typically on a quay or dock at the port.
The onus then falls on the buyer to arrange and cover the costs of loading the goods onto the vessel. Therefore, FOB incoterms place a greater burden on the seller compared to FAS, as FOB includes the responsibility and cost of loading.
What Is The Difference Between Free On Board (FOB) and Cost and Freight (CIR)?
Both FOB and CFR involve the seller delivering the goods to a designated port. However, under FOB, the specific location of delivery within the port is typically the ship’s railing or hatch. In contrast, CFR delivery can occur elsewhere within the port, such as alongside the vessel on a quay or dock.
Both FOB and CFR transfer the risk of loss or damage to the buyer once the goods are loaded on board the ship at the origin port. This means that if the goods are lost or damaged during transportation, the buyer bears the financial loss.
The key difference between FOB and CFR lies in their cost allocation. Under FOB, the seller’s responsibility ends with loading the goods on board. The buyer is then responsible for all subsequent costs, including:
- Ocean freight charges for transporting the goods from the origin port to the destination port.
- Terminal handling charges at the destination port.
- Customs clearance charges at the destination port.
- Inland transportation charges for moving the goods from the destination port to their final delivery location.
What Is The Difference Between Free On Board (FOB) and Cost Insurance Freight (CIF)?
Similar to FOB and CFR, the seller delivers the goods to a designated port. There’s no difference in the delivery point itself under these incoterms.
When it comes to FOB, risk transfers to the buyer upon loading on the vessel at the origin port.
CIF places risk to the buyer at the same point as FOB and CFR (upon loading at the origin port), but with an added layer of protection.
Under CIF incoterms, the seller is obligated to obtain minimum insurance coverage for the goods against loss or damage during transportation.
This means that if the goods are lost or damaged while in transit, the buyer can file a claim with the insurance company arranged by the seller to recoup some or all of their financial losses.
Who Should Use Free On Board (FOB) Incoterm?
FOB incoterms can be a suitable choice for several scenarios:
If the buyer has experience managing international freight forwarding and customs clearance processes, FOB can offer them greater control over transportation costs from the origin port onwards.
FOB can be a good option for sellers who want to offer a competitive price by excluding their own transportation and insurance costs.
For bulk goods with lower per-unit value, the buyer might prefer the flexibility and potentially lower transportation costs associated with managing their own freight from the origin port.