What Is Free on Board (FOB)?
Free on Board (FOB) is a shipment term that defines the point in the supply chain when a buyer or seller becomes liable for the goods being transported. Purchase orders between buyers and sellers specify the FOB terms and help determine ownership, risk, and transportation costs.
"FOB Origin" or FOB Shipping Point" means the buyer accepts the title of the goods at the shipment point and assumes all risk once the seller ships the product. The buyer is responsible if the goods are damaged or lost while in transit.
"FOB Destination" meansthe seller retains the title of the goods and all responsibility during transit until the items reach the buyer.
Key Takeaways
- Free on Board (FOB) is a term used to indicate when the ownership of goods transfers from buyer to seller and who is liable for goods damaged or destroyed during shipping.
- "FOB Origin" meansthe buyer assumes all risk once the seller ships the product.
- "FOB Destination" meansthe seller retains the risk of loss until the goods reach the buyer.
- FOB terms can impact inventory, shipping, and insurance costs.
Understanding Free on Board (FOB)
FOB is a common term used for all types of shipping, both domestic and international. Shipping orders and contracts often describe the time and place of delivery, payment,when the risk of loss shifts from the seller to the buyer, and which party pays the costs of freight and insurance.
The vendor-client transaction defines the FOB terms in the purchase order. FOB status does not determine ownership, which is determined in the bill of sale or agreement between the buyer and seller, but defines which party takes responsibility for the shipment, whether at Origin, where the shipment begins or at Destination, where the shipment ends.
Each party should have a firm understanding of free on board (FOB) to ensure a smooth transfer of goods from the vendor to the client. Regardless of whether that transfer occurs on the domestic or international level, FOB terms can impact inventory, shipping, and insurance costs.
FOB Origin vs. FOB Destination
FOB origin, or shipping point, means that the buyer will receive the title for the goods they purchased when shipment begins. The seller’s responsibility ends when the items are placed with a shipment carrier, and the buyer must ensure their goods reach their final destination on time and undamaged.
For FOB destination, the seller retains ownership of the goods and is responsible for replacing damaged or lost items until the point where the goods have reached their final destination.
For shipments internationally, especially for companies ordering large inventory for global shipment on vessels and containers, international contracts establish and outline provisions, including the time and place of delivery, payment terms, and FOB designation to define when the risk of loss shifts from the seller to the buyer and which party pays for freight and insurance.
The most common international trade terms are Incoterms, which the International Chamber of Commerce (ICC)publishes, but firms that ship goods within the U.S. must adhere to the Uniform Commercial Code (UCC).
Since there is more than one set of rules, and legal definitions of FOB may differ from one country to another, the parties to a contract must indicate which governing laws are being used for a shipment.
FOB and Company Accounting
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 at the same time.
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.
Other Shipping Terms
Although FOB Origin and Destination are the most familiar shipping terms, other terms include:
• FAS or Free Alongside: The seller must deliver goods on a ship that pulls up alongside a ship and close enough that the ship can use its lifting devices to bring the goods aboard.
• FCA or Free Carrier: The seller is obligated to deliver goods to an airport, shipping port, or railway terminal where the buyer has an established place of operation and takes delivery there.
• EXW or Ex Works: The seller prepares items for shipment from its location, but the buyer is responsible for picking the goods up and arranging shipment.
• DES or Delivered Ex Ship: The seller delivers products to a specified shipping port, where the buyer will take delivery on arrival.
What Is FOB Pricing?
The costs associated with FOBcan include transportation of the goods to the port of shipment, loading the goods onto the shipping vessel, freight transport, insurance, and unloading and transporting the goods from the arrival port to the final destination.
Who Pays Freight for FOB Origin?
If the terms include the phrase "FOB origin, freight collect," the buyer is responsible for freight charges. If the terms include "FOB origin, freight prepaid," the buyer assumes the responsibility for goods at the point of origin, but the seller pays the cost of shipping.
What Is the Difference Between FOB and CIF?
CIF (Cost, Insurance, and Freight) and FOB (Free on Board) are two widely used INCOTERM agreements. Although the definition of both terms can differ across countries and is ultimately determined by each vendor-client contract, historically, FOB transfers liability from seller to buyer when the shipment reaches the port or other facility designated as the point of origin. With a CIF agreement, the seller pays costs and assumes liability until the goods reach the port of destination chosen by the buyer.
The Bottom Line
Free on Board (FOB) is a shipment term that defines the point in the supply chain when a buyer or seller assumes responsibility for the goods being transported. FOB terms like FOB Origin and FOB Destination help define ownership, risk, and transportation costs for both buyers and sellers.
FAQs
FOB is a shipping term that stands for “free on board.” If a shipment is designated FOB (the seller's location), then as soon as the shipment of goods leaves the seller's warehouse, the seller records the sale as complete. The buyer owns the product en route to its warehouse and must pay any delivery charges.
Who is liable for free on board? ›
Free on board (FOB) definition
FOB origin, or FOB shipping, means the buyer takes responsibility at the point of origin of the freight. FOB destination means that the buyer only takes responsibility for freight once it reaches its destination, and the seller is liable for any damage.
Who pays for shipping on FOB destination? ›
FOB destination point, or FOB destination freight prepaid (DAP in Incoterms): The shipper pays the freight cost, and maintains ownership while goods are in transit. FOB destination point, freight collect: The buyer pays freight shipping fees upon delivery. The shipper assumes liability and ownership during transit.
How does FOB prepaid collect determine who is responsible for the freight charge? ›
FOB Destination freight collect and allowed.
The shipper owns and shares responsibility for freight until delivery, but the receiver deducts the freight charges from. As a result, the upfront invoice will include the charges shipper originally paid.
What are the responsibilities of Free On Board? ›
Free on Board (FOB) Shipping Terms
In FOB, the seller is responsible from the point of origin i.e. maintaining goods and transporting them till the delivery point. The loading of goods at the destination port is done by the seller. The processing responsibility after the delivery point rests with the buyer.
What does Free On Board cover? ›
When goods are bought or sold “Free on Board” (FOB) it means that the seller delivers the goods to a ship at a port previously agreed to by the seller and the buyer. The seller loads the goods onto the ship. The buyer then takes care of the import formalities and transportation to the final destination.
Who pays shipping if its free? ›
Does the Customer Pay? Let's say an item's retail price is $20, and it costs $5 to ship. If the retailer charges $25 and announces, “free shipping”, then the customer is paying. This approach is still common among many third-party sellers on sites like Amazon and eBay.
What is the responsibility of FOB shipper? ›
Under FOB shipping terms, the seller is responsible for all costs involved in the process up until the goods are on a vessel at the designated port. Once goods have been loaded onto the vessel the buyer is responsible for any costs and risks involved in the onward shipment.
Who covers shipping costs on FOB shipping point? ›
With a FOB shipping point option, the seller only pays transportation costs required to get the freight to the shipping dock, after which the buyer assumes all of the associated costs.
Who is responsible for damages in FOB? ›
The buyers must handle all of the claims and damages, assuming all related costs. Note that a freight hauler or shipping company is still liable for any damage caused in transit. However, in the case of FOB Origin, the carrier would work solely with the buyer and the buyer's insurance to settle any claims or disputes.
Free on Board, or FOB is an Incoterm, which means the seller is responsible for loading the purchased cargo onto the ship, and all costs associated. The point the goods are safe aboard the vessel, the risk transfers to the buyer, who assumes the responsibility of the remainder of the transport.
Is the buyer responsible for the payment of freight? ›
In shipping arrangements classified as FOB Destination, Freight Collect, the buyer is responsible for shipping costs. In FOB Destination, Freight Prepaid & Add arrangements, the seller pays for the shipping costs but then passes on the cost to the buyer.
What is the disadvantage of free on board? ›
A buyer can save money by using FOB Destination since the seller assumes costs and liability for the transportation. However, the disadvantage for the buyer is the lack of control over the shipment including shipment company, route and delivery time.
What are the two types of free on board? ›
There are two forms of FOB: FOB Origin (or FOB Shipping Point) and FOB Destination.
What are the disadvantages of FOB contract? ›
One of the main disadvantages for seller under FOB terms is that the exporter does not have any control over main carriage, import clearance and on carriage of goods to final destination. The tracking of shipping details is depended with the buyer as he undertakes main carriage and on carriage contract.
What does free on board mean for shipping? ›
Free on board, often abbreviated as “F.O.B.,” applies to the sale of goods and indicates that purchased property will be placed on board a vessel for shipment at a designated place without expense to the buyer for packing, potage, cartage, etc.
Does free on board include freight and insurance? ›
Definition: Free On Board (FOB) indicates that the supplier pays the shipping costs that usually also include the insurance costs from the point of production to a specified destination, at which point the buyer takes responsibility.
What is the difference between free on board and cost and freight? ›
Free on Board means the seller is responsible for the product only until it is loaded on board a shipping a vessel, at which point the buyer is responsible. With CFR, the seller must arrange and pay all costs to ship the product to a destination port, at which point the buyer becomes responsible.
Can you make the recipient pay for shipping? ›
Collect on Delivery (COD) is a service that allows the sender to collect from the recipient money for postage, fees, merchandise, or any combination thereof. Each COD item has an identification number, enabling delivery confirmation.
How do companies make money with free shipping? ›
By providing numerous shipping options, an online retailer can capitalize on the booming ecommerce experience to generate revenue streams through increased sales. Free shipping entices customers to purchase by wrapping all costs into the price of each item.
FOB means risk of loss transfers when the shipment is loaded on the vessel. It does not mean anything else. For this reason, the language provided by the buyer simply did not make sense. In fact, there is NO shipping term that provides for transfer of risk of loss under these terms.
Who is the person responsible for shipping? ›
A shipper is a person who is entrusted with the responsibility of transportation of goods and commodities. In the shipping industry, a shipper's role is very vital and something that can never be overlooked.
Does the seller have more responsibilities under FAS or FOB terms? ›
Shipping under FAS is easier for the seller as they have fewer responsibilities compared to FOB. But everything should be arranged with total coordination between both parties; otherwise, the seller may get complications when making the goods available at the port if not all documents are arranged beforehand.
Who pays for FCA shipping point? ›
Under the Free Carrier, or FCA Incoterm, the buyer is responsible for all freight costs. Find more information about Incoterms here.
Who is responsible for missing freight? ›
Every freight shipment is covered by limited liability, meaning the carrier is responsible for loss and damage under the Carmack Amendment. The amount of coverage is a set dollar amount per pound of freight determined by the carrier and based on the commodity.
Is the shipper responsible for loading? ›
It is the responsibility of the motor carrier and the driver to ensure that any cargo aboard a vehicle is properly loaded and secured.
Who is responsible for filing a freight claim the shipper or the receiver? ›
Whoever owns the freight while in transit has the responsibility for filing claims for loss and damage. Unless the purchase contract states otherwise, the F.O.B. point governs the transfer of title.
Is the seller responsible for the freight? ›
The seller pays for the carriage of the goods up to the named port of destination. Risk transfers to buyer when the goods have been loaded on board the ship in the country of Export. The Shipper is responsible for origin costs including export clearance and freight costs for carriage to named port.
Who bears the risk for Free On Board? ›
Key Takeaways. Free on Board (FOB) is a term used to indicate when the ownership of goods transfers from buyer to seller and who is liable for goods damaged or destroyed during shipping. "FOB Origin" means the buyer assumes all risk once the seller ships the product.
Who is responsible for insurance in FOB? ›
Under FOB contracts, the buyer is responsible for shipping and other costs, as well as insurance as soon as the goods are loaded onto the vessel and during the voyage. FOB contracts are generally more cost-effective because buyers have more control over shipping and insurance.
Free on board, often abbreviated as “F.O.B.,” applies to the sale of goods and indicates that purchased property will be placed on board a vessel for shipment at a designated place without expense to the buyer for packing, potage, cartage, etc.
What are the disadvantages of Free On Board? ›
A buyer can save money by using FOB Destination since the seller assumes costs and liability for the transportation. However, the disadvantage for the buyer is the lack of control over the shipment including shipment company, route and delivery time.
What is the buyer's responsibility under FOB terms? ›
Under FOB the exporter has to bear the cost and carry out the inland transportation till the goods reach the designated port and the buyer is responsible for the freight proceeding and the import arrangements after the vessel port.
Who is responsible for export clearance under FOB? ›
FOB means Free On Board and is when the seller takes care of all shipping documentation and delivers the goods to the ship. Once aboard, the transportation risk passes from the seller to the buyer. You then pay for the freight to get to your destination, but the seller pays for the export customs clearance.
Who bears FOB charges? ›
FOB freight prepaid and added specifies that the seller is obligated to pay the freight transportation charges. However, the seller bills the cost of transportation to the buyer. The seller assumes the risk of loss of or damage to goods during transportation because the seller owns the goods during transit.
Who has the risk of loss in FOB shipment? ›
Who Retains Risk in FOB Shipping Point? The seller is at-risk until the goods reach the shipping point. Once goods are shipped, the buyer is at-risk. If the goods are damaged in transit, the loss is the responsibility of the buyer.
Is FOB destination a liability? ›
FOB destination means the seller pays for sending and assumes all liability while items are in transit. Under an FOB destination agreement, the seller owns the items until the buyer gets them at delivery. The seller can transfer sending costs to the buyer, but they're still liable for items until delivery is complete.
Is FOB free on board or freight on board? ›
FOB stands for “free on board” or “freight on board” and is a designation that is used to indicate when liability and ownership of goods is transferred from a seller to a buyer. Free on Board: Free on board indicates whether the seller or the buyer is liable for goods that are damaged or destroyed during shipping.
What is the rule of FOB? ›
With FOB, the seller is responsible for loading the goods on the transport, while the buyer is responsible for everything else necessary to get the goods to the final destination.
What is the difference between cost and freight and free on board? ›
Free on Board means the seller is responsible for the product only until it is loaded on board a shipping a vessel, at which point the buyer is responsible. With CFR, the seller must arrange and pay all costs to ship the product to a destination port, at which point the buyer becomes responsible.
What is the difference between FOB and FAS? FOB means free on board, and differs from FAS in that the seller will pay the costs of export clearing and unloading.
What is free on board shipping vs destination? ›
In a FOB shipping point contract, the seller transfers any title of ownership to the buyer upon the product leaving the seller's location. The buyer then has full ownership. In a FOB destination sale contract, the buyer may not receive the title of ownership until the product reaches the buyer's location.
