The determination on who will pay for the freight costs of goods delivered
What is Freight On Board (FOB)?
Freight on Board (FOB), also referred to as Free on Board, is an international commercial law term published by the International Chamber of Commerce (ICC). It indicates the point at which the costs and risks of shipped goods shift from the seller to the buyer.
In modern domestic shipping, the term is used to describe the time when the seller is no longer responsible for the shipped goods and when the buyer is responsible for paying the transport costs. Ideally, the seller pays the freight charges to a major port or other shipping destination and the buyer pays the transport costs from the warehouse to his store or vendors.
The determination of who will be charged the freight costs is usually indicated in the terms of sale. If the Freight On Board is indicated as “FOB delivered,” the seller or shipper will be wholly responsible for all the costs involved in transporting the consignment. Where the FOB terms of sale are indicated as “FOB Origin,” the buyer is responsible for the costs involved in transporting the goods from the seller’s warehouse to the final destination.
It is important to note that FOB does not define the ownership of the cargo, only who has the shipping cost responsibility. The ownership is defined by the bill of lading or waybill.
History of Freight on Board (FOB)
The term “freight on board” originated from the days of sailing ships when goods were “passed over the rail by hand,” as defined in Incoterm. The term “FOB” was used to refer to goods transported by ship since sea transport was the main method of transporting cargo from far countries. The term’s usage has changed since then, and its definition varies from one country and jurisdiction to another. The phrase “passing the ship’s rail” was dropped from the Incoterm definitions in the 2010 amendment.
In North America, the term “FOB” is written in asales agreementto determine when the liability and responsibility for the shipped cargo transfers from the seller to the buyer. When it is indicated as “FOB Origin,” it means that the transfer occurs at the seller’s shipping dock when the goods are safely on board the ship.
The buyer takes responsibility for the transport cost and liability during transportation. “FOB Destination” means that the transfer completes at the buyer’s store and the seller is responsible for all of the freight costs and liability during transport.
Due to the need to eliminate confusion with the North American definition of FOB, the usage of the Incoterms should be disclosed, along with the Incoterms edition. For example, a cargo whose final destination is Vancouver should be written as “FOB Vancouver (Incoterms 2000).”
Costs Associated with Freight on Board
Freight On Boardis an international legal term that requires a seller to deliver goods on board a shipping vessel to the buyer. The seller is required to meet his obligations regarding the goods. The costs associated with shipping goods from the seller’s warehouse to the buyer’s store include transport costs to the port of shipment, loading goods onto a shipping vessel, marine freight transport, unloading costs, insurance, and costs of transporting the goods from the arrival port to the final destination.
Under FOB origin, the buyer/receiver of goods will pay for all the above costs associated with transporting the goods. For example, if a buyer in Vancouver buys basketball shoes from a seller in Chengdu, China, he must pay for the transport costs from the seller’s warehouse to the port, cost of loading goods onto a ship, and all transport costs from the shipping port to his warehouse/store. The buyer also assumes the risk of transporting the goods from China to Vancouver, and he must purchase insurance coverage for the goods in transit.
FOB Add-on Terms
Some add-on terms may be included on the freight invoice, bill of lading, or other forms of shipping documentation. These add-on terms may include the following:
FOB Origin, Freight Prepaid: The seller/shipper pays the cost of shipping while the buyer/receiver of goods assumes the responsibility of goods at the point of origin.
FOB Origin, Freight Collect: The buyer pays for freight and shipping costs and assumes full responsibility for the cargo.
FOB Origin, Freight Prepaid, & Charged Back: The seller does not pay the cost of shipping, but instead adds the freight costs to the invoice sent to the buyer. The buyer pays the bill on a more expensive invoice since the freight costs were included on the invoice. The buyer also takes ownership of the goods and assumes liability at the point of origin.
FOB Destination, Freight Prepaid: The seller/shipper pays all the shipping costs until the cargo arrives at the buyer’s store. The buyer does not pay any shipping costs.
FOB Destination, Freight Collect: The receiver of goods (the buyer) pays the freight charges upon delivery of the goods. The buyer does not take ownership or liability for the goods until the cargo gets to the buyer’s premises.
FOB Destination, Freight Prepaid, & Charged Back: The seller takes responsibility for freight until delivery of the goods, and the buyer deducts the charges from the invoice. The original invoice includes the freight charges initially paid by the seller.
FOB Destination, Freight Collect, and Allowed: The shipper adds the freight costs to the invoice, and the buyer pays the charges. The seller assumes the responsibility for the cargo until delivery.
Difference between CIF and FOB
Both Cost, Insurance, and Freight (CIF) and Freight on Board (FOB are international shipping terms used in the transportation of cargo from the seller to the buyer. Although both terms are used in a similar manner, their definitions vary from country to country.
In CIF agreements, the costs of transporting goods from the seller to the buyer are assumed by the seller. The seller pays insurance, transportation costs, and other costs associated with the transit of goods until the buyer takes possession of the goods.
Other Resources
Thank you for reading CFI’s guide to FOB. For more cost information, CFI recommends the following free resources:
FAQs
Freight on board, also known as free on board, refers to a set of Incoterms that govern who owns and pays for a shipment when traveling overseas. Although its original definition was used exclusively for seafaring transport, modern use of the term can be applied to all shipment modes of transit.
How do you fill out a FOB invoice? ›
FOB Destination is written out as the destination city. For example, if a company was shipping its goods to New York City, it would be written out as FOB New York.
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.
Who pays for loading for shipment under FOB? ›
Indicating "FOB port" means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays the cost of marine freight transport, insurance, unloading, and transportation from the arrival port to the final destination.
What is an example of a FOB? ›
Examples of FOBs in the Usage
FOB shipping destination, freight prepaid by the seller – The seller pays all the cost, and the buyer owns responsibility only after receiving the shipment. The buyer will not pay any shipping costs.
Is FOB short for free on board? ›
Free on board (FOB) is a shipping term that indicates whether the seller or buyer will be responsible for ensuring that goods are safely loaded onto a vessel at the port of shipment.
Does FOB price include freight? ›
FOB is free on board, also known as freight on board. It is a term commonly used for international shipping. It signifies a transportation term used to indicate that the selling price of the goods includes delivery at the seller's expense only up to a specified point.
What is the calculation for FOB? ›
FOB Value = Ex-Factory Price + Other Costs
(b) Other Costs in the calculation of the FOB value shall refer to the costs incurred in placing the goods in the ship for export, including but not limited to, domestic transport costs, storage and warehousing, port handling, brokerage fees, service charges, et cetera.
What is the FOB amount? ›
The FOB (Free On Board) price is the price of goods at the frontier of the exporting country or price of a service provided to a non-resident. It includes the values of the goods or services at the basic price, the transport and distribution services up to the frontier, the taxes minus the subsidies.
Who pays for freight at FOB shipping point? ›
In FOB shipping point, the seller pays for the shipping costs to bring the goods to the shipping point. The buyer is then responsible for paying the shipping costs to take possession of the goods.
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.
Do you include FOB in inventory? ›
Goods shipped F.O.B. destination are included in the purchaser's inventory while the goods are in transit. When the goods are shipped with terms of FOB destination, the inventory will be included in the seller's stock while the goods are in transit and till they don't reach the buyer's destination.
Who pays for freight on free on board? ›
FOB Origin, Freight Collect: The buyer pays for freight and shipping costs and assumes full responsibility for the cargo. FOB Origin, Freight Prepaid, & Charged Back: The seller does not pay the cost of shipping, but instead adds the freight costs to the invoice sent to the buyer.
What are the disadvantages of FOB? ›
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.
What are the two types of FOB? ›
There are two types of FOB, which are FOB destination and FOB shipping point. The type of FOB to be used is typically designated in a customer's purchase order, and is also stated on the supplier's invoice to the customer.
What is the difference between FOB and freight? ›
The primary difference between using cost and freight (CFR) and free on board (FOB) shipping lies in who must pay for various shipping or freight costs—the buyer or the seller. The terms refer to the point at which transfer of responsibility for goods shipped occurs, from the seller/shipper to the buyer/receiver.
What are the most common FOB terms? ›
However, overall, the most common FOB term is FOB Origin, Freight Collect. This means that the buyer immediately assumes ownership and liability when the seller loads the goods on the freight carrier. Basically, the seller can mark the goods as “complete” in their books and the buyer handles the rest.
What are the benefits of FOB? ›
Most buyers choose FOB because it's arguably the most affordable or cost-effective option. Under the FOB terms, buyers do not usually pay the higher fees that CIF protection plans incur. With Free On Board, the buyer has more flexibility and control of the terms, the cost, freight planning, and more.
What is the formula for calculating freight? ›
Trucking rates are calculated on a per-mile basis. First, take the mileage between the starting and destination points. Then divide the total rate by the number of miles between destinations to get your trucking freight rate.
FOB Origin (Freight Prepaid): Buyer pays shipping/Buyer assumes responsibility for goods at the point of origin. FOB Destination (Freight Collect): Buyer pays shipping/Shipper assumes responsibility during transit.
What is FOB free on board pricing? ›
The FOB (Free On Board) price is the price of goods at the frontier of the exporting country or price of a service provided to a non-resident. It includes the values of the goods or services at the basic price, the transport and distribution services up to the frontier, the taxes minus the subsidies.
What are the two types of shipping FOB? ›
There are two types of FOB, which are FOB destination and FOB shipping point. The type of FOB to be used is typically designated in a customer's purchase order, and is also stated on the supplier's invoice to the customer.
What is the difference between freight and FOB? ›
The primary difference between using cost and freight (CFR) and free on board (FOB) shipping lies in who must pay for various shipping or freight costs—the buyer or the seller.
