Free on Board (FOB) Shipping Explained
In this article, learn about:
How FOB determines when responsibility and risk shift between seller and buyer.
The main ways FOB can affect your shipments
FOB’s impact on costs and processes, and how the term influences risk management
If you’ve ever lost or had goods damaged when shipping via waterways, it won’t be a surprise to learn that liability, risk, and responsibility are more complex than the rules on land. Fortunately, there is a set of terms and rules, referred to as Incoterms®, set by the International Chamber of Commerce to determine core responsibilities when shipping by vessel.
With global trade and shipping at an all-time high, suppliers should be aware of a term used for nearly a century: Free on Board (FOB). Keep reading to learn what this term means and how to select the best type for your business.
FOB Meaning
Free on Board (FOB) is a core shipping term used in international trade that determines when and where responsibilities, costs, and risks transfer from a seller to a buyer. The term is crucial to help avoid surprise costs and unnecessary logistics risk.
It should be noted that FOB can mean free on board or freight on board. These terms are both accurate and can be used interchangeably. You will also hear Free on Board referred to as a rule, term, or Incoterm® (an internationally recognized trade rule).
FOB’s Core Identifiers
The most important thing to note about the FOB rule is that it only applies to goods transported by water, either by ocean, sea, or inland waterways like rivers or lakes.
FOB terms apply only when goods are loaded directly onto a ship or watercraft. They do not apply to containerized cargo, since containers are packed and sealed on land before being transported to the vessel.
FOB Origin (FOB Shipping Point) v. FOB Destination
Free on Board is classified in two categories – FOB Origin and FOB Destination. Think of FOB (Free on Board) as an umbrella term, with two subcategories.
FOB Origin / FOB Shipping Point: The buyer takes on most responsibility and risks early in the shipping process. This is most commonly utilized in international shipping over waterways. Once the Bill of Lading (BOL) is signed by the carrier, the risk and control of goods are transferred to the buyer.
FOB Destination: Most commonly used for domestic waterways, the buyer only assumes responsibility and risk once goods arrive at the specified location determined by the buyer (such as a warehouse or loading dock).
Comparing FOB Origin and FOB Destination
Determining which terms work best for a shipment is complex and nuanced, and many factors should be considered. Here are the key differences between FOB Origin and FOB Destination:
| FOB Origin (Shipping Point) | FOB Destination |
Transportation Costs | Buyer handles costs from seller's location to final destination. | Seller handles costs until goods reach buyer's destination. |
Risk of Loss/Damage | Transfers to buyer once goods leave seller's location. | Remains with seller until goods reach buyer's destination. |
Shipping Arrangements | Buyer handles arrangements from seller's location. | Seller handles arrangements until goods reach buyer's destination. |
Insurance | Buyer typically arranges and pays. | Seller generally arranges and pays. |
Customs & Import Duties | Buyer is responsible for clearance and paying duties. | Seller is responsible for clearance and paying duties. |
Price of Goods | Typically lower, excludes transport costs beyond origin. | Generally higher, includes transport costs up to destination. |
Ownership in Transit | Buyer owns goods in transit. | Seller owns goods in transit. |
Filing Claims | Buyer files claims for loss or damage. | Seller files claims for loss or damage. |
Accounting (Sale Record) | Seller records sale and buyer records inventory when carrier takes possession of goods. | Seller records sale and buyer records inventory upon arrival. |
Control | Buyer has more control over shipping process. | Buyer has less control over shipping process. |
Choosing between FOB Destination and FOB Origin allows companies to determine where and when they assume costs associated with transportation, duties, insurance, and more. With impacts on accounting, logistics, customs, and inventory, deciding which is best for your company requires input from many stakeholders.
A Free on Board Example
Here’s an example of goods shipped from Canada to Japan using FOB Incoterms®, broken down into a chart.
Location of Goods/ Logistical Actions | Who Assumes Cost and Liability? |
Canadian seller delivers goods from their factory to a Canadian port | Canadian Seller |
Goods are handled at Canadian port | Canadian Seller |
Goods go through Canadian customs | Canadian Seller |
Transfer of cost and liability per FOB* terms. | |
Goods are loaded directly onto the ship or freight container (still in Canada). | Japanese buyer |
Goods arrive in Japan and are handled in the Japanese port | Japanese buyer |
Goods go through Japan’s customs | Japanese buyer |
Goods are transported to the Japanese buyer’s warehouse or point of delivery | Japanese buyer |
*This example utilizes the FOB origin rule, outlined above.
It’s important to note that once the goods have completed transport and are in the buyer's possession at their warehouse, the buyer retains all responsibility. FOB terms matter because they outline when responsibility is transferred. Keep reading to see the two ways FOB terms can be detailed.
FOB Terms in Conversation
As an illustrative example, let’s take the two companies mentioned above. The supplier (Maple, based in Canada) wants to engage in business with the Buyer (Bonsai, based in Japan), but the goods must be shipped overseas.
Maple decides to go with FOB Origin for the shipment, since they want more control over the shipping process.
Since Maple and Bonsai agree on FOB Origin for the shipment, their conversation might go something like this:
Maple (seller): "Under our FOB Origin agreement, we will send 500 maple saplings for shipment and load them on the vessel at the Port of Vancouver. Once loaded, our responsibility for the goods ends."
Bonsai (buyer): "Agreed. Under FOB Origin, Bonsai understands we assume all ownership and risk until the saplings are in our warehouse in Yokohama."
FOB Payment Term Modification
FOB shipping is generally modified with payment terms, similar to other agreements in the supply chain. These modifiers don’t affect the title of goods or claim filing procedures, but they do affect how and when payment is collected.
Collect: The carrier collects transportation charges directly from the buyer.
Prepaid: The seller pays and bears freight charges.
Prepaid and Add: The seller prepays transportation charges but adds them to the invoice for reimbursement from the buyer.
Collect and Allowed: The seller prepays transportation charges, and these costs are already included in the contract price, meaning the buyer effectively bears them through the product's price.
FOB Term | Who Pays Freight Charges | Who Bears Freight Charges | Who Owns Goods in Transit | Who Files Claims |
Collect | Buyer | Buyer | Buyer | Buyer |
Prepaid | Seller | Seller | Buyer | Buyer |
Prepaid and Add | Seller | Buyer | Buyer | Buyer |
Collect | Buyer | Buyer | Seller | Seller |
Prepaid | Seller | Seller | Seller | Seller |
Collect and Allowed | Buyer | Seller | Seller | Seller |
Prepaid and Add | Seller | Seller | Seller | Seller |
These payment terms are negotiated ahead of time, so both buyers and sellers should be aware of how these terms affect the bottom line.
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