Shipping Incoterms® can often be confusing, but understanding them is important for smooth international trade transactions and shipments. One term you are likely to encounter is “FOB,” which stands for Free on Board.
This acronym is important to know because it defines specific responsibilities between buyers and sellers in a shipping agreement. By knowing the ins and outs of FOB, you can ensure that every party involved in the shipment clearly understands their roles, rights, and responsibilities, making the shipping process smoother and more efficient.
When shipping products Internationally, it’s important to understand the FOB Incoterms® and how it affects your business dealings. In this article we will break down how FOB Incoterms® work to give you an understanding of how to use it throughout the order and shipment process.
Incoterms®
Incoterms®, short for International Commercial Terms, are rules set by the International Chamber of Commerce (ICC) to define the responsibilities of buyers and sellers in international trade. These terms specify which party is responsible for tasks and costs relating to International shipping, insurance, customs clearance and duties & taxes.
What does FOB mean in shipping terms
FOB, or Free on Board, is a shipping term that defines when the buyer takes ownership and risk for goods during transport. When a seller and buyer agree to supply goods on an FOB agreement, the seller agrees to cover the cost of the products, export packaging, export documentation, export customs clearance and all hanlding fees to get the shipment delivered ‘on board’ the vessel for export.
Once the goods are on board the vessel for export, the buyer takes over responsibility for any further costs and risks associated in getting the shipment through to the final destination.
Stating FOB on Shipping Documentation
FOB on shipping documentation refers to how Free on Board terms are stated on the relevant sales & purchasing contracts, and export documentation.
It is imperative that buyers and sellers include FOB and ensure that the Incoterms® edition year is includes on all sales & purchasing contracts and relevant export documentation. If there is no year stated then the following will apply:
- Up to 31st December 2019 – Incoterms® 2010
- From 1st January 2020 – Incoterms® 2020
- If a different year is stated (for example Incoterms® 1990), then the respective terms will apply
The below is the structure that should be used on sales & purchasing contracts and export documentation:
- [Incoterm® rule] [Named port of destination/place/point] Incoterms® 2020
- FOB Shanghai, Incoterms® 2020
These documents detail the point at which the responsibility for the goods transfers from the seller to the buyer. Key export documents include the Bill of Lading, the commercial invoice, and the packing list.
What is the difference between Freight Collect and Freight Pre-Paid?
When the shipment has been received on board, the carrier of the goods will issue a ‘Bill of Lading’ document (B/L, or BoL) stating if the shipment is on ‘Freight Collect’ or ‘Freight Pre-Paid’ terms. These terms relate to which party will be paying for the International Freight costs.
- Freight Collect Incoterms® include – EXW, FCA, FAS, FOB
- Freight Pre-Paid Incoterms® include – CFR, CIF, CPT, CIP, DAP, DPU, DDP
If the export shipment is sent Freight Collect, the freight charges will be ‘collected’ by the Consignee. If the shipment has been sent on Freight Pre-Paid terms, the shipper will be billed for the freight charges.
It’s important to note that the carrier must receive payment of the shipping charges (by either party) before the cargo will be released to the Consignee.
FAQ about FOB
What is the difference between FOB and CIF?
FOB and CIF are completely different Incoterms® used throughout the supply chain.
Shipping under FOB terms, the buyer is responsible for all costs and risks once the goods are loaded onto the shipping vessel, but will not cover the cost of International seafreight.
In contrast, CIF (Cost, Insurance, and Freight) means that the seller will cover the cost of International shipping and insurance until the goods reach the port of destination. With CIF, the seller is responsible for the goods during transit, providing more protection for the buyer.
How does FOB impact landed cost?
Shipping products under FOB terms only determines which party will pay for the International seafreight and other costs to get the shipment delivered to the final destination. Regardless of which Incoterm® the cargo is shipped under, either the buyer or seller must cover the costs of International seafreight and further charges.
When importers are calculating the landed costs of imported products, they will take into account all of the various product and logistics costs, fees and charges involved to get the products delivered through to the final location. For example:
- If an importer buys products from a seller on FOB terms, the importer must add the costs of International seafreight into their landed cost calculations.
- If an importer buys products from a seller on another Incoterm® such as CFR or CIF, then the seller’s invoice will already include the cost of International seafreight through to the port of destination.
Read how to use a landed cost calculator to understand the landed cost of imported goods.
Are FOB and FCA the same?
No, FOB and FCA are completely different Incoterm®. FOB stands for Free on Board, and it is used primarily for sea and inland waterway transport. FCA (or Free Carrier) can be used for any mode of transport, including air, sea, road, and rail.
Under FCA, the seller is responsible for delivering the goods to a carrier or another party nominated by the buyer at a specified location. The seller handles the export customs clearance, and once the goods are handed over to the carrier, the buyer assumes responsibility for the transportation costs and risks. Read more about FCA here.
Is insurance required for FOB shipments?
Insurance is not required for FOB shipments. Due to the many risks faced along the global supply chain, it is highly recommended that the buyer or seller take out marine transport insurance to protect against potential loss or damage during transit.
