FOB Shipping (Free on Board ) explained
FOB shipping means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. They are responsible for all costs up until that point. Once the shipment is boarded, the buyer assumes risks and costs. Want to find out if this is the right Incoterms® for your business? Read on…
FOB Shipping meaning
Let’s break it down, FOB Shipping is one of the 11 Incoterms rules set by the International Chamber of Commerce. The FOB Incoterms rule is only applied to goods transported by sea or inland waterway. In this guide, you’ll learn all about FOB Shipping, what it means and what you need to know to determine if it’s the right shipping option for your business.
FOB Shipping: Who is responsible for what?
Under ‘Free on Board’ the seller is responsible for delivering the goods to the port of departure, clearing it for export and loading the goods on board the vessel. Once the goods is on the vessel, the risk transfers from the seller to the buyer, who’s from that point responsible for all costs thereafter.
German seller delivers goods from factory to German port — German seller assumes costs & liability
Goods are handled at German port — German seller assumes costs & liability
Goods go through German customs — German seller assumes costs & liability
Goods are loaded onto ship/freight container — Japanese buyer assumes costs & liability
Goods arrive in Japan and are handled in the Japanese port — Japanese buyer assumes costs & liability
Goods go through Japan’s customs — Japanese buyer assumes costs & liability
Goods are transported to the Japanese buyer’s warehouse — Japanese buyer assumes costs & liability
FOB Shipping is further broken down into either FOB Destination or FOB Shipping Point which essentially determines who foots the majority of the transportation bill - the buyer or the seller.
FOB Destination transfers the title of shipped goods when it arrives at the buyer’s specified delivery location—usually the buyer’s loading dock, post office box, or office building. Once the products arrive at the buyer’s location, the legal title of the ownership transfers from the seller to the buyer. Therefore, the seller is legally responsible for the products during transport, up until the point the goods reach the buyer. FOB Destination is different to FOB Shipping Point where the buyer is responsible for the shipping and transportation instead of the seller.
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.
A common mistake is using FOB for containerised cargo
A common mistake is to use FOB for containerised goods, instead of the “all transport modes” rule. This exposes the exporter to unnecessary risks. Under FOB, the risk is officially transferred when the cargo is loaded onboard the vessel. However, it is common practice for the shipper to hand over the cargo to the carrier at the terminal where it awaits to be loaded onto the vessel. Instead, use FCA, CPT, and CIP which are the correct alternatives as they are meant for containerised freight.