Free On Board (FOB) is a shipping term used to describe the point at which the liability and cost of goods are transferred from the seller to the buyer. The official Incoterm® for FOB denotes that responsibilities, charges, and risks are transferred from the seller to the buyer once the goods are onboard the vessel.
However, for United States (US) domestic shipments, buyers and sellers make use of FOB terms like FOB Origin/Destination and freight payment terms like FOB Prepaid/Collect to further define responsibility and costs.
FOB Rules in Incoterms® 2020
According to the Incoterms® 2020 rules, FOB specifies that the consignor’s (seller’s) responsibility is fulfilled when the goods are loaded onto the vessel chosen by the consignee (buyer) at the named port of shipment.
The consignor is only responsible for loading the goods onto the transportation vessel, while the consignee assumes all other responsibilities associated with delivering the goods to their final destination. Such responsibilities include customs clearance, and paying for relevant duties and taxes.
FOB is commonly used in situations where the consignor has unrestricted access to the vessel for loading bulk cargo or non-containerized goods.
FOB vs Other Common Incoterms®
While FOB shipping is a popular and widely used shipping term in international trade, there are other commonly used Incoterms® that specify different arrangements between buyers and sellers.
These Incoterms® provide clarity on the responsibilities and costs associated with shipping, and they can have a significant impact on the overall cost and efficiency of international trade transactions.
In this section, we will compare FOB with some popular Incoterms® and highlight the key differences between them.
CIF (Cost Insurance and Freight)
CIF shipping is an international trade agreement that places the responsibility of shipping, insurance, and freight costs on the seller until the goods reach the port of destination.
In CIF, the consignor is responsible for providing and shipping the goods, obtaining insurance, and paying for freight charges. The consignee is accountable for paying the purchase price, arranging customs clearance, paying import duties and taxes, and delivering the goods to the final destination.
Differences between FOB and CIF
- Costs associated with shipping, insurance, and freight
FOB places responsibility for these costs on the consignee from the port of shipment to the final destination, while CIF places responsibility for these costs on the consignor until the goods arrive at the port of destination.
Additionally, FOB requires the consignee to arrange and pay for insurance on the goods during transit. On the other hand, in CIF, the consignor must obtain and pay for insurance on the goods until they reach the port of destination.
- Risk of loss or damage to goods
In FOB, the risk passes from the consignor to the consignee at the point of loading onto the shipping vessel. In CIF, it passes from the consignor to the consignee at the port of destination.
FCA (Free Carrier)
FCA states that the consignor is responsible for the delivery of goods to a destination specified by the consignee. The consignor takes care of the transportation costs and assumes the risk of loss until the goods arrive at the destination. At this point, the consignee assumes all responsibility.
Differences between FOB and FCA
- Freight type and carrier
FCA can be used for any mode of transport, including air, sea, rail, or road, whereas FOB is typically used for sea freight. Additionally, FCA provides more flexibility for the consignee to choose the mode of transport and carrier, while in FOB, the consignee is limited to the carrier chosen by the consignor.
- Costs and risks
In FOB, the consignor is in charge of loading the goods onto the shipping vessel at the port of origin and paying for any costs associated with this process. The consignee takes on responsibility for the goods, including any risks or costs associated with transportation from the port of origin to the final destination, and any customs duties or taxes.
However, in FCA, the consignor is responsible for delivering the goods to the named location nominated by the consignee. Once the goods are delivered to this place, the responsibility for any further costs or risks associated with the shipment is transferred to the consignee.
EXW (Ex Works)
Under EXW, the consignor is only responsible for making the goods available at a designated location or on their premises. The consignee is then liable for everything else — loading of goods, risk of damage, transport costs, and other relevant duties.
Differences between FOB and EXW
The main difference between these Incoterms® is the party responsible for the relevant costs and risks.
In FOB, the consignor is in charge of delivering goods to the port of shipment and loading them onto the vessel, while the consignee is responsible for all transportation costs and risks from the port of origin to the final destination.
In contrast, EXW means the consignor is only accountable for making the goods available at their premises, and the consignee is responsible for all transportation costs and risks from the consignor’s premises to the final destination.
DDP (Delivered Duty Paid)
DDP shipping is a delivery agreement whereby the consignor assumes all of the responsibility, risk, and costs associated with transporting goods until the consignee receives them at the destination port.
Differences between FOB and DDP
- Responsibility of risks and costs
In FOB, the consignor is responsible for loading the goods onto the shipping vessel at the port of origin and paying for any costs associated. The consignee takes on responsibility for the goods, including any risks or costs and any customs duties or taxes, from the point of origin onwards.
As for DDP, the consignor is responsible for delivering the goods to the consignee’s premises, and they are responsible for all costs and risks until the goods arrive at the final destination.
- Freight type
Under FOB, the consignee has more control over the mode of transportation, whereas in DDP, the consignor is responsible for arranging the transportation.
FOB Rules in US Domestic Shipments
In the US, there are 2 types of FOB rules that are commonly used in domestic shipments: FOB Shipping Point and FOB Destination.
It is commonplace to use these rules when establishing a FOB agreement to avoid ambiguity over liability and responsibility for the goods being shipped.
FOB Shipping Point vs FOB Destination
Under FOB Shipping Point, the ownership of the goods is transferred from the consignor to the consignee at the point of shipment. This means that the consignee assumes responsibility for the transportation costs, risks, and insurance once the goods are loaded onto the freight carrier. The consignor is responsible for preparing the goods for shipment and loading them onto the freight carrier.
As for FOB Destination, the ownership of the goods is transferred from the consignor to the consignee at the point of delivery. This means that the consignor is responsible for the transportation costs, risks, and insurance until the goods are delivered to the consignee’s designated destination. The consignee assumes responsibility for the goods once they arrive at the destination.
Freight Collect vs Freight Prepaid
FOB terms are often used in combination with either of the 2 types of freight payment terms to clearly outline the terms of a shipment in shipping documents.
- Freight Prepaid – The consignor is responsible for all shipping costs.
- Freight Collect – The consignee is accountable for all shipping costs.
| Freight Origin, Freight Prepaid | The consignor bears all shipping costs, while the consignee assumes all risk of the goods at the port of origin. |
| Freight Origin, Freight Collect | The consignee is accountable for all shipping costs as well as liability for the goods. |
| Freight Destination, Freight Prepaid | The consignor pays for all shipping costs, and is responsible for the goods until they reach the destination. |
| Freight Destination, Freight Collect | The consignor is answerable for the goods until they reach the destination. The consignee will take care of all the shipping costs once the goods have arrived. |