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FOB Incoterms | Meaning and Shipping terms

04/12/2020 8 Min Read

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FOB is one of the internationally accepted incoterms, published by the International Chamber of Commerce. It stands for “Free on Board” or “Freight on Board”, and it defines shipping terms specific to transit by sea and inland waterways -- it is not applicable to air, rail and road transit.

Known as a more practical rule as compared to FAS, it specifies that the seller has to carry on the loading of goods and the export procedure as per the export country regulations, because a client from another country might not be in a position to take better control. In FOB, distribution of risk and liabilities is done by splitting responsibilities between buyers and sellers in context to places of origin and destination. Amongst all incoterms, it is the most frequently practised trade term.

Free on Board (FOB) Shipping Terms

Process for FOB Incoterms 2020 is as follows:

FOB - Free on Board Incoterms

  • The place of delivering the goods before shipment is agreed upon by both the parties.
  • In FOB, the seller is responsible from the point of origin i.e. maintaining goods and transporting them till the delivery point.
  • The loading of goods at the destination port is done by the seller.
  • The processing responsibility after the delivery point rests with the buyer.
  • Responsibility of risk and insurance is decided based on whatever the two parties have agreed upon.

Seller’s Responsibilities

Warehouse

  • In free on board incoterms, the warehouse for the seller means the place of goods maintained by the seller to carry out the export procedure.
  • Here in, the cost for maintaining goods is borne by the seller.
  • In the process, the warehouse is also called the place of origin, where the decision to enter into a contract was made by both parties.

Transportation

The trade transit for the seller involves inland transportation which is from the warehouse to the arrival port.

Documents

Seller has to provide the buyer with following documents:

Custom Clearance

In FOB, the custom clearance responsibility for the seller involves export proceedings from the place of origin to the delivery harbor. And since the obligation of the seller is only till the port, the export customs is the seller's outlook. They’ll be the one carrying out export custom procedures and bearing all the related charges.

Freight

  • Costs for maintaining goods in the warehouse are borne by the seller
  • Fees of freight forwarding agent, who has been handling his logistics
  • Terminal charges
  • Charges for loading goods on the port
  • Payment for freightfrom FOB origin, i.e., the place agreed by both parties till the port

In short, all FOB charges from point of origin till the goods are loaded at the port.

Insurance

Typically, the seller has no obligation to the buyer for insurance. Yet, as a part of discipline it can be agreed upon as a seller's matter of concern till the port. Likewise, at the buyer’s request, the seller may contribute his assistance to the buyer for insurance and customs provisions.

Also read: Ocean Freight in International Shipping | The Complete Guide

Buyer’s Responsibilities

Warehouse

A warehouse for a buyer means his site, where the goods will be preserved after the whole import export transaction. As the goods will be carried by the buyer from his country’s harbor to his warehouse, and the responsibility of unloading goods at the warehouse rests with the buyer.

Transportation

Once the seller loads the goods at the port, transportation is the buyer's responsibility from that point itself. So the ocean freight transportation, the unloading of goods and inland transportation from the buyer’s port to his place is carried out by him.

Documents

The seller will provide proof of all the export clearing procedures to the buyer, so the buyer will require those documents for importing goods to his country’s port. Also, he will have to prepare documents like ocean freight receipts, insurance receipts, goods invoice, and all other necessary documents required for clearing import procedures.

Custom Clearance

The buyer will look after FOB import customs, as the export procedures will already be carried out by the seller. Even then, he will still require proof of export customs by the seller to carry out the shipping process. After the shipping process is cleared he will look after the import clearance procedures and then load goods for inland transportation.

Freight

Free on board costs for the buyer include payment for marine freight, transportation from the arrival port to the final place of destination, cost of insuring goods, and also the cost related to the loading and unloading of goods from the arrival place to the final destination.

Insurance

As discussed earlier, FOB may include insurance with regards to parting responsibilities for damage risk, so the buyer has to take care of insurance of goods after the risk and responsibilities for the goods are transferred to him.

Difference between CIF & FOB

Difference between CIF & FOB

Also read: CIF Incoterms 2020 | Cost, Insurance & Freight

FAQs on FOB Incoterms

What does FOB mean in export?

FOB in export refers to a standard set of rules in international trade process that is carried out by two parties from two distinct locations. 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 does FOB point mean?

FOB is a point is the agreed delivery spot between both buyer and seller for handover of goods where the peril of goods is moved from the seller to the buyer.

Who pays FOB destination freight?

As the responsibility under FOB transfers to the buyer after the goods are delivered at the agreed destination, the FOB freight charges are borne by the buyer.

Which is better CIF or FOB?

Under CIF the seller has more responsibilities and under FOB the buyer has more responsibilities. As a buyer or a seller whether CIF or FOB is better, depends on the cost you will incur for conducting the shipping process. For example, if the buyer can strike a better deal for shipping costs, he should go with FOB, and if he can't then he should agree to CIF.

Does FOB include shipping?

Yes, FOB does include shipping, whereby the duty of carriage process resides with buyer, leading him to be accountable for all charges and security controls after the terminal port.

What is the difference between FOB shipping and FOB destination?

The difference is quite simple, FOB shipping involves the freight proceedings carried out by the buyer and FOB destination implies the agreed place of destination.

Does FOB include freight?

FOB does not include freight in seller's set of responsibilities. Freight for taking goods to the destination port or the importer country's port is to be borne by the buyer.

Does FOB mean free shipping?

FOB means that shipping costs are not to be borne by the seller, they are to be paid for by the buyer.

Can FOB be used for air freight?

Officially FOB cannot be used for air freight, it is restricted to transit by sea or inland waterways.

How is FOB value calculated?

In FOB, for a seller the cost or price will be the price of goods as decided by both parties, and it also includes the inland transit cost of goods since the delivery till the destination port is carried out by him. So, the buyer will bear all charges after the vessel leaves the port, he will cover freight proceedings after the destination port, and also carry the import customs & duty charges at the time of importing goods in his own country. FOB value for both buyer and seller can be calculated as per these costs incurred by them as per FOB rules.

Avani Ghangurde

Associate, Communications at Drip Capital

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