FOB is an international shipping term that stands for “free on board.” FOB rules define who is responsible for goods during transport by sea, and who bears the costs if something goes wrong.
In this article, learn the difference between FOB shipping point and FOB destination, so you can confidently navigate shipping agreements.
What is FOB?
FOB, or “free on board,” is a widely recognized shipping rule created by the International Chamber of Commerce (ICC). It defines the point when a buyer or seller becomes liable for goods transported by sea.
FOB status says who will take responsibility for a shipment from its port of origin to its destination port. It indicates the point at which the title of the goods transfers from the seller to the buyer, and therefore who needs to cover the costs of transit and deal with any issues.
FOB rules apply to shipments delivered by sea and inland waterways. Air, rail, and road freight are covered under different ICC rules.
FOB shipping point vs. FOB destination
In shipping documents and contracts, the term “FOB” is followed by a location in parentheses. This could be the port of origin or the destination port.
The stated location determines who is responsible for goods during transit. When the destination is the origin port, it’s known as the FOB shipping point. When the destination port is the location, it’s known as the FOB destination.
- In FOB shipping point, the buyer becomes responsible for products as soon as they leave the shipment origin.
- In FOB destination, the seller remains responsible for products until the shipment is complete.
FOB shipping point
When goods are labeled as FOB shipping point, the seller’s role in the transaction is complete when the purchased items are given to a shipping carrier and the shipment begins. At that point, the buyer holds the title to the goods they bought.
Unless there are additional terms in the shipping agreement, buyers handle any costs for FOB shipping point goods from when the shipping vessel departs to when they receive their purchase.
Because of this, misunderstanding FOB shipping point terms can be costly for buyers. Imagine you’re a small business owner who secures a deal to import antique furniture from an overseas supplier. You see the term “FOB shipping point” in the contract but, unsure what it means, you sign away.
A few weeks later, your shipment arrives, and you find the furniture was badly damaged in transit: you’re left with a hefty bill for goods you can no longer sell.
Hopefully, the buyer in this example took out cargo insurance and can file a claim. Due to agreed FOB shipping point terms, they’ll have no recourse to ask the seller for reimbursement.
FOB destination is the opposite of FOB shipping point. When goods are labeled with a destination port, the seller stays responsible for damages, lost items, and other costs and issues until the shipment is complete.
FOB destination terms are indicated by the word “Destination” or the destination port, usually in parentheses. So, if the shipment is heading to Vancouver, the terms would read “FOB (Vancouver).”
FOB destination shipping is in the buyer’s best interest and an effective way for businesses to enhance their customer service. Only when the purchase arrives in perfect condition does the buyer accept it and consider the sale officially complete.
How FOB terms impact accounting
Shipping costs are usually tied to FOB status, with shipping paid for by whichever party is responsible for transit.
Beyond those costs, FOB terms also affect how and when a business will account for goods in its inventory.
If a shipment is sent FOB shipping point, the sale is considered complete as soon as the items are with the shipment carrier. That means the seller will record the sale immediately. At the same time, the buyer will record the goods as inventory, even though they’re yet to physically receive them.
If a shipment is sent under FOB destination terms, the seller won’t record the sale until the goods reach the buyer’s location. Likewise, the buyer won’t officially add the goods to its inventory until they arrive and are inspected.
Free on board is one of around a dozen Incoterms, or international commercial terms. Incoterms are published and maintained by the International Chamber of Commerce (ICC).
There are 11 internationally recognized Incoterms that cover buyer and seller responsibilities during exports. Some Incoterms can be used only for transport via sea, while others can be used for any mode of transportation.
ICC Incoterms were last updated in 2020 but remain valid contractual terms. They can be used in any relevant freight agreement.
Here are all 11 Incoterms:
Incoterms for transport via sea and waterways
FOB is by far the most frequently used Incoterm for exports by sea. But other terms include:
FAS stands for “free alongside ship” and is often used for bulk cargo transactions. It says that sellers must deliver goods to a vessel for loading, with the buyer taking responsibility for bringing them onboard.
CIF means “cost, insurance, and freight.” Under this rule, the seller agrees to pay for delivery of goods to the destination port, as well as minimum insurance coverage.
CFR or “cost and freight” means that a seller agrees to arrange export and pay for the costs of shipping—but not for insurance, so the buyer takes on the risk of losses once the goods are onboard.
Incoterms for all transport modes
There are seven Incoterms that can be used in freight agreements for any mode of transport:
EXW or “ex works” requires the seller to prepare goods for shipping. From that point, the buyer is responsible for making further transport arrangements.
FCA or “free carrier” means a seller is obligated to deliver goods to a specified location or carrier where the buyer will take responsibility for transit.
Under CPT, or “carriage paid to,” the seller pays for delivery of goods to a carrier or nominated location and assumes risks until the carrier takes possession.
CIP stands for “carriage and insurance paid to” says that the seller pays for delivery and insurance of goods to a carrier or nominated location.
DAP, or “delivered-at-place,” says a seller agrees to be responsible for transporting goods to a location stated in the sales contract.
DPU, or “delivered-at-place unloaded,” says a seller agrees to cover costs and liabilities associated with transporting goods to a location stated in the sales contract—and for unloading goods.
DDP means “delivered duty paid.” Under this Incoterm rule, the seller agrees to deliver goods to the buyer, paying for all shipping, export, and import duties and taxes.
FOB shipping point: Tips for buyers
When you agree to receive items under FOB shipping point terms, it’s essential to be aware of your liabilities.
Read all contracts carefully, calculate potential costs, purchase insurance—and consider negotiating additional terms in your shipping or sales agreement to protect against losses.
Here are five tips for buyers considering FOB shipping point terms:
1. Understand your liabilities
Before negotiating, make sure you understand the consequences of using FOB shipping point or FOB destination for your purchase—in terms of costs, risks, and responsibilities. Some companies will offer different international shipping for different types of products.
2. Evaluate your risk tolerance
Consider your options for managing your goods during transit and purchasing cargo insurance. If your items are expensive, unique, or in a category where obtaining insurance is difficult, negotiating for FOB destination may be a better option.
3. Consider shipping costs
If you agree to FOB shipping point terms, remember to factor in the costs of shipping and import taxes to your location when negotiating price. Alternatively, work with the seller to add additional coverage for shipping costs into your contract.
4. Leverage volume
If you’re ordering many products from a single seller, you may have more leverage to negotiate FOB destination terms, as the cost of shipping per unit will likely be lower for the seller.
5. Use a freight forwarder
Especially for international ecommerce, a freight forwarder can help manage logistics, reducing the complexity and risk for the buyer in a FOB shipping point agreement.
How to document FOB shipping terms
Here’s what to look for when reading or writing a shipping label:
- FOB terms: Shipping labels, contracts, and other documents should clearly state either FOB shipping point or FOB destination.
- A defined location: Documents should specify the shipping point (the origin port or the seller’s warehouse) or the destination (the destination port or the buyer’s location).
- Detailed responsibilities: For clarity, documents can define FOB terms, underscoring when the buyer assumes responsibility.
- Date and time: Documents should show the date and time when goods will be transferred to the shipping point and give an estimated delivery date.
- Condition of goods: At the shipping point and destination, document the condition of goods. This can be useful for disputes or insurance claims.
4 common misunderstandings about FOB shipping
FOB terms don’t cover all risks and responsibilities associated with shipping. Here are some common misconceptions about FOB shipping:
1. FOB covers all costs
FOB doesn’t cover all costs. For example, in FOB shipping point, the buyer is responsible for freight, insurance, and other costs from the shipping point onward.
2. FOB determines legal jurisdiction
FOB terms don’t determine the legal jurisdiction for disputes. This should be specified separately in the contract.
3. FOB shipping point always benefits the seller
While FOB shipping point does transfer risk to the buyer, it may affect a seller’s reputation and sales conversion rate. Shipping costs are reduced, but fewer buyers are willing to accept shipping point terms, especially on large or fragile orders.
4. FOB destination means the seller pays all costs
While the seller does bear higher costs under FOB destination, they can factor shipping costs into pricing. Also, the buyer may still indirectly pay for freight and insurance.
FOB rules are a key component of any sea freight shipping agreement. Failing to check whether a shipment is labeled as FOB shipping point or FOB destination can leave you uninsured, out of pocket, and responsible for damaged or unsellable goods.
Remember, while FOB and other Incoterms are internationally recognized, trade laws vary by country. So, if you’re buying or selling globally, review the laws of the country you’re shipping from.