Incoterm – Free on Board (FOB)
Free on board (FOB) is an Incoterms 2020 that entails that the seller’s obligation is met when the goods are successfully loaded onto the vessel the buyer selects at the specified port of shipment, including any costs associated with the process.
When using FOB, the seller is tasked with the loading process onto the transportation means, leaving all remaining responsibilities for the buyer to handle to transport the goods to their destination.
The shift in risk and liability for the goods occurs when they are aboard the vessel. At this point, all responsibilities and costs associated are transferred to the buyer’s side.
Need to keep in mind that in the latest Incoterms 2020, “loading” refers to the moment when goods are loaded onto the vessel. In the case of container transport, this indicates when the cables become slack, indicating that the container is no longer suspended.
Choosing Free on Board
- If the buyer frequently acquires bulk cargo and prefers shipping through sea.
- If competitive unit pricing and shared freight responsibility are preferred.
- If the buyer trusts the seller or their logistics partner to handle the export procedure until the cargo is loaded.
Understanding the Responsibilities
Seller’s Responsibilities: Under FOB, the seller’s primary responsibility is to manage the entirety of the export procedure and load the goods on the desired first carrier.
Packaging
The seller must prepare the goods according to different origin's export packaging standards.
Carriage Loading Charges
When the goods depart from the seller's site, the seller is responsible for expenses encompassing any charges related to placing the cargo onto the initial carrier for its journey to the export location.
Delivery Charges
The seller is responsible for transporting goods to the agreed export location, including the fees involved in the process.
Duties, Taxes, and Custom Clearances
The seller is responsible for the export procedure, including the documentation preparation, expenses, and other examination processes.
Transportation Charges
The seller is responsible for the inland expenses from the seller's premises to the carriage, including costs like loading onto the truck.
Buyer’s Responsibilities: Once the goods are loaded on the carriage, buyers then take on comprehensive responsibilities, which include:
Duties, Taxes, and Custom Clearances
The buyer is responsible for the import procedure, including the documentation preparation, expenses, and other examination processes.
Unloading Charges
The buyer must cover charges for unloading at the destination from the final carrier.
Terminal Charges
The buyer is responsible for expenses at origin and destination terminals, including fees for unloading shipment from the destination vessel and transporting it within the harbor.
Carriage Charges
The buyer is responsible for covering all freight costs, specifically from the port of origin to the destination.
Transportation Charges
The buyer is accountable for the transportation charges from the point of the destination port to the final stop.
Insurance
While not obligatory, the buyer may opt to secure insurance for the shipment to protect against potential damages.
Pros and Cons for Buyers
FOB shipping’s popularity arises from its balanced control of buyers and sellers within their territories.
Control & Flexibility
FOB provides buyers with maximum control over logistics choices and shipping costs. Buyers can choose their preferred shipping methods and select their own logistics partner.
Cost Saving & Efficiency
When relying on one logistics partner, it minimizes the risks of miscommunication and reduces the shipping process's cost.
Transportation Process Ensured
Buyers can manage various aspects of transportation after goods are exported and can better ensure the success of their shipment.
Experience Required
Free Carrier is often best when both buyer and seller have experience, making FOB less advantageous if unfamiliar to either party.
Compared to other Incoterms, FOB is one of the most popular for exporters and importers when shipping cargo via sea.
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