What is Free on Board (FOB)?

Free on Board refers to the point in the supply chain when a buyer or seller assumes responsibility for sent items. Purchase orders between buyers and sellers define FOB terms, ownership, risk, and transportation expenses.

“FOB Origin” or “FOB Shipping Point” indicates the buyer takes the title and carries all risk when the seller ships. Damaged or missing products in transit are the buyer’s responsibility.

“FOB Destination” implies the seller retains title and responsibility for goods during transportation until they reach the customer.

Knowing Free on Board

FOB applies to all local and international shipments. Shipping contracts typically outline delivery time, payment, risk of loss transfer, and freight and insurance expenses.

Vendor-client transactions specify purchase order FOB terms. The buyer and seller’s bill of sale or agreement determines ownership, but FOB status determines who is responsible for the shipment at its origin or destination.

To guarantee a successful vendor-client transfer of products, both parties should understand free-on-board (FOB). Regardless of the transfer, FOB conditions affect inventory, shipping, and insurance costs.

FOB Origin/Destination

FOB origin, or shipping point, means the buyer takes title when the shipment begins. The buyer is responsible for ensuring the products arrive on time and are undamaged when the seller places them with a transportation carrier.

FOB sellers own the products and must replace damaged or missing items until they reach their destination.

International contracts define the time and place of delivery, payment terms, and FOB designation to determine when the buyer assumes the risk of loss and who pays for freight and insurance, especially for companies ordering large inventory for global shipment on vessels and containers.

The International Chamber of Commerce (ICC) provides Incoterms, the most prevalent international commerce terminology. However, enterprises shipping products within the U.S. must follow the Uniform Commercial Code (UCC).

Since several rules and FOB definitions vary by nation, contract parties must identify which laws apply to a shipment.

Company and FOB Accounting

After placing the items with a carrier for shipping, the corporation increases its inventory, and the seller registers the transaction for FOB origin.

FOB sellers record the sale when the products reach their destination, and buyers register the inventory increase at that moment.

Other Shipping Terms

FOB Origin and Destination are the most common shipping phrases, although others include:

• FAS, or Free Alongside: The seller must transport items on a ship that draws up alongside another and is near enough to employ its lifting gear.

• FCA, or Free Carrier: The seller must transport goods to an airport, shipping port, or railway station where the buyer operates and receives delivery.

• EXW or Ex Works: The vendor prepares products for shipment, but the customer picks them up and arranges shipping.

• DES, or Delivered Ex Ship: The vendor ships things to a port where the customer picks them up.

FOB Pricing?

FOB expenses may include transportation, loading, insurance, and unloading before reaching the ultimate destination.

Who pays FOB origin freight?

If the terms say “FOB origin, freight collect,” the buyer pays freight. If the conditions are “FOB origin, freight prepaid,” the buyer is responsible for goods at the origin, while the seller pays for transportation.

What is the difference between a FOB and a CIF?

Two often used INCOTERM agreements are CIF (cost, insurance, and freight) and FOB (free on board). While these terms’ definitions vary by country and vendor-client contract, FOB traditionally shifts obligations from seller to buyer when the shipment reaches the port or other origin. CIF agreements require the seller to pay costs and take on obligations until the products get to the buyer’s port.

Bottom Line

Shipping terms like Free on Board (FOB) indicate when a buyer or seller takes responsibility for goods. Buyers and sellers use FOB Origin and Destination to establish ownership, risk, and shipping costs.

Conclusion

• Free on Board (FOB) indicates when the buyer and seller transfer ownership and who is accountable for shipment damages.
• “FOB Origin” implies the buyer takes full responsibility for the product upon shipment.
• “FOB Destination” implies the seller bears the risk of loss until the items reach the consumer.
• FOB affects inventory, shipping, and insurance expenses.