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. Sure, you want to keep costs low by making your own shipping arrangements, but can you afford the liability if something goes wrong? Know your FOB options, so you can make the best decision based on each situation.
FOB shipping point vs. FOB destination
- FOB status says who will take responsibility for a shipment from its port of origin to its destination port.
- An FOB shipping point agreement is signed and the container is handed off to the freight carrier at the shipping point.
- Although the accounting treatment mentioned above aligns with this, it’s worth mentioning that FOB shipping points and destinations transfer ownership at different times.
- Under FOB Shipping Point, the seller would record the sale as soon as the goods leave the seller’s premises.
- From that point, the buyer is responsible for making further transport arrangements.
FOB, while advantageous in many ways, comes with inherent transit risks, especially for the party responsible during the shipping. Other terms, like CIF (Cost, Insurance, and Freight) or EXW (Ex Works), offer different arrangements regarding costs, responsibilities, and risk points. From this moment, the buyer is legally the owner of the goods and is responsible for any potential loss or damage that might occur during the transit. In practice it should be used for situations where the seller has direct access to the vessel for loading, e.g. bulk cargos or non-containerised goods.
Potential Disputes Over Transfer Points
- Since there is more than one set of rules and legal definitions of FOB, which may differ from one country to another, the parties to a contract must indicate which governing laws are being used for a shipment.
- This is because, in container shipments, the cargo is given to the carrier at a place some distance from the port, such as a container yard or even the seller’s premises.
- If you know the risks and aren’t willing to bear them, FOB shipping point may not be your best option.
- Furthermore, once the goods leave the port of origin, the seller has limited control over the shipment and may face delays during transit.
- The supplier’s responsibility ends once the electronic devices are handed over to the carrier.
- The buyer’s obligation is to take delivery when the goods have been delivered, as described in A2.
- The point at which the goods’ ownership transfers and related shipping costs also affect your cost of goods sold (COGS).
In this arrangement, the seller retains liability for the goods until they are delivered to the buyer. This means the seller bears the risk of loss, damage, or destruction during transit, which can impact their reputation and profitability. If any issues arise during shipping, the seller handles resolving them and may need to replace or refund the damaged goods. Since the quoted price typically excludes transportation and insurance costs, the final landed cost for the buyer can often be higher than FOB Destination. This can make the seller’s offer less competitive and potentially impact sales volume. Simultaneously, while the treadmills have not yet been delivered, the buyer has now officially taken responsibility for the goods.
- This can help to improve customer satisfaction and reduce the risk of delays or other issues that could impact the buyer’s experience.
- This can make the seller’s offer less competitive and potentially impact sales volume.
- When the ship’s rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use.
- On the other hand, in F.O.B. destination, title and ownership of goods are transferred at the place of delivery agreed upon by the buyer and seller.
- Clearly, the seller would still have the risk of loss or damage to the goods, so the seller might like to investigate a contingency policy for marine cover.
Choosing the right Incoterm: Ex Works (EXW) vs. FCA
This term is of particular importance in international shipping, where goods may pass through many hands before they reach their final destination. The seller includes the cost of goods, delivery to the port of destination, and all export requirements. Anytime a quotation includes FOB, it means the seller confirms this responsibility.
As the Incoterms® 2010 and now 2020 rules are very much intended to apply to both international and domestic trade, it is hoped that all manner of strange local rules will die out. With the advent of e-commerce, most commercial f.o.b. point electronic transactions occur under the terms of “FOB shipping point” or “FCA shipping point”. International shipments typically use “FOB” as defined by the Incoterms standards, where it always stands for “Free On Board”.
Most of the transactions we’re involved in include some sort of FOB distinction between a buyer and seller. For buyers, FOB, especially the FOB Shipping Point, presents an opportunity to exert more control over the shipping process. A standout advantage of FOB terms is the clarity they bring to the trading table. With clearly defined points for risk and cost transfer, both parties can better understand and plan for their respective responsibilities.
