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Created by the International Chamber of Commerce, Incoterms are a series of three-letter designations that define responsibilities between buyers and sellers around the sale of goods, specifically related to transportation costs and liability. If you’re looking for more information on Incoterms, check out our other articles on this topic:
The Complete Guide to All 11 of the 2010 Incoterms Rules
Incoterms 2020 Rules: Everything You Need to Know
Protect Your Bottom Line by Understanding These 5 Common Incoterms
Whether you’re buying or selling goods, it pays to understand your Incoterms®. These three-letter designations act as a shortcut to outline which transportation costs will be paid for by the buyer and the seller. Different Incoterms will mean different expenses for both parties, so it’s important to get yours straight before signing any contracts. Let’s take a look at the FOB Incoterm.
What Does FOB Mean?
FOB stands for Free on Board. Along with FAS, CFR, and CIF, it’s one of four Incoterms that applies only to shipments that move via sea and inland waterway.
Under the FOB Incoterm, the seller pays for all the costs up to and including loading the shipment on a ship of the buyer’s choosing. To the buyer, the goods are “free” on board—an easy way to remember the meaning of this Incoterm.
Once the goods are loaded onboard the vessel, the buyer is responsible for all the costs going forward to get the shipment to its final destination.
The FOB Incoterm is part of both the 2010 and 2020 Incoterms rules. However, a change to the FCA 2020 Incoterms rule means that you may want to consider using FCA instead of FOB. We’ll give you all the details below.
What Is the Seller Responsible for Under the FOB Incoterm?
The FOB Incoterm requires the seller of the goods to pay for all the costs to get a shipment on board a sailing vessel the buyer names. That includes the packing and loading of goods, the transportation to the port, unloading costs at the port, any export fees or duties, and loading costs to get the cargo on the ship.
What Is the Buyer Responsible for Under the FOB Incoterm?
Under the FOB Incoterm, once the shipment is loaded on board the ship, the buyer assumes any costs going forward. That includes the ocean freight, as well as costs associated with unloading from the vessel and moving the cargo to its final destination.
Additionally, the buyer also assumes responsibility for the cargo once it’s loaded on the ship. If anything happens to the cargo in transit—or at any point once it’s on board—the buyer is responsible, not the seller.
Incoterms Insights: FOB
FOB can be one of the most cost-effective Incoterms for buyers. With the possible exception of the ocean freight, buyers will only be arranging for transportation within the destination country. This can make it easier for buyers to negotiate—and do business overall.
A change to the FCA Incoterm in the 2020 rules may mean you no longer want to use FOB. Under the 2010 Incoterms rules, the FCA Incoterm made things difficult for agreements that leveraged letters of credit. As a result, many buyers and sellers used the FOB Incoterm, which put sellers at significant risk. If you find yourself in this scenario, review the changes to the FCA 2020 Incoterm before choosing FOB.
Like FAS and CFR, FOB doesn’t define which party will pay for insurance. If you’re the buyer, consider talking to a freight forwarder about your options for marine cargo insurance for your shipment.
If you’re a buyer considering a contract with the FOB Incoterm, talk to one of our experts. Our team can help you estimate your costs, as well as arrange for any transportation needs, including ocean freight and final delivery.
Additionally, a forwarder can also help you arrange for transportation from the port to your final destination, as well as connect you with resources if your shipment gets held up in customs.
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