FOB (Free on Board) Delivery Terms
Incoterms are international rules that regulate delivery terms in foreign trade. One of the most common terms in maritime shipping is FOB (Free on Board) under Incoterms. In this article, we’ll explore how this term works, how responsibility is transferred, potential risks, and common mistakes when concluding such agreements.
What is FOB: Definition According to Incoterms 2020
FOB, or Free on Board, applies exclusively to sea and inland waterway transport. According to Incoterms 2020, risk passes from the seller to the buyer when the goods are loaded onto the vessel at the port of shipment. This means that after the cargo is on board, all further costs and risks are borne by the buyer. Using this term allows both parties to clearly define their responsibilities at different stages of transportation.
Division of Responsibilities Between Seller and Buyer
The seller is responsible for the timely preparation of goods, transportation to the port, and loading onto the vessel. Additionally, the seller handles export customs clearance and provides all necessary documents. The buyer, in turn, takes care of arranging sea freight, optional insurance, import customs clearance, unloading, and further inland transportation.
Key Seller Responsibilities:
- Preparing and packing the goods;
- Delivering goods FOB to the port of shipment;
- Loading onto the vessel;
- Completing export declarations.
Key Buyer Responsibilities:
- Arranging sea transportation;
- Import customs clearance;
- Paying for freight and insurance (if needed);
- Unloading at the port of destination.
Step-by-Step Process of FOB Delivery
FOB delivery involves several key stages:
- The seller delivers the goods to the port of departure and arranges loading onto the vessel specified by the buyer.
- After loading, the buyer organizes the maritime transport and receives documents from the seller, including the invoice, packing list, and bill of lading.
- Risk transfers to the buyer once the goods are loaded onto the ship.
Documents Used in FOB Shipments
To properly arrange transportation under an FOB agreement, the following documents are typically required:
- Commercial invoice
- Bill of lading (B/L)
- Packing list
- Export declaration
- Certificates of conformity (if required by the importer)
Advantages and Disadvantages of FOB
One of the main advantages of FOB for the buyer is the ability to control the carrier and optimize transportation costs. Meanwhile, the seller benefits from minimized liability once the goods are on board.
However, this term also carries risks — such as misunderstandings about the exact moment responsibility shifts, and the need for precise coordination between the parties.
Common Mistakes Under FOB
Many parties misunderstand what FOB truly entails, which can lead to additional costs or even legal disputes. The most common mistakes include:
- Unclear transfer point of the freight;
- Vessel delays due to late communication;
- Lack of insurance by the buyer;
- Errors in documentation.
FOB vs. EXW, CFR, CIF: What’s the Difference?
The FOB Incoterms 2020 delivery terms differ significantly from others, such as EXW, CFR, and CIF.
For example:
- Under EXW (Ex Works), the seller has minimal responsibility, and the buyer picks up the goods directly from the seller’s warehouse.
- CFR (Cost and Freight) means the seller pays for the freight, but risk transfers to the buyer at the port of shipment.
- CIF (Cost, Insurance and Freight) is similar to CFR, but it also includes insurance coverage.
Term | Who pays for freight | Who bears the risk during transportation |
FOB | Buyer | Buyer, after loading onto the vessel |
EXW | Buyer | Buyer, from the seller’s premises |
CFR | Seller | Buyer, after loading onto the vessel |
CIF | Seller | Buyer, but with additional insurance coverage |
When to Choose FOB: Recommendations
FOB Incoterms 2020 is ideal for companies with established logistics networks and experience in maritime shipping. It’s a good choice when the buyer wants to control the delivery process and work with their own carriers.
However, if a company lacks experience with port procedures, using FOB or FCA terms may expose them to additional risks.
Conclusion
FOB delivery is a widely recognized standard in international maritime transport, requiring strict adherence to transportation stages. The seller must ensure timely loading of goods, while the buyer is responsible for organizing shipping and customs procedures.
These terms work best when cooperating with a professional logistics provider or freight forwarder, such as ETS, to avoid mistakes and extra costs.
Useful Information
Frequently Asked Question (FAQ)
The FOB price includes the cost of the goods, transportation to the port, loading fees, export documentation, and insurance (if applicable). Freight costs to the destination are separate.
Customs value is based on the declared product value without including insurance or shipping costs. Only the imported goods’ value is subject to taxation.
Under EXW (Ex Works), the buyer collects the goods directly from the seller’s location, bearing all risks and costs from that point. With FOB, the seller is responsible for export clearance and loading the goods onto the vessel.
Under CFR (Cost and Freight), the seller arranges and pays for transport to the destination port, while the buyer assumes risks once the goods are onboard.
The bill of lading can be arranged by the seller in the buyer’s name, the seller may secure it and transfer it to the buyer for a fee or the buyer can arrange it through their own freight forwarder.