What does FOB Mean in Shipping Terms?
Free on Board, or FOB is an Incoterm, which means the seller is responsible for loading the purchased cargo onto the ship and all costs associated. The point the goods are safe aboard the vessel, the risk transfers to the buyer, who assumes the responsibility of the remainder of the transport.
The Incoterm FOB is one of the most common agreements between international buyers and sellers when shipping cargo via sea or inland waterway. This particular term only applies to shipments that travel by water, but not air freight or any other means for transport.
What are the Sellers’ Responsibilities?
When entering into a sales contract with the Incoterms of FOB, the seller assumes the following responsibilities:
- Export Packaging: Arranging all export packaging so the cargo can be shipped safely.
- Loading Charges: Any expenses incurred at the seller’s warehouse during the loading process.
- Delivery to Port: Trucking fees incurred while moving the cargo from the warehouse to the loading port.
- Export Duty, Taxes & Customs Clearance: Ensuring the cargo is exported correctly.
- Origin Terminal Handling Charges: The seller is responsible for OTHC.
- Loading on Carriage: The seller is responsible for the costs incurred to load the cargo onto the carriage.
What are the Buyers’ Responsibilities?
When a buyer agrees to purchase goods under the Incoterms of FOB, they consent to the following responsibilities and risks:
- Freight Charges: Carriage charges to ship the cargo from the loading port to the destination.
- Insurance: Under FOB, freight insurance is not a requirement; however, it is the buyer’s decision if they would like to purchase an insurance policy for their shipment.
- Destination Terminal Handling Charges: The buyer is responsible for DTHC.
- Delivery to Destination: Once the cargo is unloaded from the carriage, the buyer is responsible for the final carrier fee to deliver the load to their destination.
- Unloading at Destination: In the event of any expenses incurred during the unloading process at the buyer’s warehouse, the buyer is responsible.
- Import Duty, Taxes & Customs Clearance: The buyer is responsible for all taxes and fees associated with customs clearance. In the event of dunnage, penalties, or delays, the buyer must cover the charges and risks associated with it.
Advantages of Shipping FOB for the Buyer
When buyers purchase an item under FOB Incoterms, they have far more control over shipping and logistics while the cargo is in their territory. This allows them to choose their preferred method of transportation and determine costs for both materials needed and fuel use during transport, all things that can contribute heavily toward the final price tag on whatever it may be shipped across borders.
The buyer can select their own freight forwarder for the entire shipment instead of relying on a supplier who may or may not provide them with all of its transportation details. This reduces back-and-forth communication between two companies and provides more clarity in permission about when something needs updating during the shipping process.
FOB Incoterms are also the most cost-effective option, as it allows buyers to shop for the best possible shipping rate. The transfer of risk occurs when goods are loaded onto vessels. The buyer’s forwarder is responsible for the entire transportation process and then transported across oceans by reputable companies who will handle all aspects until they reach their final destination.
Sellers appreciate FOB Incoterms because they can consider the sale complete once the cargo leaves their factory.
Disadvantages of Shipping FOB for the Buyer
For most buyers, there is almost no disadvantage to FOB purchases. For newer importers or those who have continually purchased under Incoterms where the seller organizes their freight costs; this process can seem more complicated because of an added step in organizing shipping information with vendors before payment was agreed upon by both parties but significant cost savings and control quickly make up for it.
With the help of a logistics company, those importers without experience in FOB shipments should avoid any potential mishaps.
When to Use and FOB Agreement
FOB is a widespread agreement for most bulk cargo shipped by sea. Buyers and sellers often confuse FOB with the understanding that it can go through any mode of transportation; however, this isn’t true in all cases as International Commerce Center (ICC) explains that a FOB shipment can only be sent by sea or inland waterway, but not via other modes of transportation like air freighting which leads many people to misbelieve about its viability in different circumstances because sometimes one type may work better than another depending on location. When not shipping via sea, buyers and sellers could consider FCA a comparative Incoterm that works for all transport modes.
While the possession of the cargo transfers to the buyer once the freight is loaded onto a truck at the seller’s warehouse, the seller still maintains responsibility in ensuring the shipment safely clears the rails of the ship. The buyer takes over once that happens and can calculate total costs by adding on top of this FOB price from both parties together with an estimate from logistics companies about how much freight each mile costs them.
What is the difference between FOB and CIF?
The significant difference is that CIF places the cost of shipping and insurance on the seller, unlike a FOB agreement where these are the buyer’s responsibilities. CIF is much more expensive for the buyer because they rely on the seller to include shipping in the price of their products.
How can I get help to manage my shipping terms?
Incoterms® 2020 is only a tiny part of the international shipping process. If you want to focus on your business more and outsource the international shipping matters, AnsarComp (M) Sdn Bhd is the right company to help you with this. Ansarcomp (M) Sdn Bhd can act as the legal importer and exporter of goods without owning them. While being technically responsible as the importer and exporter, Ansarcomp (M) Sdn Bhd’s job scope for Importer of Record (IOR) and Exporter of Record (EOR) service for our clients involves liaison such as courier services and/or forwarding agent companies for both shipment clearance and the client’s delivery. We are responsible for obtaining import permits and labels from SIRIM wherever necessary. We are offering our clients trade compliance solutions. Manufacturers, distributors and agents are our most regular clients who find the IOR and EOR concepts are helping them in managing their products into Malaysia without hassle. If you want to know more about our trade compliance and logistic solutions, particularly for goods coming into Malaysia, please click here to contact us.
Where can I learn more about shipping incoterms?
Check out our: Know your Incoterms.