What does FOB stand for?

FOB stands for Free on Board. The term originated when sailors would manually pass merchandise over a ship’s rails and was coined for official use in 1936 by the International Chamber of Commerce (ICC). FOB is one of the phrases in a set of Incoterms—globally recognized terms used to simplify international trade.

An FOB designation specifies who is liable for goods at different points in the shipping process. The term indicates who pays for shipping costs and who is responsible for damaged goods. It does not indicate when ownership of the transported goods moves from one party to the next. Instead, FOB shipping focuses on the specific obligations of delivering the goods.

What does freight on board mean? Essentially, it has the same meaning as FOB, and the terms are often used interchangeably. However, the proper term is free on board, not freight on board.

When is FOB used?

FOB is used only for a few specific shipping situations in international and domestic transportation. Internationally, businesses that ship goods through rivers, canals and sea freight use FOB to describe shipping responsibilities. The ICC does not permit the use of FOB for road freight and instead recommends that companies use the Incoterm FCA (Free Carrier).

In North America, domestic sellers use the term FOB for all forms of transportation, both maritime and on land. In the US, the trucking industry accounts for shipping 80% of goods across the country. The costs and risks of shipping road freight are often similar to maritime shipments. To maintain control on ground shipments, businesses write the FOB status into their sales agreements to predetermine when and where buyers assume liability for their purchased goods from sellers, whether it’s overseas or on land.

FOB classifications

Because either the buyer or the seller has to be responsible for the cargo at every point in the shipping process, you’ll see FOB used in two key classifications.

FOB Origin

The FOB origin designation is for when the buyer assumes responsibility for their purchased goods immediately after their freight carrier signs the bill of lading at the seller’s warehouse. For instance, if a boutique in Dallas, TX, agreed to be liable for transporting the goods, they would write “FOB Origin” or “FOB Dallas” on the freight invoice. FOB Origin responsibilities include:

• Freight charge (unless there is an alternative payment term decided upon)
• Risk of transportation
• Costs associated with damages incurred during transport
• The filing of insurance claims on damaged goods
• Control of the title and goods

FOB Destination

Businesses use an FOB destination designation when the seller retains responsibility for the goods until the goods arrive at the buyer’s location. For example, if a denim company in Dallas sends a shipment of jeans to a boutique in Albuquerque, the FOB classification would indicate who is responsible for the goods once they leave the denim warehouse in Dallas. If the denim company assumes responsibility for the goods all the way to Albuquerque, they would write “FOB Destination” or “FOB Albuquerque” on the freight invoice. The FOB destination shipper is responsible for:

• The title and control of the goods
• Freight charges (unless otherwise negotiated)
• Retaining the value of the product, including filing insurance claims for any merchandise damaged in shipment
• Selection of the carrier and route traveled

Payment term variations

Generally, FOB destination means the shipper is responsible for freight charges, while FOB origin means the receiver would be liable for those charges. However, companies are free to adjust the contract as needed, and payment term variations are common. FOB classifications can also be used in conjunction with other shipping terms that clarify additional details about costs:

• Freight Prepaid and Allowed: The seller has agreed to pay for all transportation costs and they are included in the payment prior to shipping.
• Prepaid and Add: The seller pays for freight charges initially and includes an invoice for the buyer to reimburse those costs.
• Freight Collect: The buyer will pay for all transportation costs, which are paid directly to the carrier.
• Collect and Add: The buyer pays for freight and deducts it from the invoice.
• Prepaid: The seller simply pays freight charges in advance.

For example, FOB Origin Freight Prepaid means that the buyer is liable for the goods during transit, but the seller will pay for all transportation costs. FOB Destination Freight Collect means that the seller assumes liability, but the buyer will pay for the freight fees.

How does FOB impact small businesses?

Any business that sends or receives shipments of products should have a fully functional logistics and supply chain management process and understand FOB to accurately estimate shipping costs. FOB also determines whether you are able to acquire insurance for your shipment. When the buyer has a liability, they can purchase insurance for their product. If the seller has a liability, the buyer has to rely on them to fulfill the order even if the goods get damaged or lost in transit.

FOB can also impact the amount of taxes you pay if you live in a state that charges a sales tax on shipping costs. While buyers incur more risks with FOB Origin Freight Prepaid shipments, they can also save on sales tax if they arrange shipping directly with their chosen carrier. Choosing FOB Destination means paying sales tax on the seller’s shipping costs. When negotiating your sales agreement, consider your transportation budget and how damaged or lost goods could impact your bottom line.

FAQs about FOB

What does it cost to ship inventory FOB?

The cost of FOB shipping varies greatly depending on the origin and destination of the shipment as well as the overall cost to the shipping company. Delivering a product to a receiver’s nearest port or other shipping location can be costly and requires several processes:

• Transporting goods to the shipping port
• Managing staff to load goods onto the vessel
• Insuring the goods being transported
• Handling freight charges
• Unloading the shipment and delivering it to the final destination

Shipping agreements outline the cost of freight and FOB terms including the exclusion of additional costs such as customs, value-added tax and import duty.

What is the difference between CIF and FOB?

CIF stands for Cost, Insurance and Freight. With CIF shipping, the seller is responsible for all costs and assumes liability until the product reaches the buyer. The buyer, however, is responsible for the safety of the goods at the point they are loaded onto the vessel for transport. FOB gives buyers and sellers more control over their shipping costs and responsibilities than CIF.