FOB Incoterms rule is specifically designed for ocean freight. While the supplier (exporter) manages and covers costs for loading the goods onto the ship, ownership and responsibility shift to the buyer (importer) the moment those goods are on board. This means the buyer handles and pays for the main shipping journey.
This arrangement works well for buyers experienced in international shipping or those wanting to secure their shipping contracts for potential cost savings.
In this guide, you’ll learn:
- The meaning of FOB Incoterms
- Buyer’s and supplier’s responsibilities
- An example of Free on Board Incoterms
- Advantages and disadvantages
- Frequently asked questions about FOB
What are FOB Incoterms?
FOB Incoterms (Free On Board) rule is one of the 11 Incoterms defined by the International Chamber of Commerce (ICC). Under FOB, the supplier's responsibility ends once the goods are loaded onto the vessel at the specified port. From this point, the buyer assumes all risks and costs.
Key features of FOB Incoterms explained:
- Point of delivery: The delivery destination is the port where the cargo is loaded onto the vessel.
- Modes of transport: Free On Board Incoterms rule applies exclusively to sea and inland waterway transport.
- Insurance coverage: Negotiable. The supplier doesn’t need to provide insurance.
Note that there might be additional clauses and types of FOB:
- FOB Stowed: Here, the supplier's responsibility extends beyond loading onto the vessel to include the cost and responsibility of stowing and securing the goods within the ship's hold.
- FOB Stowed & Trimmed: This adds another layer, making the supplier responsible for both stowing and trimming (distributing the cargo evenly for vessel stability) within the ship's hold.
Any additions or alterations to the standard Free On Board Incoterms should be explicitly stated and agreed upon within the sales contract to avoid misunderstandings and potential disputes.
💡 The International Chamber of Commerce updates the Incoterms every decade. The newest versions are Incoterms 2010 and Incoterms 2020. When you include FOB or any other in a contract, specify the edition to avoid misunderstandings or misinterpretations.
Read more: What are the types and rules of Incoterms?
Supplier’s and buyer’s responsibilities under FOB Incoterms
To use FOB Incoterms effectively, both exporters and importers must understand their distinct roles and obligations.
Supplier’s responsibilities
- Export packaging: Ensuring the goods are properly packed for their international journey.
- Loading charges: Paying for the cost of loading the products onto the initial transport at the pickup location.
- Delivery to port/place: Transporting the cargo to the carrier or specified party at the named port or location as per the contract.
- Export formalities: Managing all export-related paperwork, including duties, taxes, and customs clearance.
- Origin terminal charges: Covering any costs incurred at the origin terminal, such as handling fees.
- Loading onto carriage: Overseeing the loading of the goods onto the main transport vehicle.
Buyer’s responsibilities
- Main freight charges: Covering the main transportation costs to move the products to their destination.
- Destination terminal charges: Paying for costs at the destination terminal, including unloading and handling, up to the agreed delivery point.
- Delivery to the final destination: Taking responsibility for the goods once they arrive at the specified location, port, or terminal, and arranging further transport to the final destination (buyer’s premises or designated place).
- Unloading at destination: Managing and covering the costs associated with unloading the goods.
- Import formalities: Handling all import-related procedures and expenses, including customs duties, taxes, and clearance in the destination country
An example of FOB Incoterms
Let's say a Seattle-based coffee company, "Green Coffee Imports," wants to import a batch of specialty Arabica beans from "Fazenda Alta," a well-known coffee farm in Brazil. They decide to use FOB Incoterms, specifying the "Port of Rio de Janeiro" as the point where responsibility shifts.
Supplier’s responsibilities (Fazenda Alta)
Fazenda Alta meticulously prepares the coffee beans according to Green Coffee Imports' quality requirements. They then transport the beans to the port, manage all the necessary export paperwork, and handle the customs clearance process in Brazil.
Once at the port, Fazenda Alta loads the coffee beans onto the ship selected by Green Coffee Imports and provides a bill of lading as confirmation.
Buyer's responsibilities (Aroma Coffee Roasters)
At this point, Green Coffee Imports takes the reins. They cover the costs of shipping the beans to Seattle, secure insurance for the cargo, manage the import customs procedures on the US side, and finally transport the coffee beans to their roasting facility. They also oversee the unloading and inspection of the beans upon arrival.
In simple terms, using FOB means Fazenda Alta is only responsible for the goods until they are loaded onto the ship in Rio de Janeiro. From that point on, all responsibilities and risks transfer to Green Coffee Imports, giving them the power to choose their preferred shipping methods and manage the logistics as they see fit.
Advantages and disadvantages of FOB Incoterms
Like any Incoterm, FOB comes with its own set of advantages and disadvantages. Understanding these is crucial for businesses to determine if FOB aligns with their risk appetite and logistical capabilities.
Advantages
- Control over the main carriage: Buyers gain control over the main carriage, allowing them to choose their preferred shipping lines, schedules, and routes. This can be advantageous if the buyer has established relationships with reliable freight forwarders.
- Cost management: Buyers can potentially negotiate better shipping rates and terms, given their control over the main carriage, which can lead to cost savings.
- Reduced seller’s burden: Suppliers benefit from having a reduced burden as their responsibilities end once the goods are loaded onto the vessel. This can simplify logistics and lower costs for the seller.
Disadvantages
- Coordination challenges: Managing international shipping logistics can be complex and time-consuming, particularly for buyers who are not experienced in dealing with global supply chains.
- Limited to water transport: FOB Incoterms rule is only applicable to goods transported by sea or inland waterways.
FOB Incoterms: Frequently asked questions (FAQs)
Who pays the freight under FOB Incoterms?
In FOB Incoterms, the buyer is responsible for paying the international freight charges. The seller covers the costs of inland transportation to the port of shipment and loading the cargo onto the vessel. The buyer then takes over, paying for the ocean freight, insurance, and all other costs associated with getting the goods to their final destination.
FOB vs. EXW (Ex Work) Incoterms
EXW Incoterms rule places the minimum responsibility on the seller. The buyer is responsible for collecting the goods from the supplier's premises and handling all subsequent transportation and export/import formalities. FOB Incoterms agreement requires the supplier to deliver the products, loaded onto the ship, at the named port.
What’s the difference between FCA and FOB Incoterms?
FOB is exclusively for sea shipments, with the seller responsible for loading the goods onto the vessel. In contrast, FCA is used for any mode of transport, and the buyer handles loading. FCA risk transfer occurs at a designated location, while FOB risk passes to the buyer once the cargo is on board the ship.
When to use FOB Incoterms
FOB Incoterms rule is suitable for companies that want the seller to handle the initial stages of shipping, including loading the goods on board the vessel, while taking control of the main sea transport. This agreement is ideal for businesses capable of managing transportation from the port of shipment.
Choosing Free On Board Incoterms depends on specific business needs, risk tolerance, and familiarity with international shipping. It’s important to assess the benefits and drawbacks, consider the unique circ*mstances of the transaction, and seek expert advice if necessary.
By understanding Incoterms and selecting the appropriate one, you can confidently navigate the complexities of international trade and achieve success in the global marketplace.
Learn more about other Incoterms:
- EXW (Ex Works)
- FCA (Free Carrier)
- FAS (Free Alongside Ship)
- CFR (Cost and Freight)
- CIF (Cost, Insurance, and Freight)
- CPT (Carriage Paid To)
- CIP (Carriage and Insurance Paid To)
- DAP (Delivered at Place)
- DPU (Delivered at Place Unloaded)
- DDP (Delivered Duty Paid)
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