Mastering FOB in Shipping: A Complete Guide


- October 20, 2021

fob shipping

However, a shipment designated FOB Origin technically belongs to the buyer/consignee at the time that it is shipped. So, the consignee would be refusing delivery of goods it legally owns and bears the risk for. The seller has no legal reason to accept those goods back and the return shipment could possibly result in additional damages. This means that your shipment is in the proverbial hands of the supplier through the process of transporting them to a port and loading them aboard a ship. It requires the supplier to pay for the delivery of your goods up until the named port of shipment, but not for getting the goods aboard the ship.

They may also choose higher insurance limits, as they want to ensure that the goods are delivered in excellent condition. We always needed, however, one pallet of books shipped to our offices for direct sales and marketing purposes. The FOB destination terms included the stipulation that the printer delivered to one address and having them split the order in San Diego was a significant extra expense for us. Free on board (FOB) shipping Bookkeeping for Nonprofits: A Basic Guide & Best Practices clarifies predicaments like this by defining exactly when ownership of transported goods changes from one party to another. We’ll go over FOB basics, its variations, and the benefits your small business can enjoy from using it. If you are shipping less than container load (LCL), your cargo will be loaded onto the truck and taken to a warehouse to consolidate your shipment with the other consignments sharing the same container.

The cost of the goods

It’s the cornerstone that defines who pays for shipping costs, who assumes ownership, and where responsibility begins and ends between a buyer and seller. FOB freight prepaid and allowed specifies that the seller is obligated to pay the freight transportation charges and owns the goods while they are in transit. The seller assumes the risk of loss of or the damage of goods during transit.

Free on board, also referred to as freight on board, only refers to shipments made via waterways, and does not apply to any goods transported by vehicle or by air. Freight collect means the person receiving the shipment is responsible for all freight charges. They also assume all risks and are responsible for filing claims in the case of loss or damage. For FOB origin, after the goods are placed with a carrier for transport, the company records an increase in its inventory and the seller records the sale at the same time. In FOB, the custom clearance responsibility for the seller involves export proceedings from the place of origin to the delivery harbor. And since the obligation of the seller is only till the port, the export customs is the seller’s outlook.

Mastering FOB in Shipping: A Complete Guide

There is a reason FOB shipping is so popular amongst buyers and sellers; each party’s responsibilities give them the most control while the cargo is in their territory. The advantage for the buyer when purchasing under FOB Incoterms is they have the most control over the logistics and shipping costs, which allow them to choose their shipping methods. The buyer takes responsibility for the transport cost and liability during transportation. “FOB Destination” means that the transfer completes at the buyer’s store and the seller is responsible for all of the freight costs and liability during transport. A buyer can save money by using FOB Destination since the seller assumes costs and liability for the transportation.

fob shipping

Likewise, at the buyer’s request, the seller may contribute his assistance to the buyer for insurance and customs provisions. In short, all FOB charges from point of origin till the goods are loaded at the port. In shipping, the unit price refers to the cost to ship a good based on a pre-agreed or standardized unit basis. EXW terms often result in cheaper goods; however, the supplier’s risk is increased as they maintain responsibility for the product for longer. But it’s good practice for either the buyer or seller to obtain China freight insurance.

Free on Board (FOB) Explained: Who’s Liable for What in Shipping?

FOB freight collect and allowed specifies that the buyer must pay for the freight transportation costs. The seller is responsible for the goods because the seller still owns the goods during transit. Goods shipped EXW will usually be cheaper FOB, since Free on Board would have the supplier bear the costs of transportation, handling, and customs clearance. EXW terms, however, are often riskier since the supplier is responsible for the goods until they reach their location. These international contracts outline provisions including the time and place of delivery as well as the terms of payment agreed upon by the two parties. When the risk of loss shifts from the seller to the buyer and determining who foots the bill for freight and insurance, all depend on the nature of the contract.

FOB Destination is different to FOB Shipping Point where the buyer is responsible for the shipping and transportation instead of the seller. FOB Incoterms are also the most cost-effective option, as it allows the buyer to shop for the best possible shipping rate. While the transfer of risk occurs when the goods are safely loaded onto the shipping vessel, the buyer’s forwarder is responsible for the entire transportation process. Once the cargo leaves the seller’s warehouse, the buyer is in possession of the load, and can better control the successful outcome of their shipment. To understand each designation, we must first understand the difference between place of origin and place of destination and freight collect vs. freight prepaid.