Afree on board (FOB)designation specifies whether the buyer is responsible for freight charges. It determines the obligations of the parties when they're trading goods. There are two main types of free on board freight with several sub-designations, including FOB destination and FOB shipping point.
Free on board is an international trade term under the Incoterms rules published by the International Chamber of Commerce (ICC). Costs associated with FOBinclude transportation of the goods to the port of shipment, loading the goods onto the shipping vessel, marine freight transport, insurance, and unloading and transporting the goods from the arrival port to the final destination.
Key Takeaways
- Free on board is a trade term that's used internationally to designate whether the buyer of goods is responsible for paying freight charges.
- The FOB designation includes several types of payment terms and varying types of protections.
- FOB payment terms can determine whether the buyer is responsible for transportation costs.
- Terms also determine who is responsible should the shipment be damaged or lost in transit.
Types of Free on Board Destination
Freeon board destination makes thesellerresponsibleuntil the freightarrives. This includes covering the cost of lost or damaged freight. FOB destination costs can be handled in several ways.
FOB Freight Prepaid and Allowed
FOB freight prepaid and allowed specifies that the seller is obligated to pay the freight transportation charges and they own the goods while they're in transit. The seller assumes the risk of loss of or damage to goods during transit. Thetitleto goods passes to the buyer at the buyer's business location.
FOB Freight Prepaid and Added
FOB freight prepaid and added specifies that the seller is obligated to pay the freight transportation charges but the seller bills the cost of transportation to the buyer. The seller assumes the risk of loss of or damage to goods during transportation because the seller owns the goods during transit.
The title to goods passes at the buyer's business location.
FOB Freight Collect
FOB freight collect specifies that the buyer must pay the freight transportation charges when the buyer receives the goods. However, the seller assumes theriskassociated with transporting the goods because the seller still owns the goods during transit.
FOB Freight Collect and Allowed
FOB freight collect and allowed specifies that the buyer must pay the freight transportation costs but the buyer deducts this cost from the seller's invoice. The seller is responsible for the goods because the seller still owns the goods during transit.
Free on Board Shipping Point
FOB shipping point relieves the seller of any responsibility for the shipment after the goods arrive at the shipping vessel. This makes the buyer responsible for the goods during transport. They cover the freight charges and may want to purchase insurance to protect themselves if any of the shipment is lost or damaged.
Are There Options Other Than Free on Board Freights?
Cost, insurance and freight (CIF) is another commonly used INCOTERM agreement. It sets minimum standards for the insurance a seller must obtain. Free alongside ship (FAS) cites that the delivery vessel will transfer cargo from a vessel next to the buyer's vessel whereas free on board (FOB) standards require that the seller deliver directly to the buyer's vessel. FAS and FOB both apply to shipments that must be transported by waterway.
Is There Any Drawback to the Buyer in a Free on Board Designation?
The buyer generally has little to no control over the shipment process. They can't decide the shipping company, the route the company takes, or when and how the shipment is delivered.
What Are Some of a Buyer's Responsibilities in FOB Transactions?
The buyer is obligated to provide adequate instructions so the delivery can be made safely and on time according to the sales agreement. Failure to do so can break the contract.
The Bottom Line
Upholding and adhering to International Commercial Terms is critical to international trade and commerce and to individuals as well. Costs borne by sellers and buyers trickle down to consumers. Unfortunately, consumers have no control over them.
