Free on Board (FOB), a shipment term, defines the point at which a buyer or a seller is responsible for the goods being transported. Purchase orders between buyers, sellers, and other parties set FOB terms. They also help determine ownership, transportation costs, and risk.

This centuries-old term for shipping has evolved into an important concept to determine the reliability and ownership. This is due to the internationalization of markets, technological advancements in logistics, communication, and distribution.

By specifying if goods are shipped FOB Origin, or FOB Destination (Facility Originated at), companies clearly define when and where they will bear the cost and risk associated with transportation. This has a significant impact on not only the price and how and when goods will be transported, but also on insurance, customs duties and legal disputes.

Understanding FOB Shipping

FOB is an internationally used shipping term. It can be applied to both domestic and foreign transactions. It is an agreement between buyer and seller that specifies the date when ownership and liability of the goods are transferred from the seller to buyer. FOB terms are usually included in shipping contracts and orders. They detail the time and place for delivery, payment methods, and who is responsible for freight costs and insurance.

The vendor and client agree on FOB conditions in the Purchase Order. While FOB status does not determine ownership (which is determined by the bill of sales or separate agreement), the status does indicate which party assumes responsibility at different points along the journey. The two main types are:

• FOB Origin : The buyer is responsible for the goods once they leave the seller’s location. The buyer is responsible for all costs and risks incurred in the transportation process.
• FOB Destination The seller retains responsibility until the goods reach the buyer’s location. The seller is responsible for all costs and risks incurred up to this point.

FOB conditions can affect inventory management, shipping rates, and insurance requirements, whether the transaction is domestically or internationally. It is important that shippers keep an eye on this, as costs have been rising and falling sharply in the last few years.

FOB Origin and FOB Destination

The International Chamber of Commerce (ICC) publishes Incoterms as the most common international trade terms. However, firms that ship goods to the U.S. are required to adhere the Uniform Commercial Code.

There are different legal definitions and rules for FOB that may vary from country to country. Therefore, parties to a contract should specify which laws will be used to govern a shipment.

Characteristics	FOB Origin	FOB Destination
Transportation costs	The buyer is responsible for transportation costs between the seller’s location and the final destination.	The seller is responsible for all transportation costs up to the point where the goods are delivered to the buyer.
Risks of Loss or Damage	Once the goods leave seller’s premises, the risk of loss or damages to the goods is transferred to the buyer.	The seller is responsible for any loss or damage until the goods are delivered to the buyer.
Shipping Arrangements	The buyer is responsible for shipping and handling, from the seller’s place of business to the final destination.	The seller is responsible for arranging shipping until the goods arrive at the buyer’s location.
Insurance	Typically, the buyer arranges and pays insurance.	In most cases, the seller pays and arranges for insurance.
Customs and import duties (International)	The buyer is responsible to pay import duties and taxes and for clearing customs.	The seller is responsible to pay import duties and taxes, and for clearing customs.
Price	The price is usually lower because it does not include the cost of transportation beyond the seller’s locality.	The price of the product is usually higher because it includes the cost of transportation up to the buyer’s location.
When is it Typically Used	Used for domestic shipments, or when the buyer is in control of shipping preferences.	Often used when shipping internationally or when the seller wishes to offer a more inclusive package.

FOB Advantages & Disadvantages

Benefits from FOB Origin

FOB Origin is more cost-effective for buyers because they can select their freight forwarder, and manage freight costs better. Buyers also have greater control over the shipping process, which allows them to better manage logistics and mitigate problems. Here are some additional benefits for both the seller and buyer:

Benefits	Buyers	Sellers
Cost Control	Control shipping, select carriers/routes that meet budget and timeline and potentially reduce costs.	Transfer the shipping costs and responsibilities of the buyer to them, simplify pricing and focus on your core business.
Risk Management	Choose insurance providers and coverage levels. Assume the risk of loss or damages from the origin.	Limiting liability for goods in transit will reduce claims and disputes over damaged or missing goods.
	Can streamline supply chain and coordinate directly with carriers to ensure timely deliveries.	Reduced complexity of shipping logistics and faster turnaround times. Focus on production.
Flexibility	Negotiate shipping costs and terms with the carriers directly.	Transfer goods directly at the origin point without having to navigate international shipping regulations.

Disadvantages FOB Origin

FOB Origin is more cost-effective for buyers because they can select their freight forwarder, and manage freight costs better. Buyers also have greater control over the shipping and logistics process, allowing them to better manage logistics and mitigate problems.

FOB Origin means that the buyer is responsible for all risks relating to damage, destruction and loss during transit, once the goods have been loaded onto the chosen transport mode at the origin point. This arrangement may be more expensive, especially if the shipment is large and travels a great distance. Solving any problems that may arise during transport can also take a lot of time for the buyer.

FOB Origin has another disadvantage: the buyer is responsible for all aspects of transportation. This includes finding a suitable carrier and negotiating rates. It also includes handling export documents and covering additional costs like insurance, customs clearing, and other logistical service.

FOB origin also poses risks to sellers. The quoted price excludes insurance and transportation costs. Therefore, the final cost to the buyer is often higher than FOB Destination. This can make a seller’s offer appear less competitive and impact sales volume.

Before agreeing to FOB Origin, buyers should carefully assess their ability to manage costs and transportation. Both parties must have a clear idea of their responsibilities, and maintain open communication during the shipping process.

Benefits to FOB Destination

FOB Destination is a way for sellers to improve customer service, as they are responsible for the goods up until delivery. This improves customer satisfaction and loyalty. Buyers do not assume ownership of goods until they are delivered. This allows them to inspect them before accepting them. Here are some additional benefits:

Benefits	Buyers	Sellers
Cost Control	Shipping costs are included in your purchase price.	Controlling shipping costs allows for possible bulk rate negotiations with carriers.
Risk Management	The seller is responsible for any loss or damage until the goods reach their destination. This reduces the buyer’s risks.	Maintain responsibility for goods while in transit.
Operation	Reduced administrative tasks for the buyer as the seller will handle shipping arrangements.	Streamlining shipping and delivery could lead to a quicker resolution of transit problems.
Convenience	The purchasing process is simplified with fewer logistical concerns. Goods are delivered directly to a buyer’s location.	Could improve customer satisfaction through end-to-end services.
Customer Service	Sellers are often better at customer service and support, and can handle any problems that may arise during shipping.	Increase the number of services you offer to buyers and build stronger relationships with them.

The Risks and Disadvantages Of FOB Destination

In this arrangement, the seller retains responsibility for the goods until the goods are delivered to the purchaser. The seller is responsible for any loss, damage or destruction that occurs during transit. This can have a negative impact on their reputation and profitability. The seller is responsible for resolving any issues that may arise during shipping. They may be required to replace or refund damaged goods.

The seller is also responsible for the freight costs, which are added to their total cost. In order to cover these costs, sellers may have to increase the price of the final product for the buyer. This can impact the seller’s ability to compete in the market as buyers may choose lower-priced options.

A seller may not be able record the sale until after the goods have been delivered to the buyer. This can have an impact on their accounting and cash flow, as there may be a time delay between the shipping of goods and receiving payment.

The seller may also face delays in transit if the goods have left the port of origin. This can raise concerns about their ability meet delivery deadlines, and is a major risk for FOB destination transactions. Sellers need to have contingency plans in place to deal with potential delays, and communicate effectively with buyers.

Before agreeing to FOB destination terms, sellers should assess their ability to absorb losses and manage shipping expenses. Both parties must understand their responsibilities, and keep open communication during the shipping process.

Free on board Example

Imagine that the manager of Dara Inc., in New York City, orders 1000 electronic components from ABC Co. of Shanghai, China. The contract specifies FOB origin for the shipment. Dara Inc. wants to know the difference if they chose FOB Destination. Let’s go through them:

FOB Origin Examples

Seller’s Responsibilities:

• ABC Co. prepares electronic components for shipment.
• It loads the goods on a shipping vessel in the port of origin, Shanghai.
• When the goods are delivered to the carrier, the seller’s responsibility is over.

Buyer’s Responsibilities:

• Dara Inc. becomes the owner of the goods once they are loaded on the vessel.
• It is responsible for ensuring that the goods reach their destination in New York City.
• Dara Inc. covers all shipping costs, including freight, insurance and customs clearance.

FOB Destination Examples

Seller’s Responsibilities:

• ABC Co. prepares electronic components for shipment.
• It loads the goods on a shipping vessel in the port of origin, Shanghai.
• The seller retains ownership of the goods until the goods reach the buyer in New York City.

Buyer’s Responsibilities:

• Dara Inc. does not assume ownership of the goods until they are delivered to its warehouse in New York City.
• It inspects the goods on arrival and reports any damage or issues.
• Dara Inc. covers all shipping costs including freight, insurance and customs.

The specific needs of each party will determine the choice between FOB origin and FOB destination. Dara Inc. chose FOB Origin because they have experience in international shipping and want to save money on transport costs. FOB Destination is a better choice if the seller wishes to minimize risks and provide a complete service, including delivery.

Additional Shipping Conditions

You’ll also see the following terms when reviewing shipping obligations:

Term	Acronym		Mode(s)
Bill of Lading	B/L	A legal document between a shipper and a carrier that details the type, quantity and destination of goods.	All modes
Carriage and Insurance paid to	CIP	The seller pays for the carriage and insurance up to the designated destination. The risk is transferred to the buyer once the goods are handed over to a carrier.	All modes
Paying Carriage To	CPT	The seller pays the carriage to the designated destination. The risk is transferred to the buyer once the goods are handed over to a carrier.	All modes
Cost and Freight	CFR	The seller pays the freight and cost to deliver the goods to the port of destination. Once the goods are on board the ship, the risk is transferred to the buyer.	Sea and inland waters
Cost, Insurance, Freight	CIF	The seller pays for the freight, insurance and cost of bringing the goods to their destination port. Once the goods are loaded on the vessel, the buyer assumes the risk.	Sea and inland waters
Frontier Delivered	DAF	Requires that a seller deliver goods to an area near the border. The seller is responsible for the cost of transporting goods to the drop off point for the buyer. The person picking up the goods is usually importing and traveling through customs.	All modes
Delivered to Place	DAP	The seller delivers the goods at a specified place (usually to the buyer’s premises) and the buyer is responsible for import duties and taxes. Risk transfers when goods are available for unloading.	All modes
Terminal Delivered	DAT	The seller delivers goods to a terminal in the port or place of destination, while the buyer is responsible for import duties, taxes and further transportation. Risk transfer occurs when the goods are unloaded from the terminal.	All modes
Delivered Duty Payed	DDP	The seller will cover all costs including duties and transport the goods to the specified place in the buyer’s home country.	All modes
Ex Work	EXW	The seller makes the goods available on their premises. From that point, the buyer is responsible for all transport and risk.	All modes
Free Alongside Ship	FAS	The seller must deliver the goods to an airport or shipping port where the buyer is established and takes delivery.	Sea and inland waters
Free Carrier	FCA	The seller must deliver the goods to an airport or shipping port where the buyer is established and takes delivery.	All but typically used in land, sea/inland waters, and air transport
Freight on Board	FOB	Same as Free on Board	Sea and inland waters
Full Truckload	FTL	A shipment that is large enough to fill an entire truck.	Road
Less than Truckload	LTL	A shipment that does not fill a truck.	Road

The Bottom Line

Understanding Free on Board is essential for businesses involved in domestic and international commerce. FOB Destination and FOB Origin each have their own set responsibilities, costs and risks for both buyers and sellers. By clearly defining the terms in their contracts, parties can ensure a smoother transfer of goods while minimizing the possibility of disputes.

The choice between FOB origin and FOB destination depends on a number of factors, such as the nature of the goods and the distance that they must travel. It also depends on the ability of both the buyer and seller to manage the risks associated with transportation. Businesses should carefully evaluate their options and negotiate the terms that best suit their needs.