What is Free On Board (FOB)?

Free on board is like when you and your spouse decide ahead of time who’s in charge of the dishes tonight…

Let’s say that during the day, you and your spouse decide you’ll cook dinner as long as he or she washes the dishes. If you figure it out ahead of time, then there will be no unpleasant surprises or complaints later. Similarly, free on board is a way of clarifying ahead of time who is responsible for the costs and liabilities of a product at any point in the transportation process. That way, there are no surprises or questions about responsibility later.

Free on board (FOB) is a commercial transportation term. It indicates the point at which ownership and responsibility for an item transfer from the seller to the buyer. Before the FOB point, the seller still owns the item and is liable for any loss or damage that occurs. Once the item passes the FOB point, all ownership and liability shifts to the buyer.

Let’s say you own a retail store where you sell home goods. You order a shipment of glassware to sell in your shop. Unfortunately, the box holding the glasses suffers some damage during the shipping process, and most of the glasses have broken by the time they arrive at your shop. At this point, you need to check your shipping contract. If the contract indicates the goods were shipped FOB shipping point, then the goods were your responsibility when they broke. You’ll have to file a claim with your insurance company. If the contract says FOB destination, then the glasses were still under the ownership of the seller at the time they broke, and the seller will have to replace them.

The term free on board (FOB) has a few primary uses. First, the term may indicate when the ownership and liability for an item shift from the seller of the item to the buyer. The two options are FOB shipping point and FOB destination. FOB shipping point refers to a contractual agreement where the ownership of the goods shifts from the seller to the buyer at the time they ship. In the case of FOB destination, the ownership doesn’t shift until the items reach their final destination.

FOB can also indicate who is responsible for paying the shipping costs of an item. The terms FOB freight prepaid or FOB freight collect indicate that either the seller or buyer pays the freight costs, respectively.

Finally, FOB is a term that appears in international trade law. In that case, FOB appears without any modifiers. It indicates that the seller is responsible for shipping the items and covering any freight costs for the buyer.

Free on board (FOB) shipping point refers to a contractual agreement where the ownership and liability for an item shifts from the seller of an item to the buyer at the shipping point, meaning the shipping dock of the seller. In the case of FOB shipping point, the buyer acquires ownership and responsibility of the item once it leaves the shipping point. The buyer also acquires the risk and liability of the item at that point. He or she is responsible for filing any claims if the item gets lost or damaged. FOB shipping point also sometimes appears as FOB origin.

Unlike free on board (FOB) shipping point (aka FOB origin), which puts most of the risk on the buyer, FOB destination puts most of the risk on the seller. The seller maintains ownership and responsibility of any items he or she is shipping until they reach their final destination. The seller also keeps all of the risk until delivery. He or she will have to file any necessary claims for lost or damaged items.

There are different scenarios when it comes to determining who pays the freight for free on board (FOB).

In the context of goods transported internationally by ship, the term FOB appears without any modifier. FOB here means that the buyer of an item chooses a seaworthy ship, and the seller puts the goods on board that ship at no cost to the buyer. Once the item makes it past the ship’s rail with the freight charges paid, the liability shifts from the seller to the item’s buyer. If a contract uses the classic or strict definition of FOB, then this is the type of arrangement to which it’s referring.

The term FOB might also appear with modifiers to designate who is responsible for paying the shipping costs. In general, four different terms might appear in the contract:

• FOB Destination, Freight Prepaid: The seller pays the freight charges and retains ownership and liability of the item until it reaches its destination.
• FOB Destination, Freight Collect: The buyer pays the freight charges, but the seller retains ownership and liability of the item until it reaches its destination.
• FOB Shipping Point, Freight Prepaid: The seller pays the freight charges, but the buyer acquires ownership and liability of the item once it leaves the shipping point.
• FOB Shipping Point, Freight Collect: The buyer pays the freight charges and acquires ownership and liability of the item once leaves the shipping point.

Cost, insurance, and freight (CIF) is another shipping term that indicates that the seller of an item covers the cost of goods sold, insurance, and freight. The term most commonly appears in international shipping.

First, the seller is responsible for clearing the items for export and delivering them to the ship that will transport them. The seller also pays the shipping cost. Like the classic definition of free on board (FOB), the liability for the goods under a CIF contract shifts to the buyer as soon as the goods are on board the ship. However, the seller purchases insurance on behalf of the buyer in case anything goes wrong in transit.

In the case of FOB, the seller is also responsible for clearing the goods for export, delivering them to the ship, and paying the freight costs. The major difference between the two is that in the case of FOB, the seller doesn’t have to purchase insurance on behalf of the buyer to protect them from losses in case the item incurs any damage.

When a shipping contract includes the phrase “Free on Board Shipping Point,” it means that the buyer takes ownership of the item at the time the product leaves the supplier’s shipping location. Even though the buyer doesn’t have possession of the item yet, he or she officially owns it.

In addition to having ramifications for who takes liability for the goods, and possibly who pays for the freight costs, the FOB point is also significant for purposes of both the seller’s and buyer’s records. If the contract includes FOB shipping point, then the seller records the sale for the date when the item leaves its shipping dock, regardless of when the buyer receives it.

Similarly, the FOB point also has an impact on the records of the buyer. Suppose that a transaction is occurring between a wholesaler and a retailer with FOB shipping point. At the time the truck leaves the wholesaler’s shipping dock, the seller records the sale. The buyer should also record an increase in inventory at this time, though he or she hasn't received the item yet.

Free on board (FOB) appears often in the context of international commerce when one company sends an item to another via ship. So if you’re in the situation where you’re receiving international goods, is FOB a good deal for you?

In cases of both FOB and cost, insurance, and freight (CIF), the seller is clearing your goods for export, delivering them to the ship, and paying the transport costs. Given those two options, CIF might be preferable for a buyer because the seller is responsible for buying insurance to shield you against potential losses.

In other cases, the term FOB might include a modifier to indicate when the costs and liability shift from the seller of an item to the buyer. In that case, FOB destination might be a safer bet for the buyer because the seller takes on all the risk of loss until the item reaches your location.