Free On Board (FOB) is a fundamental term in international commerce that dictates the division of responsibilities, costs, and risks between a seller and a buyer during a shipment. When a transaction specifies an FOB price, it sets a precise boundary in the logistics chain, establishing exactly who pays for which part of the journey and who is accountable for the shipment at any given moment. Clearly defining the term in contracts is necessary to avoid costly disputes and unexpected financial burdens.
Defining Free On Board (FOB)
Free On Board is one of the 11 internationally recognized trade terms, or Incoterms, created by the International Chamber of Commerce (ICC). The formal definition requires the seller to deliver the goods by placing them onto the vessel nominated by the buyer at a specified port of shipment. When a business quotes an “FOB Price,” it signifies that the cost includes all expenses necessary to prepare the product for export and load it onto the ship. This structure means the seller manages the initial domestic leg of the journey, and the buyer assumes control of the international main carriage.
The Critical Point of Risk and Responsibility Transfer
The FOB term establishes the exact moment when the risk of loss or damage transfers from the seller to the buyer. This transfer occurs when the goods are physically placed “on board” the vessel at the named port of shipment.
Before this point, the seller is fully liable for any damage, such as a mishap during transport to the port or while the cargo is being loaded. Once the goods are on board, the liability shifts entirely to the buyer for the remaining journey. Because of this distinct separation of risk, the buyer is advised to arrange marine insurance coverage for the main carriage. The FOB term operates as a “sale on departure,” where the risk is transferred to the buyer at the point of shipment.
Seller Costs Included in the FOB Price
The FOB price includes all costs incurred by the seller up to the moment the goods are delivered onto the vessel. These costs begin with preparing the goods for shipment, including adequate export packaging, marking, and labeling. The seller must cover all pre-carriage expenses, such as transporting the goods from their warehouse to the designated port of shipment. The seller is also responsible for managing and paying for all export clearance formalities required by the country of export, including securing necessary licenses, permits, and paying any export duties or taxes. Finally, the seller covers the terminal handling charges and the physical loading costs associated with placing the goods onto the buyer’s nominated ship.
Buyer Costs Excluded from the FOB Price
The FOB price is the starting point for the buyer’s total expenditure, often called the total landed cost. The buyer is responsible for securing and paying for the main international freight charge from the named port of shipment to the destination port. Since the risk transfers at the port of export, the buyer also pays for any cargo insurance purchased for the transit. Upon arrival, the buyer must pay for all subsequent charges, including unloading the goods from the vessel and destination terminal handling charges. This also includes all formalities required to legally import the goods, such as import clearance, customs duties, and taxes. Finally, the buyer arranges and pays for the onward carriage from the port of destination to their final facility.
How FOB Differs from Other Common Trade Terms
Comparing Free On Board to other common trade terms highlights the specific responsibility split it represents. The term Ex Works (EXW) places the minimum obligation on the seller, who simply makes the goods available at their premises. Under EXW, the buyer must manage and pay for every step, including pickup, transport, and all export and import formalities.
FOB represents a middle ground where the seller handles delivery and export clearance. This gives the buyer more control over the main shipping costs compared to other terms. Cost, Insurance, and Freight (CIF) is similar to FOB because the risk transfers to the buyer once the goods are loaded onto the vessel. The difference is that under CIF, the seller pays for and arranges the main carriage freight and secures minimum insurance coverage up to the port of destination.
The Strict Maritime Rule for Using FOB
The Free On Board term is strictly intended for use with sea or inland waterway transport. The rule’s definition and the point of risk transfer rely on the physical act of loading the goods “on board” a vessel. This term is generally appropriate for bulk cargo, such as grain or oil, which is loaded directly onto the ship.
The ICC advises against using FOB for non-maritime transport (air, road, or rail) or for containerized sea shipments. When goods are containerized, the seller typically delivers the cargo to a terminal before it is physically loaded onto the ship. In these situations, Free Carrier (FCA) is the more appropriate choice, as it aligns the risk transfer with the moment the seller hands the goods over to the buyer’s nominated carrier.