FOB Incoterms® and Free on Board shipping explained

What does FOB (Free on Board) mean in shipping?

If your business buys or sells goods overseas, choosing the best Incoterms for your cargo can sometimes be confusing, especially if you are new to the world of overseas freight shipping.

Let’s break it down, FOB Shipping is one of the 11 Incoterms rules set by the International Chamber of Commerce. The FOB Incoterms rule is only applied to goods transported by sea or inland waterway. In this guide, you’ll learn all about FOB meaning; what the Free on Board shipping Incoterms® mean and what you need to know to determine if it’s the right shipping option for your business.

FOB (Free on Board) Shipping: Who is reponsible for what?

The FOB Incoterms® meaning defines that, under ‘Free on Board’ the seller is responsible for delivering the goods to the port of departure, clearing it for export and loading the goods on board the vessel. Once the goods is on the vessel, the risk transfers from the seller to the buyer, who’s from that point responsible for all costs thereafter.

This is an example of how it works for goods shipped from Germany to Japan using FOB Incoterms®;

• German seller delivers goods from factory to German port — German seller assumes costs & liability

• Goods are handled at German port — German seller assumes costs & liability

• Goods go through German customs — German seller assumes costs & liability

• Goods are loaded onto ship/freight container — Japanese buyer assumes costs & liability

• Goods arrive in Japan and are handled in the Japanese port — Japanese buyer assumes costs & liability

• Goods go through Japan’s customs — Japanese buyer assumes costs & liability

• Goods are transported to the Japanese buyer’s warehouse — Japanese buyer assumes costs & liability

FOB Destination or FOB Shipping Point?

FOB (Free on Board) Shipping is further broken down into either FOB Destination or FOB Shipping Point which essentially determines who foots the majority of the transportation bill - the buyer or the seller.

FOB Destination transfers the title of shipped goods when it arrives at the buyer’s specified delivery location—usually the buyer’s loading dock, post office box, or office building. Once the products arrive at the buyer’s location, the legal title of the ownership transfers from the seller to the buyer. Therefore, the seller is legally responsible for the products during transport, up until the point the goods reach the buyer. FOB Destination is different to FOB Shipping Point where the buyer is responsible for the shipping and transportation instead of the seller.

A buyer can save money by using FOB Destination since the seller assumes costs and liability for the transportation. However, the disadvantage for the buyer is the lack of control over the shipment including shipment company, route and delivery time.

A common mistake is using FOB (Free on Board) Incoterms® for containerised cargo

A common mistake is to use FOB (Free on Board) Incoterms® for containerised goods, instead of the “all transport modes” rule. This exposes the exporter to unnecessary risks. Under FOB, the risk is officially transferred when the cargo is loaded onboard the vessel. However, it is common practice for the shipper to hand over the cargo to the carrier at the terminal where it awaits to be loaded onto the vessel. Instead, use FCA, CPT, and CIP which are the correct alternatives as they are meant for containerised freight.

Please note: At Twill, we are not offering all Incoterms® globally. For example, EXW and DDP are not offered in most countries. If you want to know which Incoterms® are offered in your region, please reach out to a local Twiller.

Are Free on Board (FOB) Incoterms® the same as Freight on Board Incoterms®?

Yes, Free on Board (FOB) is the same as Freight on Board. Both can be used interchangeably.

Are FOT Incoterms® different to FOB Incoterms®?

FOT (Free on Truck) Incoterms® refer to cargo being carried by truck, and can be used when shipping goods by truck. FOB (Free on Board) Incoterms® refer to cargo carried via sea or inland waterway.