VP of AI, Wisor
VP of AI, Wisor
Freight terms like FOB, CIF, and EXW can be complex, particularly when your profit margins are involved. Understanding standardized Incoterm and UCC agreements like FOB is critical to navigating freight negotiations and making the best choices for your business and profit margin.
Free on Board (FOB) is a standardized international trade term that specifies the point at which ownership and responsibility for goods transfer from seller to buyer. Internationally, FOB shipping covers non-containerized sea freight. In the United States, under the UCC, FOB also covers the domestic shipping process.
In either case, FOB contracts define clear ownership and distinct points for the transfer of goods, including all associated risks and shipping costs. This clarity is critical for avoiding disputes and defining division of responsibilities. The FOB-liable party takes on all risks, shipping costs, and ownership for taxes and customs purposes.
Free on Board simply defines which party is liable for goods and associated costs to which point in the shipping process. The term varies depending on whether you’re shipping goods within the United States or internationally:
FOB under the 2020 Incoterms uses a stripped-down and simplified system. Here, you specify FOB Port or FOB Free to define the point when the seller hands goods and associated responsibility and liability over to the seller.
FOB Port (e.g., FOB Rotterdam) – The Seller covers all costs to transport goods to the specified port, such as Rotterdam. All costs (inland haulage/drayage, customs, documentation, demurrage, and origin port handling charges) to that point are covered by the seller. All further transportation costs, including unloading, are covered by the buyer. A port may be the destination or origin port.
Under the UCC, FOB may be used for transportation over water or over land. Free on Board Origin or FOB Shipping Point defines that the seller retains ownership of the goods from the point of origin. Free on Board Destination defines that the seller retains ownership of the goods to the point of destination. Points of destination and origin may be individually defined as part of the UCC FOB contract.
FOB under Incoterms only applies to non-containerized sea freight. If your cargo’s in a container, Incoterms recommends using FCA instead for clearer liability handoffs.
FOB Origin (FOB Shipping Point) and FOB Destination are clearly understood international definitions. These hold whether you’re using the UCC system with Destination and Origin or the Incoterms 2020 definition with a defined destination. In the U.S., the contract defines whether the seller or buyer pays the freight costs with Freight Prepaid agreements.
FOB Origin | FOB Destination | |
|---|---|---|
Basic Definition | The buyer is responsible for goods from the point of origin. | The seller is responsible for goods from the point of destination. |
Shipping Costs | The buyer covers freight charges from the point of origin. | The seller covers expenses from the point of destination, including drayage, port fees, and demurrage. |
Risks of Loss or Damage | The buyer takes on the risk of loss or damage from the point of origin. | The seller carries the risk of loss or damage to the point of destination. |
Shipping Arrangements | The buyer arranges shipping and transportation. | The seller arranges shipping and logistics to the point of destination. |
Insurance | The buyer arranges and pays for insurance. | The seller arranges and pays for insurance to the point of destination. |
Customs/Import Duties | The buyer pays for customs/import duties from the point of origin. | The seller pays for customs and import duties to the point of destination. |
Drayage/Haulage | The buyer pays for any drayage/haulage needed from the point of origin. For example, from destination port to destination warehouse if the point of origin is a port. | The seller pays for drayage/haulage to the point of destination, for example, from their warehouse to a port. |
Costs for Buyer | The buyer can control freight charges by negotiating contracts and leveraging networks to generate the highest possible margin. Without established contacts and optimization tools, the buyer may incur higher costs. | The seller pays a flat fee upfront that covers all associated costs. This can benefit buyers lacking the networks or tools to optimize transportation and documentation expenses. |
Use Case | Ideal for buyers who want control over shipping and costs. | Preferred for one-off shipments or for new buyers. |
Keep in mind that under Incoterms agreements, FOB origins and destinations are ports. Under UCC agreements, FOB origins and destinations may be the actual point of origin or final destination. This greatly impacts the shipping process, costs, and associated responsibilities.
For example, under a UCC FOB Destination agreement, the seller may take full responsibility to the point of final warehousing. Under an Incoterms agreement, you’d need a DAP destination agreement for the same coverage. With “just” FOB port, the buyer would take on liability, shipping costs, customs, etc., from the port of destination.
Free on Board can mean a lot of things depending on location and which agreement you’re using it under.
FOB Origin, also known as FOB Shipping Point, is the standard term under Incoterms for defining the point at which the seller’s responsibility ends. The buyer then assumes all costs, risks, and liability, including shipping costs, insurance, shipping documents, and customs.
FOB Origin Example: You purchase non-containerized goods from a factory in Shenzhen. Your FOB Shipping Point agreement stipulates handoff at Shekou port. The shipping process would look like this:
FOB Destination means the seller retains responsibility for the goods until they arrive at a designated location – whether that’s a port, warehouse, or the buyer’s facility. Ownership and liability shift to the buyer only once delivery to that agreed destination is complete.
FOB Destination Example/ FCA: You purchase non-containerized goods from a factory in Shenzhen. Your FOB Destination agreement stipulates the seller hands goods off to your carrier at the International Inland Port of Dallas. The shipping process would look like this:
In most cases, it’s important to review the scenario, including buyer expertise, network, and capabilities when choosing types of FOB. For example, buyers may benefit from FOB Shipping Point when handling a routine route within their standard carrier network. On the other hand, you may prefer FOB Destination in less routine situations or when you don’t have the resources to negotiate cost-effective alternatives.
FOB Origin transfers full responsibility of the cargo to the buyer immediately upon shipment. While it adds extra risks and may incur operational and shipping costs, FOB Origin gives organized sellers opportunities to leverage freight technology and networks to reduce costs and improve margins.
FOB Origin isn’t always beneficial to buyers. For example, if you don’t have strong logistical capabilities, it may incur extra costs.
With FOB Destination, the buyer retains ownership and responsibility for goods until they are delivered to a specific location. This reduces responsibility and operational load for buyers but may add costs.
FOB Destination offers simplicity and low operational overhead for buyers. At the same time, it can incur higher costs and reduce control over shipping timelines and methods.
FOB options greatly impact revenue flow, inventory flow, and documentation. Understanding those differences is critical to making the right choice for your shipment.
Under FOB Origin, revenue is typically recognized – and payment exchanged – once the goods are handed off to the carrier at the port of origin. At this point, the buyer assumes ownership and associated risks. In contrast, FOB Destination delays this transfer until the goods arrive at the agreed destination, meaning cash flow and inventory remain with the seller during transit.
This timing difference can have a significant impact. For example, a shipment from Shenzhen to the Port of Houston may take up to 45 days. With FOB Origin, the seller receives payment and offloads risk at departure, resulting in earlier revenue recognition. With FOB Destination, however, that same payment may be delayed for the full 45-day transit period, potentially impacting working capital and financial reporting.
The meaning of FOB varies significantly between countries and regulatory systems, often leading to confusion about responsibilities, cost allocation, and risk transfer.
For example, it’s commonly thought that FOB means all of the seller’s costs are covered by the buyer. Instead, FOB defines at which point responsibility for costs transfers between the seller and buyer.
FOB also defines the point of transfer of responsibility in terms of physical location. Many people believe that also refers to the legal jurisdiction of disputes. However, this isn’t true, and legal jurisdiction should be covered in the contract.
Finally, many people believe that the FOB shipping point (destination) is always better for sellers. That isn’t necessarily true. Sellers can use FOB Destination to offer more competitive rates by controlling the full cost of goods sold, door to door.
Understanding various Incoterms is crucial for determining the responsibilities and risks between buyers and sellers in international trade. Here’s an overview of some commonly used terms:
From CIF to DDP to FOB, understanding freight terms is one of the basics of freight forwarding and logistics. For the most part, terms are simply a matter of location. For example, whether you’re shipping internationally or in the USA.
Understanding various Incoterms is crucial for determining the responsibilities and risks between buyers and sellers in international trade. Here’s an overview of some commonly used terms:
These terms help in clearly defining the obligations, costs, and risks associated with the transportation of goods in international trade.
Under Incoterms, FOB places responsibility on the seller only until the goods are loaded at the port of origin; beyond that, the buyer covers shipping, insurance, and risk. In contrast, CIF (Cost, Insurance, and Freight) requires the seller to cover these costs all the way to the port of destination. Functionally, CIF under Incoterms resembles FOB Destination under the UCC.
With DDP (Delivered Duty Paid), the seller covers all logistics, including export and import duties, until the goods arrive at the buyer’s location. Under FOB, the seller typically handles only export-related responsibilities – customs clearance and loading – while the buyer manages import duties and final delivery.
No matter which freight agreement you’re operating under, the Bill of Lading (BOL) is a critical document. Here, the BOL acts as proof that goods were loaded and transferred to a carrier. Under Incoterms, delivery of a Bill of Lading means the seller’s obligations are completed.
FOB freight terms greatly impact cost, margins, control, and even compliance. Depending on your team, the region, and the scenario, different terms may afford the highest margin.
FOB, CIF, EXW — freight terms can be confusing, especially when stakes are high. Wisor simplifies this by automating workflows, reducing errors, and bringing clarity to your global shipping operations.
Wisor automates document workflows, ensuring that each shipment follows the appropriate process based on its specific terms and conditions. With real-time visibility into shipments, handoffs, and when goods become your responsibility, you can optimize control and ensure documentation, insurance, and carriers are all in place for a seamless handoff.
Wisor provides tools that help users interpret and apply standardized Incoterms and UCC terms within their shipping workflows. That simplifies complex and interchangeable international shipping agreements, so you can easily see what’s happening and who is responsible at every stage of shipment.
Wisor delivers real-time visibility into shipping data, including location, documentation, customs clearance, and responsibility so your team can stay on top of responsibilities and handoff.
Wisor automates compliance documentation between carriers, freight methods, and organizations, so you can seamlessly manage compliance and documentation across agreements like CIF, DDP, and FOB.
FOB agreements are standardized to allow for clear handoff of responsibilities at any stage of freight. Unfortunately, with multiple international shipping terms, there is definitely some confusion. In addition, it might not always be clear whether FOB Origin or Destination options are right for your freight.
Choose sellers offering Free on Board Origin Destination if you lack a network or the negotiation options to source cost-effective transportation and insurance for goods. Great examples include one-off shipments outside of your normal carrier coverage, areas with language barriers, and anywhere you can’t source a lower rate than the seller can.
Leverage Free on Board Origin if you have those networks and tools and can reduce costs over a Destination agreement.
VP of AI, Wisor
Dvir is a Professional Mountains Mover, Dynamic and experienced cybersecurity specialist capable in technical cyber activities and strategic governance.
VP of AI, Wisor
Free on Board is used in freight forwarding to define where the seller takes responsibility for goods, freight costs, and liability.
Automation platforms like Wisor leverage workflows to guide teams through steps, including handoff, responsibilities, and needed documentation – automatically clearing up inconsistencies and mistranslations.
Learn how automation can streamline your operations, reduce reliance on labor-intensive manual processes, and free up resources
