We recently received a request to cover shipping terms of sale under FOB, and based on the great feedback we’ve received about shipping and freight topics we’ve covered in the past, we thought it was a great idea!
In addition to covering the different varieties of FOB shipping, we’ll cover payment terms and a small piece of trivia.
Shipping Terms of Sale Under FOB
“FOB” or “Free On Board” is a transportation term that indicates that the price for goods includes delivery at the seller’s expense to a specified point and no further. It is used with a physical location to establish responsibility for freight charge payment and where the title for the goods passes from seller to buyer.
How Location Affects Title and Control of the Goods
FOB Origin means that the buyer accepts responsibility for the shipment once it’s loaded on the truck and the bill of lading is signed by the carrier. These responsibilities include:
- Title and control of the the goods
- Transportation risk
- Filing Claims for loss or damage
- Unless a payment term variation is included, the buyer is responsible for the freight charges
FOB Origin also gives the buyer the right to specify a route.
FOB Destination means that the shipper retains responsibility for the goods until they are delivered and the carriage contract is completed, including:
- Title and control of the shipment
- Carrier selection and transportation risk
- Filing claims for loss or damage.
- Unless modified by a payment term variation, the shipper is responsible for the freight charges.
Payment Term Variations
The most common modifiers to both FOB Origin and FOB Destination are Collect, Prepaid & Add, and Prepaid & Allow and they work as follows:
- Collect: The carrier collects the transportation charges from the buyer.
- Prepaid & Add: The seller prepays the freight cost then adds the charges to the invoice for reimbursement from the buyer.
- Prepaid & Allow: The seller prepays for shipping and the cost is already included in the contract price.
Less common options are
- Collect & Allowed: the buyer pays the freight charges and deducts the amount from the seller’s invoice.
- Prepaid: The seller pays the freight charges.
If you do any international shipping, you should be aware that FOB was borrowed from the Incoterm (International Commerce Term) of the same name, which has an entirely different application. To avoid confusion, specify that you’re using Incoterms. For example “FOB Chicago (Incoterms 2020)”.
The term “Free On Board” originated in the days when sailing ships were used to ship goods and the ship’s rail was used to establish the passage of title and responsibility from the seller to the buyer.
In 1936 the International Chamber of Commerce formalized the use of FOB and we’re still using it today.