International Commercial Terms (incoterms) were designed by the International Chamber of Commerce (ICC) to make international trade easier by creating a universal standard language, a list of terms uniformly recognized throughout the world in regards to shipping and transporting goods internationally.
There are many terms importers and exporters need to be savvy about and well-versed in. Some are more common than others, such as Free On Board (FOB), Free Carrier (FCA) and Ex Works (EXW). FOB, while common, is largely misunderstood.
Despite their convoluted language largely drafted in legal speak, it is the responsibility of all parties involved in a shipment to be sure they understand all incoterms, or a simple shipment may turn into a wildly expensive mishap.
Incoterms are important for several reasons. If you find yourself wondering what does FOB mean in shipping, it’s important you take the time to understand that FOB shipping:
- Defines the transaction for the exporter (seller) and the importer (buyer)
- Helps buyer and seller communicate all provisions
- Ensures all parties understand risks, and the cost, tasks and responsibilities
- Determines all logistics of a shipment
- Outlines the transportation management from exit to reception
- Distributes all obligations and responsibilities
Free On Board (FOB)
Free On Board (FOB) is one of the most common of the incoterms. It essentially indicates who is liable and responsible for goods if they are damaged, lost or destroyed during shipment. FOB states that the seller should pack the goods and deliver and load them onto the ship fully cleared for export. The cost and risk of the shipment is transferred to the buyer only after the goods are on board safely at a mutually agreed upon shipping port. The shipper is free of any obligation regarding the goods once they are on the ship.
Pros to FOB – There is a reason FOB is one of the most common incoterms. There are some major advantages to this shipping, including:
- The seller will handle the local export process
- The buyer will remain in control of the shipping costs and arrangements
Cons to FOB – It’s important to understand all sides of the process, and there are some disadvantages to FOB, too. Some of the disadvantages include:
- Potential for seller to mark up local transport costs
- Chance for higher unit costs
FOB Shipping Point vs. FOB Destination
FOB shipping point (also known as FOB origin) and FOB destination point reference the moment in the transaction where the title of the goods transfers from seller to buyer. This is a very necessary distinction in that it determines succinctly which party is responsible and liable for any lost or damaged goods during the shipping at any given time. The major difference between the two terms is the timing of the transfer.
FOB shipping point – Notes responsibility of goods and title transfer from seller to buyer once the goods are loaded on the delivery vehicle at the shipping point. Once this happens, and the legal title of all goods is transferred to the buyer, the seller is no longer responsible for the goods.
FOB shipping point cost – Seller is responsible for all fees and transport costs only until the point in time that the goods have reached the port of origin. It is then that the buyer becomes financially responsible for any and all costs that are associated with the transport, customs, taxes and any other fees.
FOB destination – Means that transfer of ownership and responsibility occurs at the buyer’s loading dock, their post office or their physical location. Upon delivery to the buyer’s noted location, the title is transferred to the buyer, who then owns the goods and is legally responsible for them.
FOB destination cost – Seller is responsible for all fees and transport costs right up to the point that the goods reach the actual destination. Once the goods reach entry to the port, the responsibility for fees transfers to the buyer.
There are also some variations to FOB destination:
- Freight Prepaid and Allowed – Seller pays and bears freight charges. Seller remains owner of goods during transit. Seller files any claims (if there are any).
- Freight Prepaid and Added – Seller pays freight charges and then bills them to buyer. Seller remains owner of goods during transit. Seller files any claims (if there are any).
- Freight Collect – Buyer pays and bears freight charges once goods are received. Seller remains owner of goods during transit. Seller files any claims (if there are any).
- Freight Collect and Allowed – Buyer pays freight charges once goods are received. Buyer deducts freight charges from invoice. Seller bears freight charges and remains owner of goods during transit. Seller files any claims (if there are any).
The Role of Your 3PL
Incoterms are an important part of international trade. They are used to assign responsibilities and cost to buyers and sellers. A clearly defined agreement is necessary to protect the interests of both parties.
Buyers in particular need to understand the contract they are agreeing to so they clearly comprehend the costs and risk, as well as all tasks associated with international transportation and delivery. Incoterms all have their own nuances and intricacies that can be difficult to navigate on your own.
Working with a 3rd party logistics (3PL) provider who is an expert in all incoterms is a smart choice. Don’t take chances with your international deals that could end up costing you tremendously. Reach out to ShipCalm today to learn more about how we can be your partner and resource in international shipping – we take the uncertainty out of the complexities of incoterms.