FOB (shipping)
- For other uses, see FOB.
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FOB is an abbreviation for Free On Board. The term FOB (often seen as f.o.b.) is commonly used when shipping goods, to indicate who pays loading and transportation costs, and/or the point at which the responsibility of the goods transfers from shipper to buyer. FOB shipping is the term used when the ownership/liability of goods passes from the seller to the buyer at the time the goods cross the shipping point to be delivered. FOB destination designates that the seller is responsible for the goods until the buyer takes possession. This is important in determining who is responsible for lost or damaged goods when in transit from the seller to the buyer. The buyer is responsible when shipped FOB shipping and the seller is responsible if shipped FOB destination. CAP, or customer arranged pickup, is used to denote that the buyer will arrange a carrier of their choice to pick the goods up and the liability for any damage or loss belongs to the buyer.
Incoterm
Under the Incoterm standard, FOB stands for "Free On Board" also "Freight on Board". Indicating "FOB" means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays freight, insurance, unloading costs and transportation from the arrival port to the final destination. The passing of risks occurs when the goods pass the ship's rail at the port of shipment. Internationally the term specifies the port of loading; e.g., "FOB HKH" or "FOB Vancouver". When the Incoterm version of the FOB term is agreed upon, the parties to the contract should expressly specify it, including the version of the Incoterms to be applied; e.g., "FOB New York (Incoterms 2000)".
It is important to understand this term originated in the days of sailing ships, and even when the International Chamber of Commerce first wrote guidelines for it in 1936, the ship's rail was relevant. Now in the era of most modern shipping being containerised, the ship's rail no longer has relevance. That is why in Incoterms 1990 the ICC stated for FOB "When the ship's rail serves no practical purpose, such as in the case of roll-on/roll-off or container traffic, the FCA term is more appropriate to use." Incoterms 2000 adopted a more legalistic-sounding wording: "If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used."
North American use
Domestically within the United States and Canada, "FOB" is sometimes still used in accordance with the long-discontinued "Foreign Trade Definitions" of 1941, with at least four different precise meanings. It is important to note the distinction that the definition of FOB published in Incoterms 2000 (International Chamber of Commerce publication 560) only applies to cross-border trade, not domestic trade within any country.
The term is used domestically in two common phrases, "FOB shipping point" (origin) and "FOB destination," to distinguish when the title of goods passes from the seller to the buyer. Under the terms of "FOB shipping point," the title of the goods passes to the buyer at the shipping point. Similarly, under the terms of "FOB destination", the title of the goods passes to the buyer when the goods arrive at their destination. The distinction is important because it determines who pays for the shipping costs of the merchandise: whoever holds the title to the merchandise at the time of its shipping pays for its transportation costs unless otherwise noted (e.g., freight prepaid or freight collect). Also, it is important that if the shipment is damaged while traveling the owner must file the freight claim.
Note that this usage is inconsistent with the official Incoterm definitions. North American FOB definitions correspond to Incoterm approximately as follows:
| North America | Incoterm |
|---|---|
| FOB shipping point or FOB shipping point, freight collect | FCA shipping point |
| FOB shipping point, freight prepaid | CPT destination |
| FOB destination or FOB destination, freight prepaid | DDU destination |
| FOB destination, freight collect | No Incoterm equivalent |
Accounting and auditing
When counting inventory, merchandise in transit plays a crucial role depending on whether it is added to the company's balance sheet. Items under "FOB shipping point/destination" generally do not appear in stock listings at year ends. However, they should be included as the risk and rewards of ownership have transferred to the buyer.
A trade term requiring the seller to deliver goods on board a vessel designated by the buyer. The seller fulfills its obligations to deliver when the goods have passed over the ship's rail.
When used in trade terms, the word "free" means the seller has an obligation to deliver goods to a named place for transfer to a carrier.
eCommerce
With the advent of e-commerce, most commercial electronic transactions occur under the terms of "FOB shipping point" or "FCA shipping point". Most analysts see this as a disadvantage of online shopping compared to traditional in-person purchasing, where "FOB destination" is more prevalent.