What is FOB (Free On Board)?

FOB is one of the most familiar trade terms in sea freight. The seller looks after everything up to the ship, and the buyer takes over from there. For the other 10 rules, see what are Incoterms.

This is a general explanation, not legal or customs advice. Check the ICC's own text for your shipment.

Why FOB matters

FOB splits a sea shipment at a clear point: the moment the goods are loaded on the vessel. The seller knows its costs end at the port. The buyer controls the shipping line and the freight rate, which is attractive to buyers who have a good forwarder.

Name the port, for example "FOB Shanghai", or nobody knows where the seller's job ends.

Who does what under FOB

The seller

• Delivers the goods on board the vessel the buyer names, at the named port.
• Pays for everything up to that point, including carriage to the port and loading.
• Clears the goods for export and pays any export duties.
• Gives the buyer the usual proof that the goods were delivered on board, often the transport document.
• Supplies the commercial invoice, plus the other documents the contract asks for, such as a packing list.

The buyer

• Books the vessel and pays the main sea freight, then tells the seller the vessel name, the loading point and the delivery time.
• Carries the risk of loss and damage once the goods are on board.
• Arranges any insurance. The rule does not require either side to insure.
• Clears the goods for import and pays import duties and taxes.

Where risk passes

Under FOB the risk passes when the goods are on board the vessel. A pallet that falls into the water during loading is the seller's loss. One that is damaged after the goods are on board is the buyer's.

FOB and containers

The ICC says FOB, FAS, CFR and CIF are meant for sea and inland waterway only. Goods in a container are usually handed to the carrier at a terminal or depot well before they are loaded on a ship. Under FOB the seller still carries the risk while the container sits at the terminal, out of its hands. The ICC notes that FOB may not be appropriate in that case and points to FCA, which matches what happens. FOB is still widely used on container shipments, so check the text before you rely on it.

An example from product sales

Say a resin maker sells 10 pallets for $12,000 at its factory. A buyer overseas asks for FOB the nearest port. The maker adds inland haulage to the port, port charges at origin and export clearance, which come to $650. The FOB price is $12,650.

The buyer then books the ship and pays the sea freight. The maker's responsibility ends when the pallets are on board, and the maker keeps a copy of the bill of lading as proof. See what is a bill of lading for what that document does.

Common mistakes with FOB

• Using FOB for air freight or road transport. FOB is a sea and inland waterway rule. For other modes, FCA is the usual choice.
• Not naming the port. State the exact port of shipment.
• Treating FOB as "the seller pays freight". The buyer pays the main carriage.
• Mixing up FOB and FCA. Under FCA, delivery is to a carrier named by the buyer, not on board a vessel.

How FOB changes the price you quote

An FOB price is higher than EXW because it includes haulage to the port, loading and export clearance. It is lower than CIF, because the freight and insurance are not in it. If you quote the same goods under both FOB and CIF, the buyer can compare them, and a landed cost estimate shows what the buyer pays after the port.

Related terms

• Incoterms: the 11 rules FOB belongs to.
• EXW: the buyer collects from the seller and clears export itself.
• CIF: the seller also pays the sea freight and minimum insurance.
• Bill of lading: the carrier's document that shows the goods went on board.

How PromptLab handles it

Record FOB in the trade terms field on the sales order, which lists the 11 Incoterms 2020 rules. Put the named port in the order's notes and in the quote's notes, and add the shipping documents to the account's Files tab, next to the quote with its lines, the customer's price list and the email thread.

Frequently asked questions

What does FOB stand for?

FOB stands for Free On Board. The seller delivers the goods on board the vessel the buyer names at the named port of shipment.

Who pays freight under FOB?

The buyer pays the main sea freight. The seller pays only up to the point where the goods are loaded on the vessel.

Who pays for insurance under FOB?

Neither side must insure under the rule. The buyer carries the risk after loading, so a buyer normally insures the sea leg itself.

What is the difference between FOB and FCA?

FOB delivers the goods on board a vessel and is for sea and inland waterway transport only. FCA delivers the goods to a carrier or another person named by the buyer, and works for any mode of transport, including containers handed over at a terminal.

Who clears the goods for export under FOB?

The seller. The buyer clears them for import at the destination.