Free On Board, in short FOB, is a term frequently used in shipping terms where the seller quotes a price including the cost of delivering goods to the nearest port. The buyer bears all the shipping expenses and is responsible to get the products from that port to its final destination. In simple terms, FOB price means the buyer has to bear the shipping costs completely. Other frequently used shipping terms include EXW, CFR, CIF, DAP, DDP, etc.

FOB is a price that the buyer pays for the product excluding any of the following costs:

• Loading
• Insurance
• Freight
• Unloading
• Customs
• VAT
• import Duty
• Transportation (from the port to the final destination)

In most cases, buyers prefer FOB price since it is relatively lower than CFR, CIF, etc. and offers them greater control over shipping and transit time. Most buyers ask for FOB, EXW, and DDU rates from their manufacturers or suppliers and transportation charges from freight companies to make the final decision.

Advantages of FOB Price

Some buyers falsely assume that FOB is not a good fit for them. However, this is not true since it offers some advantages for the buyers, such as:

One of the biggest advantage is that the buyer gets a greater control over freight and freight costs. The buyer is free to choose a freight carrier and also decide the route and transit time. If the buyer does not go for FOB, he has no say over freight carriers and the freight time. Most buyers choose FOB over other shipping options for this very reason. The manufacturer can choose any freight company and since buyer can do nothing but wait for the goods and hope that nothing goes wrong in transit.

With FOB, the buyer can get insurance since he is responsible for the goods. He can choose to insure the products up to the point of final destination. This is not possible for many other shipping options where the seller takes charge of shipping and insurance. The goods are usually insured only up to the destination port. And damage from the port to the buyer’s address is not insured by the seller.

When the buyer has more control on shipping, he can hire a freight company of his choice. At any point during the transportation, the buyer knows the status of the shipment since he is the central contact. Whereas, if the seller arranges for shipping, the buyer is not in direct touch with the shipping company. And if the seller chooses to hire multiple companies for shipping, it can be tough for the buyer to obtain the updated shipping information.

With FOB, the buyer can select a freight company that offers the best prices for shipping and insurance for the products. It gives him greater control over shipping as well as the overall cost of the products. However, if the buyer has to pay for shipping arranged by the seller, it can turn out to be quite expensive especially if the seller decides to hire different companies to take care of freight and in-land transportation.

important Shipping Terms

There are plenty of other shipping terms like FOB that buyers need to know about to make sure that they make the right choice. Some of the common terms have been discussed here:

FOB(Free on Board): The seller quotes a price including the cost of delivering goods to the nearest port. The buyer bears all the shipping expenses and is responsible to get the products from that port to its final destination. In simple terms, FOB price means the buyer has to bear the shipping costs completely. This is one of the most used shipping terms by international buyers and sellers.

EXW(Ex-Works): The seller has no involvement with the transportation costs and risks. The buyer has to collect the goods from the seller’s site and get them to the final destination. All the costs and risks are borne by the buyer. It is advisable that the buyer purchases insurance since the goods can get damaged in transit. EXW is ideal when the buyer and seller are in the same country or region.

CFR(Cost and Freight): The seller pays the loading and freight costs from his premises up to the destination port. Then, the buyer has to arrange for the goods to be transported from the port to his premises. The seller is only responsible for the cost of shipping the products to the destination port. CFR is used for products transported by sea or inland waterways only. The seller does not bear the risk of loss or damage during transit.

CIF(Cost, Insurance, and Freight): If the buyer opts for CIF price, the seller pays for the loading and freight costs right from his premises up to the destination port as well as insurance. In the case of damage or loss, the seller bears the risk completely. The buyer has to arrange for transportation of the goods from the port to his premises. CIF is a safer option than CFR since the goods are insured by the seller up to their arrival at the destination port.

DAP(Delivered at Place): It was previously known as DDU, Delivery Duty Unpaid. In this case, the seller is responsible for getting the goods from his own factory up to the premises of the buyer. He also bears the risk in the case of loss or damage of the goods right until the products are delivered to the buyer. The buyer only has to pay the import duties or custom clearance charges.

DDP(Delivery Duty Paid): The seller is responsible for shipping the goods from his factory to the destination address provided by the buyer, usually his factory or warehouse and is also liable for any damage or loss of goods during transit. The seller also takes care of the customs, VAT, or import duties levied on the products. The buyer only has to receive the products at the destination. In most cases, most sellers only offer DDP for small shipments.

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