There are many confusing terms in freight shipping, regardless if you are an experienced shipper or new to the business. It is important to be aware of the true meaning of freight terms to properly use them. It is especially vital to understand what a FOB is to ensure the FOB terms in your agreeement reduce your transport costs and clearly state who is liable if loss or damage occurs before your goods reach their final destination. FOB shipping is one of the unusual terms in freight shipping, yet it is very important.
What does FOB stand for in freight shipping?
There are two options for the meaning of FOB: free on board and freight on board. Freight on board is not an official term and is not defined in recognized domestic and international codes like Incoterms and the Uniform Commercial Code (UCC). Free on board is a shipping term defined in these sets of codes, making it the preferred phrase for freight shippers.
Why does FOB matter?
FOB is an important note that designates who is liable for the shipments, who pays all the remaining expenses upon arrival, and when the liability of goods are transferred from buyer to seller. Basically, it states which party is responsible for the goods, bills, payments, and documentation. You will need a free on board note when the shipment is damaged or lost. Depending on who is held liable for the goods, it further defines the returns, claims, or delivery refusal process of the damaged freight shipment.
How is FOB used in freight shipping?
The term free on board is not used alone, it always has a note. For example, if there is a FOB with an origin point, this means that the shipper (seller) retains liability for the transportation and loading of the shipment. But once it arrives at the destination point, the responsibility transfers from the seller to the buyer or consignee. With FOB shipping and FOB destination being the main categories in which the title of goods are transferred, there are ultimately four ways to use FOB for freight shipping:
- FOB Origin (Freight Collect): Shipper pays shipping/Buyer assumes responsibility for goods at the point of origin.
- FOB Origin (Freight Prepaid): Buyer pays shipping/Buyer assumes responsibility for goods at the point of origin.
- FOB Destination (Freight Collect): Buyer pays shipping/Shipper assumes responsibility during transit.
- FOB Destination (Freight Prepaid): Shipper pays shipping/Shipper assumes responsibility during transit.
Further conditions of FOB, including the timing of when the title of goods are transferred, may be found on the Bill of Lading (BOL). An invoice may also contain a cost, insurance, and freight agreement, also known as a CIF agreement. This means the seller must agree to pay these fees (which may also include accessorial fees) until the shipment is transferred to the buyer.
Be mindful of the differences between free on board and CIF agreements. Remember that FOB’s lay out the transfer liabilities. CIF’s are when sellers agree to pay costs and assume liability until goods reach the destination point.
Origin & Destination
Both of these marks state who owns the shipments and holds responsibility for it. If the place of origin is stated, it means the receiver owns the shipment after the BOL is signed. In case there is a place of destination, the shipper is liable for the shipment.
Freight Collect & Freight Prepaid
Whenever you see freight collect on the BOL, it means the receiver is accountable for all freight charges and payments, and vice versa. If it’s freight prepaid, the liable party is the shipper (seller).