FOB (shipping)

For other uses, see FOB (disambiguation).

FOB is an initialism which pertains to the shipping of goods. Depending on specific usage, it may stand for Free On Board or Freight On Board. FOB specifies which party (buyer or seller) pays for which shipment and loading costs, and/or where responsibility for the goods is transferred. The last distinction is important for determining liability for goods lost or damaged in transit from the seller to the buyer.

Precise meaning and usage of "FOB" can vary significantly. International shipments typically use "FOB" as defined by the Incoterm standards, where it always stands for "Free On Board". Domestic shipments within the US or Canada often use a different meaning, specific to North America, which is inconsistent with the Incoterm standards.

North American FOB usage corresponds to Incoterms 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

Incoterm

Further information: Incoterm

Under the Incoterm standard published by the International Chamber of Commerce, FOB stands for "Free On Board", and is always used in conjunction with a port of loading. Indicating "FOB port" means that the seller pays for transportation of the goods to the port of shipment, plus loading costs. The buyer pays cost of marine freight transport, insurance, unloading, 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.

For example, "FOB Vancouver" indicates that the seller will pay for transportation of the goods to the port of Vancouver, and the cost of loading the goods on to the cargo ship (this includes inland haulage, Customs clearance, origin documentation charges, demurrage if any, origin Port handling charges, in this case Vancouver). The buyer pays for all costs beyond that point (including unloading). Responsibility for the goods is with the seller until the goods pass the ship's rail. Once the cargo is off of the ship, the buyer assumes risk.

Due to potential confusion with domestic North American usage of "FOB", it is recommended that the use of Incoterms be explicitly specified, along with the edition of the standard. For example, "FOB New York (Incoterms 2000)". Incoterms apply primarily to international trade, not domestic trade within a given country.

This use of "FOB" originated in the days of sailing ships. When the ICC first wrote their guidelines for the use of the term in 1936, the ship's rail was often still relevant, as goods were often passed over the rail by hand. In the modern era of containerization, the term "ship's rail" is somewhat archaic for trade purposes. The standards have noted this. Incoterms 1990 stated, "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 the wording, "If the parties do not intend to deliver the goods across the ship's rail, the FCA term should be used."

North America

Within the United States, the term FOB 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 point" or "FOB origin" indicates the buyer pays shipping cost, and takes responsibility for the goods when the goods leave the seller's premises. "FOB destination" designates the seller will pay shipping costs, and remain responsible for the goods until the buyer takes possession.

Previously, under the Uniform Commercial Code, both "FOB origin" and "FOB destination" left the seller responsible for paying costs of loading goods on board the carrier; hence "Free On Board". When the buyer was responsible for loading costs as well, the UCC term is "FAS", "Free Alongside". Currently, the UCC has removed FOB and FAS leaving the definition of these terms up to the interpretation of the parties or the applicable state's law. Many state's have wholly or in part adopted the UCC terms without realizing that the UCC has abandoned the definitions.

A related but separate term "CAP" ("customer arranged pickup") is used to denote that the buyer will arrange a carrier of their choice to pick the goods up at the seller's premises, and the liability for any damage or loss belongs to the buyer.

In North American usage, the expansion "Freight On Board" is also seen.

Accounting and auditing

When counting inventory for financial accountancy purposes, shipping terms determine whether goods in transit are added to the buying company's balance sheet. At year/period-end goods in transit under "FOB destination" (North American usage) appear on the seller's balance sheet but not in the buyers balance sheet, as the risk and rewards of ownership change to the buyer at the "destination" port. Items in transit under "FOB shipping point" at period end should be included as the risk and rewards of ownership have transferred to the buyer at the time of shipment. For example, if Seller ships products to Buyer on December 28, 2009 to be delivered to Buyer on January 3, 2010 and the shipping terms are FOB shipping point, then Buyer would record the shipped products on its books on December 28, 2009. However, if the shipping terms were FOB destination, then Buyer would not record the products until they reach destination on January 3, 2010.

With the advent of e-commerce, most commercial electronic transactions occur under the terms of "FOB shipping point" or "FCA shipping point".