FOB Incoterms: everything you need to know about the terms and rules

What is FOB (Free On Board)

Incoterms rules determine who (the seller or the buyer) is responsible for transportation, insurance, customs clearance and the risk of loss or damage to the goods and until what point. In this article, we talk about Free on Board (FOB) delivery terms.

FOB Incoterms Conditions

FOB ("Free on Board") is an Incoterms term used for sea transportation. According to the FOB terms, the seller is responsible for delivering the goods on board the vessel specified by the buyer. From that moment, all transportation risks and responsibilities are transferred to the buyer.
Let’s say you order goods from China. Under FOB (Free on Board), the seller delivers the goods to the port and loads them onto the ship, after which all costs and risks are yours. Under DAP (Delivered at Place), the seller handles the entire delivery process, and you only pay for customs clearance. In DAP, the supplier is responsible for loading and unloading, insurance, finding the vessel, and processing all documents. DAP services are more expensive than FOB because they include indirect costs.
Understanding FOB Incoterms helps buyers and sellers clarify responsibilities and conduct deals more safely and transparently. Note that this model only applies to sea cargo delivery.

Responsibilities of the supplier:

• provision of an invoice and necessary documents for registration of insurance;
• packaging and marking of cargo;
• delivery of the goods in the stipulated quantity and proper quality to the port of loading;
• carrying out export registration of cargo, payment of duties and taxes;
• transshipment and loading on board the ship.

Once the cargo has boarded the ship, all costs and responsibility for delivery are borne by the buyer.

Distribution of costs and risks between the seller and the buyer when using FOB terms for the delivery of goods

Obligations of the buyer:

• payment of goods in accordance with the contract;
• vessel chartering;
• payment of the cost of transportation and cargo insurance;
• unloading the container at the port of destination;
• cargo inspection at the arrival terminal;
• clearance of goods from import duties;
• organization and payment of cargo transportation from the port of arrival to the warehouse.

Thus, the seller can freely choose a forwarder whom he trusts and minimize possible risks in the process of delivering the goods.

FOB Incoterms 2020: Key Changes and Updates

Changes to the FOB Incoterms were made in 2020. The main points that differ from the 2010 version include:

• Updated insurance provisions. The rules now more clearly delineate the responsibilities of the parties regarding insurance, particularly in CIF and CIP terms.
• More clearly defined costs. The FOB terms now detail the division of costs between the seller and the buyer, especially concerning terminal fees and other port charges.
• E-commerce: Incoterms 2020 recognizes electronic documents on an equal basis with paper documents if the parties have agreed to use them.

Since the introduction of Incoterms 2020, several years have passed, and the updated rules have demonstrated their effectiveness in international trade.

In what cases is it convenient to use delivery on FOB terms

FOB terms of delivery require the buyer to actively participate in logistics processes and customs formalities, so his experience and knowledge are of great importance. In general, FOB is suitable for:

• Experienced importers. Buyers who have experience with international suppliers and logistics processes can confidently monitor the transportation of goods to the port of loading and manage customs procedures.
• A company with efficient logistics. If you already have a logistics infrastructure in place, you can use FOB to ensure optimal transportation of goods to the port of loading.

Thanks to well-established logistics and control over the transportation process, the buyer can optimize the transportation route, reduce delivery time and costs

Large batches of goods. The purchase of large lots allows you to scale logistics processes and reduce the cost of delivery per product unit.

Importantly. FOB may prove to be a difficult and unprofitable option for buyers without experience of cooperation with international suppliers or for small batches of goods.

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How to Choose Optimal Terms and Minimize Delivery Risks

If you want to work under FOB Incoterms, consider the following aspects to reduce risks:

• In practice, FOB is only applicable to sea and inland waterway transport. Consider whether this delivery method suits you.
• The risk transfers to the buyer at the moment the cargo crosses the ship's rail. Therefore, clarify the exact loading time, safety of the vessel and request reports.
• Insurance — obtain coverage with "All Risks."
• Prepare import documents (especially certificates and licenses) in advance.

FOB is convenient if the buyer has experience in international shipping and verified logistics partners.

Potential Issues and Nuances

Although FOB Incoterms is considered a convenient option, it is not without pitfalls:

• Port Delays: Sometimes suppliers fail to prepare export documents on time, leading to delays and additional costs.
• Hidden Fees: In some cases, the seller may require extra payment for loading, increasing expenses.
• Insurance: The buyer is responsible for insuring the cargo from the moment it is loaded.
• Communication with the Seller: It is crucial to specify FOB terms clearly in the contract to avoid misunderstandings.
• Increased Number of Contractors: For instance, one company might transport your cargo by sea, while another delivers it by truck from the port to the warehouse. The more intermediaries, the higher the risk of delays or loss of cargo due to coordination issues.

A typical situation with improperly organized Incoterms: A company ordered furniture from China under FOB. Due to delays in processing export documents, the goods missed the scheduled vessel. The cargo stayed at the port. The buyer paid for demurrage and lost their spot on the vessel.

Avoid Mistakes: Choose the Right Delivery Terms and Minimize Risks

To minimize risks under FOB Incoterms, follow these recommendations:

• Carefully select your supplier. Work only with reliable partners experienced in FOB.
• Specify all details in the contract. Clearly define which expenses each party is responsible for.
• Work with a reliable freight forwarder. This helps control the shipping process and reduces risks.
• Always insure your cargo — it will protect you from losses in case of force majeure.
• Monitor documentation. Properly prepared export documents will speed up customs clearance.

Before choosing delivery terms, we recommend analyzing your needs, experience, resources, product specifics, and market characteristics.

If you need international cargo transportation, DiFFreight is a reliable logistics partner for your business. We organize procurement and delivery of goods from China on a turnkey basis, we offer our customers our warehouse in China, pay local costs in the destination country, handle import customs clearance and duties, and deliver your cargo directly to your door.