Free On Board (FOB)

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Free on Board (FOB): Who’s Liable for Goods in Transit

Free on Board (FOB) is a shipping term that specifies the point in the supply chain when responsibility for goods shifts between the seller and the buyer. It determines who bears the costs, risk of loss or damage, and which party handles transportation and insurance at various stages of a shipment.

Key Takeaways

  • FOB identifies when ownership-related responsibilities transfer and who is liable for goods during transit.
  • FOB Origin: buyer assumes risk once goods are handed to the carrier at the seller’s location.
  • FOB Destination: seller retains risk until the goods arrive at the buyer’s location.
  • FOB terms affect inventory accounting, insurance, freight costs, and dispute resolution.

FOB Origin vs. FOB Destination

Both are common contract terms used domestically and internationally. Because legal definitions can vary by jurisdiction and contract, parties should explicitly state which rules (e.g., local law, UCC, or specific Incoterms) govern their shipment.

  • FOB Origin (also called “FOB Shipping Point”)
  • Risk and responsibility transfer to the buyer when the seller places the goods with the carrier at the origin.
  • Buyer arranges and pays for freight, insurance, customs clearance (for international shipments), and assumes risk during transit.

  • Seller’s obligation ends once goods are handed to the carrier.

  • FOB Destination

  • Seller retains ownership and liability until the goods are delivered to the buyer’s specified destination.
  • Seller typically pays freight and insurance and is responsible for transit-related losses or damage until delivery.
  • Buyer accepts ownership and records inventory upon delivery.

Advantages and Disadvantages

Accounting Treatment

  • FOB Origin: Buyer records inventory and seller records the sale once goods are placed with the carrier.
  • FOB Destination: Seller recognizes the sale only when goods arrive at the buyer’s location; buyer records inventory upon delivery.

Practical Example (Condensed)

A New York company orders components from a supplier in Shanghai:
* With FOB Origin: the buyer becomes responsible for the goods once they’re loaded in Shanghai. The buyer arranges shipping, insurance, and assumes transit risk.
* With FOB Destination: the supplier remains responsible and must ensure safe delivery to New York. The buyer assumes ownership only upon arrival and inspection.

Choice depends on each party’s logistics capability, risk tolerance, and cost considerations.

Related Terms

  • Incoterms: International rules (published by the International Chamber of Commerce) that define trade terms globally; parties should specify which version applies.
  • Uniform Commercial Code (UCC): Governs many domestic U.S. sales and shipping provisions; parties shipping within the U.S. should be aware of applicable UCC rules.
  • CIF (Cost, Insurance, Freight): Under CIF, the seller pays cost, insurance, and freight to the destination port, differing from FOB where responsibility shifts at origin or destination depending on the specified term.

Choosing Between FOB Origin and FOB Destination

Consider:
* Who manages logistics and has carrier/insurance relationships.
* Cost vs. control trade-offs: buyers often choose FOB Origin for control and potential cost savings; sellers choose FOB Destination to offer a turnkey delivery and reduce buyer friction.
* Impact on cash flow and accounting recognition.
* Insurance and liability preferences, especially for long or international shipping routes.

Conclusion

FOB terms clearly allocate risk, cost, and responsibility for shipments. Explicitly specifying whether a sale is FOB Origin or FOB Destination (and which governing rules apply) prevents misunderstandings and helps both parties manage insurance, inventory, and logistics more effectively.