As an example, U.S. Company A buys watches from Vietnam and signs a FOB Newark agreement. The shipment is sent to Newark, New Jersey, and the watches are damaged in transit. The seller is responsible and either must deliver new watches or reimburse Company A if they’ve already purchased the products.
Defining the Terms
Before delving into more detail, it’s helpful to clarify a few points. The first is that free on board is not the same as freight on board. Some use the terms interchangeably, but they don’t mean the same thing. Freight on board is not a term used or defined in the two sets of recognized domestic and international codes: Incoterms and the Uniform Commercial Code (UCC). These are the codes regulating shipping terms. Assume that FOB refers to free on board. The other clarification is that FOB can be defined in international trade and U.S. domestic shipment terms. We’ll be referring to Incoterms here:
Incoterms is short for International Commercial Terms, which is published by the International Chamber of Commerce (ICC). Incoterms is updated each decade, with the 2020 Incoterms published in late 2019. Incoterms are agreed-upon terms that define transactions between shippers and buyers, so importers and exporters can speak the same shipping language. While Incoterms can apply to international trade and domestic shipments, UCC is primarily used for domestic shipments.
What is FOB Shipping?
FOB shipping is also called FOB shipping point or FOB origin. As soon as the goods arrive at the transportation site, and are placed on a delivery vehicle, or at the shipping dock, the buyer is liable for any losses or damage that occur after. The buyer would then record the sale, and consider their inventory increased.
With FOB shipping point, the buyer pays for shipping costs, in addition to any damage during shipping. The buyer is the one who would file a claim for damages if needed, as the buyer holds the title and ownership of the goods.
As an example, U.S. Company A buys watches from Vietnam and signs a FOB shipping point agreement. The cargo arrives at the receiving dock and the buyer takes ownership and liability. The watch glass breaks during transport overseas. The buyer is responsible, even though the watches were damaged before arriving on U.S. soil.
What is FOB Destination?
FOB destination, sometimes called FOB destination point, means that the buyer takes ownership from the shipper upon delivery of goods, usually at the buyer’s receiving dock. To be crystal clear whether a shipper is referring to UCC or Incoterms, a shipper might include the final destination name and specify Incoterms definitions, by referring to FOB Savannah (Incoterms 2020) in the contract. That means the delivery port is Savannah and Incoterms definitions are referenced. Incoterms 2020 considers delivery as the point when the risk of loss or damage to the goods is transferred from the seller to the buyer.
This is also the moment that the supplier should record a sale since they’re taking ownership at the receiving dock. It’s common for high-value goods to be sent via FOB destination designation. That allows the buyer to ensure they arrive in good condition and can be inspected upon receipt. The seller retains liability until the buyer accepts the goods, ownership, and liability at the receiving dock, office or agreed-upon place of transfer, after inspecting for damage.
A related but separate term, “CAP,” (customer-arranged pickup) is used when the contract is for the buyer to arrange transport via a carrier of their choice, to retrieve the goods from the seller’s premises. The liability for any damage or loss then belongs to the buyer.
Why is it Important to Understand the Difference?
Shipping terms are important because of the massive worldwide volume shipped, and the need to have a common understanding of these terms for contracts. The terms affect shipping costs, liability, and even financial statements for accounting. With so many languages spoken, it makes sense to have agreed-upon terms to lessen confusion.
Inventory costs are expensive and include not only the cost of goods, but the fees to prepare inventory for sale. Delays in recognizing costs as expenses affect net income. The amount of inventory and cost of goods on the books changes as well, depending on where the goods are and the FOB status. And of course, accepting liability for goods adds to the profits and losses, if there is damage during transit. Understanding the terminology and understanding when you’re accepting liability and ownership, is imperative.
Understanding the History of Shipping
With shipping, you may hear about the ship’s rail, and how costs or ownership transfer when it’s over the rail. That’s because the rail concept, as well as FOB, goes back to the early days of sailing ships. The earliest ICC guidelines were published in 1936, when the rail was still used – goods were passed over the rail by hand, not with a crane. And liability mattered then too. The liability transferred as the cargo made it safely over the rail. Now with containers, it’s harder to know when items are damaged. But there has to be a point when liability transfers. Incoterms last included the term “passing the ship’s rail” before its 2010 publishing.
06 Who Assumes the Cost of FOB Shipping Point vs Destination?
Traditionally with FOB shipping point, the seller pays the transportation cost and fees until the cargo is delivered to the port of origin. Once on the ship, the buyer is responsible financially for transportation costs, customs clearance, fees, and taxes. Conversely, with FOB destination, the seller pays the shipment cost and fees until the items reach their destination, such as the buyer’s location. That destination is the receiving port, not the final stop or seller’s warehouse in the journey across the country. The buyer assumes fees like customs clearance fees and taxes at port entry.
The FOB shipping point price does not generally include shipping, as that is typically paid by the seller. With a FOB destination point contract, the contract is a delivered price, with the transportation cost figured into the final contract. There may not be a line item on the bill for shipping and the shipper may require payment ahead of shipping. It’s always good to know whether shipping is already factored into overall costs, or whether it’s a line item when inquiring about discounted shipping rates. That can help when comparing apples to apples in pricing.
The Fine Print of FOB Shipping and Destination
FOB shipping and FOB destination are the main categories to determine when the title of the goods is transferred from the seller to the buyer, who pays the fees and who is liable. But there are some finer points to know, and you may see these terms on your invoice or bill of lading.
- FOB shipping point (origin) or FOB shipping point freight collect (FCA shipping point, in Incoterms): The shipper pays for shipping, and the buyer assumes responsibility for the goods at the point of origin.
- FOB shipping point (origin), freight collect: The buyer pays for shipping and freight costs, assuming all liability for the goods.
- FOB shipping point (origin), freight prepaid (CPT in Incoterms): The seller adds freight shipping costs to the buyer invoice. The buyer assumes ownership and liability of goods at the point of origin.
- FOB destination point, or FOB destination freight prepaid (DAP in Incoterms): The shipper pays the freight cost, and maintains ownership while goods are in transit.
- FOB destination point, freight collect: The buyer pays freight shipping fees upon delivery. The shipper assumes liability and ownership during transit.
- FOB destination, freight prepaid & charged back: The shipper pays the shipping fees and is responsible for the freight until delivery. The buyer deducts the shipping fees from the invoice, which lists the freight cost paid by the shipper.
- FOB destination, freight collect and allowed: The shipper includes freight fees in the invoice and the buyer pays the full invoice. The shipper maintains liability for the goods until delivery.
Buyers may also see CIF on invoices. That stands for Cost, Insurance and Freight. With a CIF agreement, the seller agrees to pay the transportation fees, which include insurance and other accessorial fees, until the cargo is transferred to the buyer.
Keep an Eye Out for the Details
Just as these shipping terms are detailed, so are shipping invoices. Shipware can help you audit your freight invoices to ensure that you’re not overpaying, and you’re getting the service promised to you. Contact Shipware for more details on how we can help save you money with our parcel audit software and other solutions for logistics optimization.
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