FOB in Shipping [Complete Guide]: Meaning, Cost, vs. Other Incoterms (2023)

FOB in Shipping [Complete Guide]: Meaning, Cost, vs. Other Incoterms (1)

FOB is probably the most popular shipping term when you’re importing from China, but do you know what is FOB is shipping? And is it the best choice for you?

Do you know you can save more money and avoid risks by choosing other terms?

In this guide, you will learn about everything you need to know on FOB.

Contents hide

Chapter 1 What Does FOB Incoterms Mean in Shipping?

Chapter 2 FOB Incoterms Shipments Responsibility of Buyer And Seller

Chapter 3 FAQ About Responsibility under FOB Incoterm:

Chapter 4 What are the Costs in FOB Terms for the Buyer and the Supplier Respectively? Who Pays for What?

Chapter 5 Fob vs. Other Incoterms: EXW, CIF, FCA, DDP

Chapter 6 FOB Pros and Cons for Buyers

Chapter 7 Incoterms 2020 vs. 2010: What’s New About FOB Term

Chapter 8 Fob Incoterms vs. FOB UCC: They are Different!

Chapter 1 What Does FOB Incoterms Mean in Shipping?

FOB Meaning

“Free On Board” or FOB, is used to define the international commercial laws. This specifies what point relevant costs, obligations, and risks involved in the trading of goods under the incoterms standard published by the International Chamber Of Commerce.

It simply means transferring of goods from seller to buyer. However, a supplier is responsible for the goods until they get on the ship. Once it ships out, all responsibility for the goods is transferred to the buyer.

What is FOB Price?

FOB price is the quotation from the supplier under the law, FOB incoterm. It is a sum of factory price and FOB local charge.

FOB price = factory price + FOB local charge

What is FOB Local Charge?

FOB local charge is a sum of various costs involved in exporting, such as the transportation cost of goods from the factory to the loading port, handling charges, customs fee, etc.

What is FOB Value?

FOB value is the value of your goods, excluding insurance, carriage, and freight. You can say it is a domestic price in the country of origin. FOB value and FOB price are the same amounts but they are used for different situations, for example, when you need to declare the goods’ value for custom, you will need to submit the FOB value.

The Correct Way to Write FOB Terms

There is a proper way to write FOB terms, which indicates the port of loading and the incoterm version of your contract. The following are examples of correct and incorrect methods for your understanding.

Incorrect Example: “FOB price USD 250/piece.”

Correct Example: “FOB Guangzhou, China – Incoterms® 2020: USD 250/piece.”

Why Is It Important to Include the term “Port of Loading” in your Contract?

Some suppliers may have factories in another area, far from their local offices. So, if you don’t specify your port, it may cost you more.

Why Is It Important to Include the term “Incoterm Version” in Your Contract?

Incoterm is a series of pre-defined commercial terms. So, you must follow its latest version to avoid any problem, and you also have to mention it in your contract. The recent one is Incoterm 2020.

Chapter 2 FOB Incoterms Shipments Responsibility of Buyer And Seller

A Seller’s Obligations under FOB Incoterm

Sellers fulfill their entire obligation until the goods had been loaded on board of the ship at the port of loading. The seller has to pass various obligations, including:

  • Export packaging
  • Loading charges
  • Delivery to port
  • Export duty, taxes &customs clearance
  • Loading on carriage

The Buyer’s Obligations under FOB Incoterm

When the goods are loaded on board of the ship, it’s the buyer’s responsibility to look after the goods. This means that the purchaser has to bear all the costs and risks of loss once the goods are loaded on the ship. The buyer has to follow the following obligations:

  • International carriage charges
  • Destination terminal charges
  • Delivery to destination
  • Unloading at destination
  • Import duty, taxes & customs clearance

Chapter 3 FAQ About Responsibility under FOB Incoterm:

Here are the basics you need to know about using the method of FOB in shipping.

In FOB, Who Pays Freight?

You can say that the freight is divided into two sections, inland freight and ocean freight.

·Inland Freight

The supplier pays for inland freight. This freight includes transportation of goods from the factory to the port for loading.

·Ocean Freight

The buyer is the one who pays for ocean freight. It includes the transportation of goods from the port of loading to the port of destination.

In FOB, Who Pays Bill of Lading?

It is the seller’s responsibility to pay for the fee of the original bill of lading if there is any. If it’s because the seller did not process shipment in time so the necessary customs clearance documents can not be reaching the buyer in time. Then the seller should pay for the telex release fee.

However, if the buyer chooses to use the telex release, the buyer will pay for the telex release fee.

In FOB Who Pays Duties?

The FOB in shippingcompels the seller to pay for the export duties. And the buyer is the one who pays for import duties. However, China doesn’t charge for export duties on most of the products to encourage exporting in their country.

In FOB, Who Pays Insurance?

Insurance costs are not included in the FOB price of the supplier. However, marine insurance can be negotiated between the buyer and seller, according to incoterms regulations. Normally, the buyer pays the insurance fees.

Chapter 4 What are the Costs in FOB Terms for the Buyer and the Supplier Respectively? Who Pays for What?

The buyers and sellers have to pay different segments of the import through the method of FOB in shipping.

What are the Costs in FOB Terms that the Buyer Needs to Pay?

The following are the costs you will need to pay for your shipment:

  • Supplier’s Invoice

The supplier is responsible for shipping under FOB terms due to which they need to pay local shipping fees for the goods. They will add this fee to your invoice. However, this will not be too much and will fall within your budget.

  • Sea Freight

Whether you are shipping through sea freightunder FOB terms, you need to pay for the transportation of your goods from the origin country to the destination country.

  • Goods Management at the Destination Port

Once the goods reach your port, you are responsible for paying all the charges established in the destination country. The charges start from the removal of the container from the ship to the delivery of goods to their required place.

  • Customs Clearance Cost

When you import goods, you need to go through some customs procedures. You also need to pay the customs duties and taxes of your destination country. It’s better to investigate and understand these payments before importing goods because they can cost you a hefty amount of money.

  • Delivery of Goods

You will need to pay for the transportation of goods from the destination port to your door. However, it depends on you as to how and when you need the delivery.

Note: The best part of the FOB is that you can estimate and establish almost all your costs, which you will need to pay in the procedure. Other methods don’t provide you foreseeable costs, which is why it’s difficult for you to make a budget.

FOB in Shipping [Complete Guide]: Meaning, Cost, vs. Other Incoterms (5)

What are the Costs in FOB Terms that Suppliers Need to Pay?

These are the costs your supplier will pay in order to ship your goods.

  • Document Fees

Your supplier will make documents for the shipping of the goods and also pay the charges of making them.

  • Entry Summary Declaration (ENS)

Your suppliers need to pay for ENS five days before the closing date. This is the cost your supplier will pay to assign the goods to the shipping lines.

  • Terminal Handling Cost

These are the charges for loading the goods on the vessel. First, your goods will be transferred onto the container, and the container will be lifted and positioned in place it on the vessel via a crane.

  • License Fee

Your supplier needs a license to export goods. If they don’t have this, they will need to pay some fees each time they export products.

  • Customs Clearance

An agent from the customs clearance front is needed to clear goods. The agents will charge for their services and other charges too, which the suppliers have to pay.

  • Transportation Fees

Your supplier will pay for the cost of transporting your goods from the factory to the origin port.

  • Telex Release

Telex releases are a new way of getting documents. You will get all your shipment documents through electronic release, and your supplier will pay for the charges of the telex release.

  • Other Charges

Sometimes custom officers at the origin port ask to inspect the cargo or ask queries about the documents. Your supplier will need to pay if something goes wrong. For example, if your supplier makes a mistake when declaring the goods, a customs officer will request re-submission, and your supplier will also pay for this cost.

Chapter 5 Fob vs. Other Incoterms: EXW, CIF, FCA, DDP

Why is FOB better than other terms, and why you should choose FOB in shipping? You can read about the significant difference between FOB and other methods in this chapter.

1.FOB vs. CIF

What Is the Difference Between FOB and CIF

The main difference between them is the point at which liability and responsibility transfer from the seller to the buyer. This occurs in a FOB shipment when the goods pass the ship’s rail at the agreed port of loading. In a CIF agreement, the seller pays for everything and assumes liability until the shipment reaches the port of destination chosen by the buyer.

When Should You Choose FOB over CIF as a Buyer?

If you have experience in importing goods, you can choose FOB. But new buyers have little experience and knowledge about trading, and they might end up with problems that can cause them penalties and charges.

When Should You Choose CIF Over FOB as a Buyer?

Some importers also use CIF to import a small number of products because the cost of insurance for goods is higher than the fee charged by sellers. Unlike FOB, you don’t have to worry about handling the claims, risks, or freight while importing. This method is also best for new importers, who have little knowledge about trading.

2.FOB vs. FCA

What are the Differences Between FOB and FCA?

Both of them have some major differences. The FCA applies to all modes of transport, whereas FOB only applies to seaway transport.


Moreover, the FCA and FOB methods of transferring goods are also different. Once sellers place the goods onto the truck arranged by the buyer or delivered to the designated warehouse., the FCA holds buyers responsible for anything, and the FOB holds the seller responsible until the goods are placed on the ship at loading port.

When Should You Choose FOB Over FCA as a Buyer?

FOB term gives you a clearer idea of the local charge on the country of origin. Because comparing FOB and FCA, the seller’s FOB quotation includes the port of loading fees, tolling fee, customs clearance fee, and some other cost happen during the factory to the loading port, which is the original terminal charge and loading onboard charge. If you don’t know about too much about logistic cost, FOB is better for you than FCA, since you can compare with an overall price from sellers’ quotations.

When Should You Choose FCA Over FOB as a Buyer?

When you are shipping by air or train, you should useFCA. Because FOB is just for sea and inland waterway transportation.WhileFCAcanbeused on all methods of transportation.

Also if you already know about the reasonable level of local port charges or have someone kept an eye for you, FCA will help you to avoid chances to run into a dispute with the seller, in the case when the shipment gets lost or damaged between the logistic warehouse and ship’s rail.

3. FOB vs. EXW

What is the Difference Between FOB and EXW

In FOB incoterm, the seller needs to load your goods onto your chosen ship before the responsibility of the shipment passes to you. However, if you go with EXW incoterm, the seller will provide you with a pickup location and produce goods so that you can collect, load, and transport them by yourself.

When Should You Choose FOB Over EXW as a Buyer?

If you don’t know the logistic process in China, FOB is a better choice for you than EXW. By choosing incoterms FOB, you don’t have to worry about how to move the products from the factory to the port of loading.

When Should You Choose EXW Over FOB as a Buyer?

When the buyer wants to control everything in the procedure, they can choose the EXW method. The seller makes the product available at the chosen location, and from then on, the buyer has the responsibility of transporting the goods. EXW is good for those buyers who have time and resources to manage everything for themselves.

4. FOB vs. DDP

What Is The Difference Between FOB And DDP?

FOB means that the buyer has the responsibility to bear all costs and looks after the goods are on board. The buyer can choose the ship and port for the transport, and unload the goods, whereas the DDP doesn’t offer you a choice when it comes to the ship and port.

The main difference between the FOB and DDP is that in the DDP method, the seller manages the delivery and associated costs, whereas, FOB in shipping, the buyer is responsible for controlling delivery and associated costs.

When Should you Choose FOB Over DDP as a Buyer?

If your supplier is a factory, or they haven’t shipped to your country, you should go with FOB.

DDP term requires the seller to be responsible for international delivery cost as well as customs duties in the destination country. Most of the suppliers just focus on production and they don’t know too much about the supply chain, especially customs clearance in buyer countries. In order to quote in DDP, the seller will usually quote much higher than it actually cost in order not to lose money on shipping.

When Should You Choose DDP over FOB as a Buyer?

Some buyers prefer the DDP method because they don’t have to worry about the supply chain. And it’s super straightforward to know if a business is profitable when you ask your suppliers to quote in DDP.

5. FOB vs. Landed Cost

The landed cost is somewhat the same as DDP. It includes the costs of goods as well as the cost of transportation, export, and import the goods. DDP and landed costs, both have calculated sum prices, from making products to the buyer receiving the delivery. However, landed costs also include the cost of unloading at the destination, but DDP doesn’t offer this facility.

FOB includes all the costs that suppliers need to pay before shipping by sea. The means that suppliers in the FOB don’t pay for shipping, but supplier who quoted landed cost will pay all the costs till the products reach your doorstep.

Chapter 6 FOB Pros and Cons for Buyers

FOB in shipping has both, advantages and disadvantages. However, FOB has more conveniences and less risk than other methods.

FOB Advantages for buyers

The following are some pros of FOB in shipping.

1.The FOB Term is Generally Accepted by Alibaba.com

FOB is the most popular term used on the site, “alibaba.com.” FOB is on the default setting of the site for importing products from China. The reason behind its extensive use on this website is that this method covers product costs, local exporting fees, and delivers your order to the nearest port.

2.The FOB term Prevent Logistic & Customs Hassles in the Country of Origin

Through the FOB method, the seller has the authority to control everything and manages the transportation of goods from the factory to the designated port. Buyers don’t have to face problems following the laws and regulations of the origin country.

Most purchasers don’t know about certain laws, and they see it as a challenge to pass export customs. Under FOB, the buyer doesn’t have to worry about the legislation of the origin country. They are free of the worries of logistic and customs laws in the country of origin.

3.FOB Term Give Buyers a Good Balance between “Lower Cost” and “Less Hassle”

Under FOB, the seller pays for transportation until the goods reached the customer port. The buyers have more chances to get a better shipping cost. Moreover, buyers also don’t have the responsibility to manage the procedure of local logistic.

FOB Disadvantage for Buyers

FOB in shippinghas many facilities for you, but it also has the following cons.

  • FOB Term Has Limited Options of Suppliers than EXW Term

Most factories can make good products, and offer you a perfect price, but they don’t have facilities and capabilities to conduct trading procedures on their own. Sometimes, they also don’t have an export license, so they can’t accept an FOB term. This is why buyers choose the EXW term and get expertise in the trading method by working with them. Because of this, expert buyers always get bettercosts compared to new buyers.

  • Suppliers Might Charge More in FOB Local Charge than it Actually Costs

The supplier has the responsibility of loading your goods in the container. They might have to move or unload your goods for some reason. Yoursupplier willoftenaddmorethanactualcostinto their quotation so they can make more profit from takingextraresponsibility.

  • You Don’t Know the Actual Unit Cost of Product in FOB Compared To EXW

You will see that the unit cost of the product is higher in FOB compared to EXW. This doesn’t mean that the overall costs will be higher, as this cost includes some transport costs. However, EXW offers you an actual price per unit of your product.

  • FOB Term Is Not Suitable if You’re Buying from Several Suppliers and Mix it into One Container

FOB is not for you if you are buying from a couple of factories and want to import everything in one container. If you do it this way, your FOB total cost will be higher, and you will pay more to suppliers. The EXW method is better if you want to import from different manufacturers at the same time.

Chapter 7 Incoterms 2020 vs. 2010: What’s New About FOB Term

You may need to know more about the term “Incoterm,” here what you should know.

FOB Incoterms 2010 vs. FOB Incoterms 2020

The International Chamber of Commerce (ICC) has published the new Incoterms 2020. This body has been publishing training rules since 1930. They publish international trading laws after every decade. The latest versions will work until December 2029.

The updated version has some more offers and facilities for buyers and sellers. Traders are looking forward to taking advantage of this new law. Moreover, the incoterms 2020 is better than the incoterms 2010.

The following are the major differences between the incoterm 2020 and incoterm 2010.

1Customs Clearance: Export, Transit, and Import

You can find a more precise explanation as to which party is responsible for carrying out clearance and custom facilities under incoterms 2020. The law also confirms who will assume the costs and risks of the trading. Moreover, for the first time in history, the policy also includes the release of goods in transit.

In incoterms methods, the EXW, FCA, FAS, FOB, CPT, CIP and CIP, and CCFR risks of transport are transferred at origin country, and the buyer holds the liability in the customs transit clearance. Moreover, the methods of DAP, DPU, and DDP, the transportation risk is on the destination country, and the sellers bear the liability. This change is one of the major differences between the updated and the previous incoterms laws.

2Transport Security Requirements

In the updated version, the liability regarding the security is easily understandable under two circumstances: transport of goods from the country of origin to the designated one, and the customs clearance formalities and procedures of export, import, and transit.

During the goods transport, the security liability is the responsibility of the seller in the methods of CPT, CFR, CIP, CIF, DAP, DPU and DDP, and responsibility of the purchaser in the procedures of EXW, FCA, FAS, and FOB. For the customs clearance, the security liability lies with the buyer or purchaser who must undertake the clearance.

Chapter 8 Fob Incoterms vs. FOB UCC: They are Different!

Incoterms vs. Uniform Commercial Code (UCC)

Although incoterms are familiar for the people across Asia-Pacific, Europe, and other parts of the world, they are not widely recognized by the Unites States. Most shippers in the U.S. use Uniform Commercial Code (UCC) instead of Incoterms. This can lead to some confusion while trading internationally because some of the incoterms terms are also used in UCC, but they have a different meaning. For example, FOB means Freight On Board under the UCC. This is why awareness of both laws is essential for U.S. shippers.

Where Are They Used?

The first thing you need to understand is that there is no use of UCC outside the United States. The Uniform Commercial Code only applies to U.S. shipping, whereas the Incoterm is a series of policies practiced by traders internationally. This means every country can follow incoterms laws.

FOB Shipping Point Term in UCC

FOB shipping point is also known as FOB origin; it follows the methods of shipping but defines the origin. This FOB term indicates the geographic location to which the delivery will reach to fulfill these general obligations.

Suppose that you have a transaction pending between a seller in Settle, Washington, and the purchaser is in Battle, Montana. If the parties want the transactions of “FOB Origin,” they will use the word “FOB Seattle.”

FOB Destination Term in UCC

Under this term, the destination word shows the geographic location where the goods have to reach. It also follows the same laws as FOB, but gives you more information. The seller has to transfer the products to the designated point.

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Author:

Reynold Li is the co-founder of Fami Sourcing who specializes in the field of supply chain management in China. He works with oversea buyers and wholesalers to maximize their import business profit, ensure product quality, and engender business growth. He likes to work with clients who are super serious about their businesses.

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