What it means
Every sale of goods that must travel raises two questions: who pays to move them, and who bears the loss if they are damaged on the way. FOB answers both with a named location.
In international trade, FOB is one of the standard Incoterms (rules published by the International Chamber of Commerce), and it applies to sea and inland waterway shipments. Under FOB with a named port of shipment, the seller delivers the goods by loading them on the vessel chosen by the buyer.
Once the goods are on board, the risk passes to the buyer, who pays the main freight and usually the insurance. The seller remains responsible for clearing the goods for export.
In US domestic trade, the term has a related meaning. FOB shipping point means ownership and risk pass to the buyer as soon as the goods leave the seller's premises.
FOB destination means they pass only when the goods arrive at the buyer's location, so the seller carries the transit risk. For accounting, FOB matters because it influences when a sale is recorded and when inventory appears on the books.
A buyer under FOB shipping point should record goods in transit as inventory, while a seller under FOB destination should not record the sale until delivery. Mistakes can cause errors in revenue and stock at the period end.
FOB also affects pricing comparisons. Two suppliers might quote $80,000 for the same goods, but one price may be FOB the supplier's factory and the other delivered to your door.
Always compare quotes on the same delivery basis before choosing, adding the freight, insurance and handling costs back to the cheaper-looking offer. A common nuance is that FOB is meant for ship-based transport only.
For containerised cargo or air freight, the Incoterms rules FCA (free carrier) is generally more suitable, because the goods are handed over to a carrier before they reach the ship.
In practice
Real-world examples.
Example
A furniture retailer buys chairs from a factory overseas on FOB port terms. The retailer books the shipping and insurance itself, and it owns the chairs from the moment they are loaded.
Example
A US food distributor sells goods to a supermarket chain FOB destination. A pallet is damaged in a lorry accident on the way, and the distributor bears the loss because the goods had not yet arrived.
Example
A year-end auditor finds that a manufacturer has included in stock a delivery that left the supplier on December 30 on FOB shipping point terms. The goods were in transit but already belonged to the manufacturer, so the inclusion was correct.
Formula
Calculation
Landed cost to buyer = Goods price + Freight + Insurance (any costs the buyer pays under the chosen terms)
Suppose a buyer is quoted $80,000 for goods, with freight of $3,000 and insurance of $1,000. Under FOB shipping point, the buyer pays the freight and insurance, so the landed cost is 80,000 + 3,000 + 1,000 = $84,000. Under FOB destination, the seller pays those costs, so the buyer's cost is $80,000, although the seller may have built the extra $4,000 into the price.Case study
Seen in the real world.
Harlow Garden Supplies is an illustrative, fictional retailer that compared two quotes for terracotta pots. Supplier A offered $62,000 FOB its factory, while Supplier B offered $65,500 delivered to the retailer's warehouse.
The finance manager added freight of $2,800 and insurance of $700 to Supplier A's quote, giving a landed cost of 62,000 + 2,800 + 700 = $65,500. The two offers were identical in cost, so the decision came down to reliability and payment terms.
The illustrative lesson is that FOB quotes can look cheaper simply because they exclude costs. The retailer now requires every supplier to quote on the same basis before the comparison is made.
Watch out
Common mistakes.
- Comparing an FOB price with a delivered price as if they were the same, which hides the freight and insurance the buyer must add.
- Forgetting to record goods in transit as inventory when the terms say the buyer already owns them.
- Using FOB for containerised or air shipments, where other Incoterms are generally a better fit.
Questions
People also ask.
Who pays for insurance under FOB?
The buyer normally arranges and pays for insurance once the goods are on board, since the risk has passed to them.
What is the difference between FOB shipping point and FOB destination?
Under shipping point the buyer owns the goods in transit, while under destination the seller does until delivery.
Does FOB decide who owns the goods?
In domestic sales it is often used that way, while Incoterms mainly allocate risk and costs, so the contract should also state when ownership passes.
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