FOB (Free on Board) — What FOB Means and How It Works

FOB stands for Free on Board and is one of the oldest shipping terms used to describe when the seller's obligation ends and the buyer's obligation begins in a commercial trade transaction. At its core, FOB answers two practical questions every beginner needs to know: who pays for which costs, and at what specific point does the risk of loss or damage move from seller to buyer.

There are two common contexts where you will encounter FOB. The first is under international trade rules known as Incoterms, where FOB applies only to sea or inland waterway transport. In Incoterms language, the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. Risk passes from seller to buyer when the goods are on board the vessel. The buyer is responsible for the main carriage, insurance, and import formalities.

The second context is domestic U.S. commerce where people often use terms like FOB Origin or FOB Destination. These terms clarify which party pays freight and when ownership or risk shifts. FOB Origin (or FOB Shipping Point) means the buyer takes ownership and risk once the goods leave the seller's dock; the buyer typically pays freight. FOB Destination means the seller retains ownership and risk until the goods arrive at the buyer's location; the seller usually pays freight.

Why does this matter to a beginner?

Because FOB affects costs, insurance responsibilities, customs clearance, and who must file claims if damage occurs. A small importer who believes the seller is responsible for goods all the way to their warehouse may be surprised if an FOB term transfers risk earlier.

Here are clear, practical examples to illustrate both uses of FOB:

• Incoterms FOB example: A buyer in Spain buys steel coils from a seller in Brazil under FOB Santos, Incoterms 2020. The seller loads the coils on the ship at the Port of Santos. Once the coils are on board, the buyer assumes risk and arranges ocean freight and insurance to Spain.
• Domestic FOB example: A retailer in New York orders furniture from a manufacturer in Ohio with terms FOB Origin. The truck driver picks up the furniture from the factory in Ohio and the retailer becomes responsible for the goods during transit.

Key practical points and definitions to remember:

• Named place matters: For any FOB clause you must specify the exact place (for example, FOB Shanghai port or FOB seller's warehouse). That named location defines where delivery and risk transfer occur.
• Risk vs cost: Risk of loss and responsibility for costs are related but distinct. Under many FOB arrangements, the buyer assumes risk at the point of delivery but may still accept different cost responsibilities depending on the contract.
• FOB is specific for mode: Under Incoterms, FOB applies only to shipments by sea or inland waterway. For containerized multimodal transport, consider alternative Incoterms such as FCA, which better match container operations.

Practical checklist for small businesses using or negotiating FOB terms:

1. Always record the full Incoterms version and the named place in contracts (for example, FOB Shanghai Incoterms 2020).
2. Decide who arranges and pays for export clearance, ocean freight, and insurance; spell it out in writing.
3. Confirm who will receive the bill of lading and whether the transport will be containerized (containers may require different handling than breakbulk cargo).
4. Arrange insurance to cover the period when you hold risk. Buyers should review insurance if risk passes at shipment; sellers should maintain cover until delivery if FOB Destination is used.
5. Document loading and handover carefully: obtain signed loading receipts and a clean bill of lading to support any future claims.

In short, FOB is a compact term but carries significant consequences for logistics, costs, and legal risk. For beginners, focusing on the named place, the exact Incoterms version, and who is arranging each step of the transport chain will prevent most misunderstandings. Use a clear written contract and a short checklist to avoid the common pitfalls associated with FOB.