Ex Works (EXW) vs. Free on Board (FOB): An Overview
Ex Works (EXW) and Free on Board (FOB) are both international trade terms, known as Incoterms that dictate the responsibilities of buyers and sellers, including which parties are required to cover all costs and arrangements related to the shipping of goods.
With Ex Works, the seller is not obligated to load the goods on the buyer's designated method of transport. Instead, the seller must make the product available at a selected location, and the buyer must incur transportation costs.
With Free on Board, the seller does have to load the goods on the buyer's method of transport at the shipping point and may be responsible for them throughout the trip and to the final destination. Free on Board means the seller retains ownership and responsibility for the goods until they are loaded "on board" a shipping vessel. Once on the ship, all liability transfers to the buyer.
- Ex Works and Free on Board are both international shipping terms.
- They are types of incoterms.
- Incoterms specify the rules and terms used in international and domestic trade contracts.
- Ex Works requires that the seller make the product available at a designated location, and the buyer incurs transport costs.
- Free on Board has the seller responsible for the goods until they are loaded on a shipping vessel; at which point, all liability transfers to the buyer.
Shipping using the designation of Ex Works (EXW) indicates the seller has a responsibility to make sure the buyer can access and pick up the cargo at their place of business. Transportation costs and associated risks are no longer a burden for the seller under the EXW option, and this favors the shipper.
For example, say a seller of electronic products is located in San Francisco, CA. The buyer is located in New York, NY. The buyer and seller agree on the price for these products and sign an Ex Works trade agreement. The buyer wants to pick up the products in two weeks, and the seller must have the products ready for transport. However, the buyer is responsible for all of the further costs associated with delivering the goods to New York City. The buyer pays for all the transportation costs, and if the products get lost along the way, the seller is not liable.
EXW terms often result in cheaper goods; however, the supplier's risk is increased as they maintain responsibility for the product for longer.
Free on Board
Unlike EXW, when a buyer and a seller enter a Free on Board (FOB) trade agreement, the seller is obligated to deliver the goods to a destination for transfer to a carrier designated by the buyer. The location designation in the FOB trade agreement is the point at which ownership is transferred from the seller to the buyer. The responsibility often shifts at this arrival location. The seller is responsible for transporting goods up until this point, but the buyer may or may not be responsible for all transportation arrangements from this point to their location, depending on the terms of the agreement.
For example, suppose a buyer located in Los Angeles, CA, wants to purchase computers from a seller located in Chicago, IL. The buyer and seller sign a FOB trade agreement. The buyer designates that the computers be shipped by airplane, and the seller is obligated for the transportation expenses associated with transporting the computers to the airport located in Los Angeles. At this point, the responsibilities shift and the buyer is responsible for all further costs related to transporting the computers to the final destination. The buyer is also liable for any damages that may occur during this phase of the shipping process.
FOB transfers liability from seller to buyer when the shipment reaches the port of origin, and not the destination.
Contracts involving international transportation often contain abbreviated trade terms that describe conditions such as the time and place of delivery, payment, when the risk of loss shifts from the seller to the buyer. Other items include who pays the costs of freight and insurance considerations. The more common terms are called Incoterms, which the International Chamber of Commerce (ICC) publishes.
However, companies that ship goods in the United States must also follow the Uniform Commercial Code (UCC). Due to there being more than one set of rules, the parties in a contract must specify which governing laws they used for a shipment.
What Do EXW and FOB Stand for?
EXW stands for Ex Works, an incoterm whereby the buyer of a shipped product pays for the goods when they are delivered to a specified location. FOB, or Free on Board, instead shifts the responsibility of the goods to the buyer as soon as they are loaded onboard the ship.
Is Ex Works or Free on Board Better?
Goods shipped EXW will usually be cheaper FOB, since Free on Board would have the supplier bear the costs of transportation, handling, and customs clearance. EXW terms, however, are often riskier since the supplier is responsible for the goods until they reach their location.
What Is EXW or FOB Unit Prices?
In shipping, the unit price refers to the cost to ship a good based on a pre-agreed or standardized unit basis. For instance, to ship coal per ton, oil per barrel, or grain per bushel.