A free on board (FOB) designation specifies whether the buyer is responsible for freight charges and determines the obligations of parties when trading goods. There two main types of free on board freight—FOB destination and FOB shipping point—with several sub-designations.
Free on board is an international trade term under the Incoterms rules published by the International Chamber of Commerce (ICC). The costs associated with FOB include transportation of the goods to the port of shipment, loading the goods onto the shipping vessel, marine freight transport, insurance, and unloading and transporting the goods from the arrival port to the final destination.
Types of Free on Board Destination
Free on board destination makes the seller responsible until the freight arrives, including covering the cost of lost or damaged freight. There are several different ways FOB destination costs can be handled.
FOB freight prepaid and allowed specifies that the seller is obligated to pay the freight transportation charges and owns the goods while they are in transit. The seller assumes the risk of loss of or the damage of goods during transit. The title of goods passes to the buyer at the buyer's business location.
FOB freight prepaid and added specifies that the seller is obligated to pay the freight transportation charges. However, the seller bills the cost of transportation to the buyer. The seller assumes the risk of loss of or damage to goods during transportation because the seller owns the goods during transit. The title of goods passes at the buyer's business location.
FOB freight collect specifies that the buyer must pay the freight transportation charges when the buyer receives the goods. However, the seller assumes the risk associated with transporting the goods because the seller still owns the goods during transit.
FOB freight collect and allowed specifies that the buyer must pay for the freight transportation costs. However, the buyer deducts the cost from the seller's invoice. The seller is responsible for the goods because the seller still owns the goods during transit.
Free on Board Shipping Point
FOB shipping point relieves the seller of any responsibility for the shipment once the goods arrive at the shipping vessel. This makes the buyer responsible for the goods during transport, which means they cover the freight charges and may wish to purchase insurance to protect themselves if any of the shipment is lost or damaged.