Freight on Board (FOB) Definition: How It Works in Shipping

Freight on Board (FOB) is a key global shipping term defined by the International Chamber of Commerce (ICC) that helps streamline cross-border trade. It clearly outlines who is responsible for goods at each stage of the shipping journey, making it essential for understanding how supply chains and shipping agreements truly work.

In this blog, we explain the meaning of freight on board, including its types and costs, its importance in freight insurance and how it differs from cost, insurance and freight (CIF) agreements.

What is Freight on Board?

Freight on board (FOB) is a point at which ownership of shipped merchandise is transferred from the exporter to the importer.

Once the goods reach the destination port, the exporter’s responsibility ends, and the importer assumes all costs and risks associated with the shipment from the destination to their warehouse.

Bajaj General Insurance offers freight insurance through its marine cargo insurance plans, which are highly flexible and customisable, tailored for your business.

Let us understand FOB shipping using an example.

Example

Consider a scenario in which a spice store in Germany purchases 15,000 tons of spices from Company XYZ in India. The shipping contract specifies “FOB destination, Germany, ABC warehouse.”

This indicates that company XYZ covers all costs, including loading, shipping, and insurance, until the shipment reaches the ABC warehouse.

If any loss or damage occurs to the goods during transit, company XYZ is accountable. However, if the goods sustain loss or theft after reaching the ABC warehouse, the responsibility falls on the importer.

Types of Freight on Board

Freight on Board is mainly of two types:

FOB Origin

In this type, the importer pays the entire shipping costs from the exporter’s facility to the destination.

FOB Destination

In this type, the exporter pays for the cost of sending goods to the importer’s warehouse.

Costs Associated with FOB

The costs related to FOB shipping encompass a range of expenses from arrival port to ultimate destination.

International Fees: This fee covers the cost of transporting a shipment across international borders.

Transportation Cost: Transportation fees are calculated based on the cost of moving the shipment from the freight yard to the buyer's warehouse or store.

Inventory Fees: Buyers can minimise costs by increasing the size of their shipment, as this allows them to assume the fees for one large load instead of several smaller ones.

Labour Cost: If a buyer wants to hire professionals to unload the shipment, they must pay for the labour.

Freight Insurance: As part of regulations set by ICC, freight insurance is mandatory for any shipping transactions across borders. This insurance covers the risk of damage, theft or loss of goods during transit.

Importance of Freight Insurance in FOB Shipping

Freight insurance policies protect businesses such as carriers and freight forwarders, who hold legal responsibility for the goods. 

The freight forwarder pays for this insurance, but the exporter bears the cost when they use the forwarder’s service. This type of insurance is typically included in the shipping quote given to the sender and is part of their payment.

If the goods are lost or damaged during transit, the freight insurance policy will compensate for the cost of both the goods and the freight.

Under MSME insurance of Bajaj General, businesses can buy marine insurance that provides freight coverage to secure their goods from any damage, loss or theft during transit.

How Freight on Board is Different from Cost, Insurance, Freight?

CIF and FOB both indicate the transfer of responsibility and costs for a particular international shipping transaction, but they differ in various aspects. 

Let us look at key differences between a CIF agreement and an FOB agreement.

Bottom Line

Freight on Board (FOB) plays a crucial role in the shipping industry as it clarifies freight shipping terms for both vendors and customers. FOB conditions ensure that the two parties involved in shipping a package avoid disputes over charges. It also provides the legal compliance required for shipping across borders.

Get your Freight insurance from Bajaj General Insurance and secure your goods now!

Frequently Asked Questions

Who uses freight on board (FOB) and why?

Exporters and importers use Freight on Board (FOB) to clearly define when the ownership, cost, and liability of goods transfer from seller to buyer during international shipping

Who pays for the FOB cost in shipping?

The buyer generally pays for FOB (Free on Board) charges from the origin to the destination port, and they assume responsibility for all costs and risks from that point forward.

Are Free on Board (FOB) and Freight on Board (FOB) the same?

Yes, Free on Board (FOB) and Freight on Board (FOB) indicate the same thing, and both terms can be used interchangeably. 

Does FOB only refer to marine shipment?

No, FOB refers specifically to the shipment via sea or inland waterbody.

What is the difference between FOT and FOB?

Freight on board (FOB) is an Incoterm related to cargo shipments via sea or inland waterway, whereas Free on Truck (FOT) refers to goods shipped by truck.

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