What Does Free or Freight On Board (FOB) Mean?
The FOB Acronym Is an Important Term to Understand in Shipping Circles
When items are transported either domestically or internationally, the delivery must be accompanied by relevant documentation. The amount and type of documentation vary depending on whether the shipment is within the United States or to another country.
For domestic shipments, there are three key documents to be aware of: the bill of lading, the freight bill, and the Free On Board (FOB) terms of sale. For most retailers, the FOB type is referenced on all documents, including the invoice for payment.
What FOB Stands For
The acronym FOB, which stands for "Free On Board" or "Freight On Board," is a shipping term used in retail to indicate who is responsible for paying transportation charges. It is the location where ownership of the merchandise transfers from seller to buyer. The seller pays the freight, and the buyer takes the title once it's been shipped. The buyer pays the transportation costs from the warehouse or vendor to the store.
FOB terms of sale establish which party (vendor or retailer) will be liable for the transportation costs, which party is in control of the movement of the goods, and when (date/time) the title passes to the buyer. In most cases, the freight hauler or delivery company (such as FedEx, UPS, Conway) is not involved, but in some instances, the freight hauler is liable as well. A freight hauler is always liable for the damage it may cause in transit, though.
If the FOB terms of sale indicate that it is "FOB delivered," then this implies that the shipper will be responsible for all of the carrier’s costs. If the terms of sale show "FOB origin," then this means that the buyer will take the title of the goods when they are shipped, and they will incur all the transportation costs from the shipping location to the final destination.
History of the Term
FOB historically had referred to the transfer of title and liability between buyers and sellers of goods, and it was used solely for goods transported by ship. The term has been expanded since the days when sea commerce was the primary means of transporting goods, and the definition includes all types of transportation and can vary by country or legal jurisdiction.
One of the most important aspects of FOB terms is that it helps determine which party owns the freight while it is in transit. If the freight is damaged or lost, the insurance policy of the owner is in effect. Thus, it's important to be clear about the terms and know who is responsible for the shipment at every stage of its journey.
Any vendor-client transaction should have the FOB terms spelled out very clearly in purchase orders. It's best for a retailer to have a standard set of terms that can be negotiated on a per-vendor basis. This will save headaches and cost down the road.
Terms and Conditions
There are a few variations of FOB terms to be aware of:
- "FOB origin" means the buyer will assume the title of the goods as soon as the carrier/hauler picks up and signs for the shipment.
- Freight collect means the buyer is then responsible for all freight charges and is responsible for filing any necessary insurance claims.
- If the terms include the phrase "FOB destination, freight collect," the seller has title and control over the shipment until it's been delivered, and the buyer is responsible for freight charges.
- If the terms include "FOB destination, freight prepaid," the seller retains ownership until delivery, provided there are no insurance claims. In this scenario, the seller is responsible for the freight charges.
It's important to understand the specifics of the FOB terms so all parties know what is expected and who will be responsible for unforeseen charges and fees. It's also important to consider your dating as well. Some vendors will offer longer terms for payment, but the start date is based on FOB date. This ultimately impacts the cost of goods.