Domestic freight shipment is full of industry acronyms. “FOB” or Freight on Board is one of the more common we’re asked to explain. Freight on Board (also called Free on Board, primarily in international shipping) is an international commercial law term defined by the International Chamber of Commerce. The FOB is one of the three essential pieces of documentation used in the shipping process. The other two are the freight bill and the bill of lading (BOL) which provide proof that goods have been received from a shipper.
Why is FOB so Important?
FOB establishes the responsibility and costs of shipped goods, specifying the point at which the responsibility shifts from the seller to the buyer/receiver. The FOB includes:
- Whether the buyer or seller is responsible for the cost of transporting goods
- The date and time when ownership (i.e., the title) of the goods is transferred to the buyer
There are several ways the freight on board terms of sale will be indicated, FOB Delivered and FOB Origin being the most common.
- FOB delivered – Seller/Shipper is responsible for all of the transportation costs
- FOB origin – Buyer/Receiver is responsible for shipping costs from the seller (or seller’s warehouse) to the final destination
- FOB freight collect: A buyer is not only responsible for all freight charges, but they must also file insurance claims when necessary
- FOB origin, freight prepaid: The buyer assumes responsibility for the goods when picking up, but the seller pays shipping costs; if “charged back” is added to these specifications, the seller adds the freight costs to the invoice, so the buyer ultimately pays for shipping
- FOB origin, freight collect: Assuming full responsibility for the shipment, the buyer covers costs for freight and shipment
- FOB destination, freight collect: With this specification, the buyer covers freight charges, but the seller holds title and control over the shipment until delivery; if “allowed” is added to these specifications, freight costs are added to the invoice by the shipper
- FOB destination, freight prepaid: The seller both pays for freight charges and has ownership until delivery, as long as no insurance claims are necessary; if “charged back” is added to these specifications, the buyer deducts from the invoice the shipping charges originally paid by the seller
What About Liability for Damage or Loss?
Although the company physically moving the freight (typically the freight carrier) is generally not part of FOB terms, there are exceptions. In addition, they are always liable for any damage to the freight while in transit.
Ownership of freight also affects insurance in the event of damage or loss, meaning whoever owns a shipment at any particular stage along the way is also responsible for having an insurance policy to cover it.
To avoid issues between buyers and sellers, FOB terms must be clearly communicated in purchase orders and all parties must be in agreement regarding who will be responsible and liable for shipments, and when.
If you have questions regarding FOB, contact us today. If you’d like to learn more about LTL, FTL, and freight shipping options, click below to request a free trial of our cloud-based transportation management system; Amrate. Amrate is saving clients over 30% annuallly on their LTL spend. Click below to learn more.