When buying goods from an overseas supplier, importers should always seek payment, risk, and transfer of risk terms that are the most favourable to them.
As always, failure to plan is planning to fail, and the best way to form a solid plan as an importer is to understand the Incoterms rules.
Let’s dive into one of the more common Incoterms for sea shipment: Free on Board (FOB)
FOB – All you need to know
FOB, short for ‘Free on Board‘, is one of the Incoterms rules established by the International Chamber of Commerce (ICC) to help standardise international commercial transactions.
In FOB shipments the seller generally bears all costs and risks – including any export formalities, like export customs clearance – until the goods are loaded onto the vessel for transport.
While there are many more variations and complexities that go into the FOB Incoterm, a good shorthand to remember is that the seller will put the goods, for free, on board the shipping vessel.
Some of the more common shipping terms when importing from other markets are:
- EXW – Ex Works
- FOB – Free on Board
- CFR and CIF – Cost and Freight
- DAP – Delivery at Place
- DDP – Delivery, Duty Paid
FOB shipping is one of the more favourable Incoterms for the importer because it balances the imports risk and control, includes customs clearance, and is more cost-effective.
FOB balances risk and control
For most situations, FOB strikes an optimal balance of risk and control for importers.
The Incoterm EXW would provide the importer with the most control – it has to arrange every aspect of the shipment – but it also adds considerable risk and responsibilities to the importer, so much so that the seller isn’t even responsible for loading goods onto the cargo.
Further to this, under EXW the supplier has no obligation to clear goods through export customs, or even unload them off their own trucks, which is another significant advantage to FOB for importers.
FOB includes customs clearance
Clearing export customs is often challenging, especially if the importer isn’t familiar with the legislation in the origin country of their goods.
Under FOB, suppliers are responsible for clearing goods through customs at export, including export clearance documents at the port or terminal, which could save an importer considerable hassle, complications, and even money.
FOB is cost-effective
Under FOB, the importer can control the shipping process from the time the vessel leaves the port in the seller’s country but does not need to figure out the logistics of getting the goods from the seller’s warehouse to the port – something that can be particularly difficult if the importer is not familiar with the seller’s country.
Other Incoterms, including CIF and CNF, give the supplier the responsibility to transport goods to the port, airport, or terminal in their country, while DAP and DDP take this a step further and give the seller the responsibility of getting the goods to your destination place.
Quite often, yes.
By charging more, a supplier can increase its revenues while keeping product prices competitive. Inflated shipping fees are particularly apparent when margins are thin or the product competes heavily with others on the market.
Furthermore, because suppliers need time to produce goods, by giving an inflated estimate of shipping costs, they add a buffer in case their estimates are incorrect, or the goods are heavier than originally expected.
FOB is a good solution for bulk transporting goods from a supplier, as you have full cost control and the supplier is responsible for clearing the goods and export duties, which is one of the most complex and frequent mistakes first-time importers make.
We’d always recommend getting quotes, researching the different transport options or transport terms, and also understanding where your risks and liabilities are.
By using an independent professional freight forwarding or specialist logistics company that is independent of the seller, you’ll likely save costs and ensure goods are safely transported to the end destination.
Read our freight forwarding guide to find out about all of the other forms of shipping, or, if you’d like to find out more about how FOB can be used for your business, read our FOB Guide here.
Incoterms 2020 Rules PDF
A comprehensive 96 page guide on Incoterms® 2020, to be used in conjunction with The International Chamber of Commerce’s (ICC) new book, INCOTERMS® 2020.
Written by Bob Ronai CDCS, a member of the ICC’s Incoterms® 2020 Drafting Group, in partnership with Trade Finance Global (TFG). This 94 page guide provides an article by article commentary on Incoterms® 2020.
- Introduction and layout of the rules
- A1 / B1: GENERAL OBLIGATIONS
- A2 / B2: DELIVERY
- A3 / B3: TRANSFER OF RISK
- A4 / B4: CARRIAGE
- A5 / B5: INSURANCE
- A6 / B6: DELIVERY/TRANSPORT DOCUMENT
- A7 / B7: EXPORT/IMPORT CLEARANCE
- A8 / B8: CHECKING / PACKAGING / MARKING
- A9 / B9: ALLOCATION OF COSTS
- A10 / B10: NOTICES
- Advantages and Disadvantages of each rule and whether they work with LCs
- Rules for Any Mode or Modes of Transport
- Rules for Sea and Inland Waterway Transport