FOB explained in 3 minutes3 min read

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FOB explained in 3 minutes – FOB shipping example

FOB, FOB shipping, incoterms fob, Free On Board or Freight On Board, is a term in international commercial law under the general Incoterms (International Commercial Terms) where, in an international trade, the supplier organizes and pays the part of the shipping process until the goods are onboard the ship (for example). After that, any costs and organizing is on account of the buyer: the costs of the freight, port handling and the delivery to your door.

The main point behind a system such as incoterms FOB, is to equally divide the the costs, risks, and responsibilities between the seller and the buyer (see our FOB shipping example underneath). From the perspective of the buyer, some of the main advantages of FOB are the less hidden costs, there is more transparency in the shipping process, and you don’t have to deal with customs in the foreign country. Some disadvantages include the slightly higher cost of goods and the fact that you have to find a shipping company yourself.

Who bears which responsibilities?

As a buyer, you are responsible for:

  • the freight transport;
  • port handling;
  • customs in your country; and
  • the delivery to your door.

As a supplier, you have to arrange the following.

  • Document Fees
  • Entry summary declaration
  • Terminal handling charges
  • License fees
  • Customs clearance
  • Transport costs to the port
  • Other local costs

FOB explained: shipping costs

Here we will list some of the costs for the buyer in our FOB shipping example:

  1. The invoice: incorporating not only the price of the goods but also the fees and charges they had to pay to bring the product to the port. As mentioned before, the cost is slightly higher but there are no hidden costs in the end.
  2. Freight charges: to bring the goods to your country by plane or ship. You will have to bear the costs of the main transportation.
  3. Port handling: fees and charges to unload the bought goods and loading them onto trucks after customs clearance.
  4. Customs clearance: upon arrival, you will need to pass customs clearance, you will have to declare the imported goods with border control and pay and taxes.
  5. Delivery to your door: the final costs involves the transportation of the goods to your warehouse, factory, shop or home.

For the seller, on the other hand, the following costs may arise:

  1. Document fees
  2. ENS
  3. Seal fee
  4. Handling fee
  5. Telex release
  6. Pick up fee
  7. Port congestion fee

Incoterms FOB is your go-to shipping method when you want to control costs as much as possible and avoid risks as much as possible. You oversee most of the shipping process, but you leave the risky foreign customs clearance (and any charges that may arise due to wrongful declaration) to the supplier. If you have any other questions or a question about our FOB shipping example, feel free to contact us anytime!

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Last modified: June 8, 2019

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