What Does F.O.B. Mean?

by George Muha

F.O.B. stands for Free On Board and indicates the price for goods including delivery at the seller’s expense to a specified point.

People ask me the meaning of the term F.O.B. more so than any other freight discount viagra soft gels verbiage. Many people do not even know what it stands for. In fact, recently I was at a prominent shipper in the Northeast and a high-level purchasing person actually called it fob (rhyming with “bob”). At that moment, I knew I needed to draw up an article to further explain how this often-misused term actually is defined.

First of all, F.O.B. stands for Free On Board and indicates the price for goods including delivery at the seller’s expense to a specified point. In the purchasing world, F.O.B. is also used with an identified physical location to determine a) the responsibility for the payment of

the freight charges and b) the point at which title for the shipment passes from the seller to the buyer.

In other words, F.O.B. is a purchasing term that is used between suppliers and customers. Every vendor and customer should have the F.O.B. requirements specified.

F.O.B. terms identify: 1) who’s paying for the freight and 2) who owns it at which point.

Below are four different ways in which F.O.B. terms are used in a purchasing agreement:

1) F.O.B. Origin, Freight Collect
2) F.O.B. Origin, Freight Prepaid
3) F.O.B. Destination, Freight Collect
4) F.O.B. Destination, Freight Prepaid

Explanation Of Each F.O.B. Term

F.O.B. Origin, Freight Collect: The “origin” part means that the buyer assumes title of the goods the moment the freight carrier picks up and signs the bill of lading at the origin pick-up location. The buyer also assumes risk of transportation, and therefore is responsible for filing claims in the case of loss or damage. The “freight collect” part means the buyer is responsible for the freight charges.

F.O.B. Origin, Freight Prepaid: The “origin” part means the same as above, but the “freight prepaid” part means the seller is responsible for the freight charges.

F.O.B. Destination, Freight Collect: The “destination” part means the seller retains title and control of the goods until they are delivered. The seller selects the carrier and is responsible for the risk of transportation and filing claims in case of loss or damage. The “freight collect” part means the buyer is responsible for the freight charges.

F.O.B. Destination, Freight Prepaid: The “destination” part means the same as above and the “freight prepaid” part means the seller is responsible for the freight charges.

How This Affects Your Company

This can affect you in some serious ways if you are not careful. I was recently at a distributor who receives a lot of freight from various vendors. He has a policy on his dock that his receiving guys should refuse an order if it has the slightest sign of damage. He does not want to file a claim or deal with the process of ordering replacement parts for potential damages. So, he just tells his dock people to refuse the shipment at the receiving dock.

Concerned about what this distributor was liable for, the first thing I wanted to find out was what the F.O.B. terms are with his vendors. The vendor who he refused the most shipments from had the terms “F.O.B. Origin, Freight Prepaid.” This meant that although his vendor was paying the freight, the distributor owned the freight, and the responsibility of loss or damage, as soon as the carrier picked it up. So, by refusing the freight, he was returning something that he actually owned at this point.

There are a few reasons why it is not smart to refuse a shipment when it is F.O.B. origin. First of all, in this case his vendor has no reason (besides being a nice guy) to accept those goods back. The distributor owned them as soon as the trucking company picked them up. So by returning a shipment, this distributor was just raising the risk for more possible damages by going back through the carrier system to the vendor. Technically, when an order gets delivered back to the vendor, they could refuse it because they no longer own it at that point.

Luckily for this distributor, his vendor is very nice. The vendor accepts the returned items, files the claims on behalf of the distributor and is quick to replace orders. This distributor could get shafted at some point if the vendor decides not to be nice.

How To Handle F.O.B. Issues

In this case, the distributor should be accepting these partially damaged shipments (since he technically owns them) and have an inspector come in to check them out. If replacement is possible, the distributor should order the parts and have them replaced. All this should be covered by the carrier via a claim settlement.

The other option in this case is to change the terms to “F.O.B. Destination, Freight Prepaid.” If it is “F.O.B. Destination,” then the distributor could refuse the shipment because they do not own it until it is

delivered properly.

The bottom line is that it is important to pay attention to these F.O.B. terms. There are a lot of suppliers and vendors that try to do the right thing by their customer, regardless of what the F.O.B. terms are. But that doesn’t mean you should ignore what your F.O.B. terms are with your vendors and customers.

If you are a shipper, make sure the F.O.B. terms are what you want them to be. You may want them to be “F.O.B. Origin” so your customers own the goods when they leave your door. Or you may want to own them until they are delivered intact. In fact, that is a good selling point to your customers if that is the way you want to do it.

The same is true with companies that receive a lot of goods. Make sure the F.O.B. terms suit your needs.

 

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George Muha

George Muha is the founder and editor of Freight Savings Tips and earns his living doing his passion, helping companies optimize logistics. Learn more about him here and connect with him on Twitter, Facebook and LinkedIn.

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{ 30 comments… read them below or add one }

Louis May 8, 2010 at 12:26 am

Need a little help! I will be purchasing product weekly and I’m responsible for freight. I want the seller to retain title and control of the goods until they are delivered since they want to select the carrier, so that part of the freights terms would be (F.O.B. Destination). My freight terms can’t be F.O.B. Destination, Freight Collect or F.O.B. Destination, Freight Prepaid because I pay for the Freight & Product in advance. Would my Freight terms than be for this situation F.O.B. Destination, Freight Paid ?? Any help would be Great ! TKS, Louie

George Muha May 8, 2010 at 2:48 am

Louis, your FOB terms are part of your purchasing agreement with your vendor and who pays for freight and when they pay for it are three separate things. If you want your vendor to retain title and control until they reach your door then you want “FOB Destination”. This verbiage goes in your purchasing agreement to your vendor. Who pays for the freight has nothing to do with who holds title of it. I hope this helps!

Mark May 13, 2010 at 8:30 am
George Muha May 13, 2010 at 12:20 pm

Good reference Mark! Thanks for adding the link!

Joe Metz June 1, 2010 at 5:15 pm

I would suggest that the Discussion of the section on Wikipedia be reviewed because it mays how flaws in the entry that are in flux. I’m not certain the article is precise in its explanation.

Mamun August 7, 2010 at 12:48 am

It is nice eplanation. It helped me very much.

TonyaTko November 27, 2010 at 4:55 am

Hello George,
Thanks for this article. It came at just the right time. I am currently in negotiations to purchase goods from China. I did not realize FOB had different terms associated with it.

Can you please point me in the direction which will help me figure out how much the charges are at the port to release goods.

My seller has a different price for FOB China, and FOB New York, by like 20 cents per piece. Then she told me that I would have to pay all of these exorbitant taxes & fees at the port, so I am having the goods shipped via fedex but I am having second thoughts. Fedex is an extra $700 added to the cost of my goods. I dont know if the seller is yanking my chain about the “high” port fees.

I am importing 2,000 aluminum jar caps.
Any information you can provide would be helpful

-Tko

freight audit February 7, 2011 at 9:14 pm

Hi Tonya. I can sense that you are in doubt of the charges your freight carrier is giving you. You may want to check out OceanAudit.net for accurate freight audits :) I hope this helps :D

cathy June 15, 2011 at 10:34 am

Who’s responsibility is it to provide the destination warehouse with a packing slip so that the destination warehouse knows what was supposed to have shipped and signs for….instead of something vague like three pallets.

Wolfy July 24, 2011 at 4:46 pm

Cathy,
It all depends on the product. A bill of lading is required on all loads, but how specific it is varies depending on the items in question. If there is hazardous materials on it, that requires more information than say 3 pallets of toilet paper. You ship 3 pallets of boxes, the bill of lading SHOULD state (for example) 3 Pallets – 27 cartons (or boxes) . The shipper has to certify that there is no hazmat materials in the shipment in some cases, and there is a checkbox on the BOL (bill of lading) when there is. As a driver, thats all I care about, is whether 1) its illegal and 2) is it going to blow up/burn up/radiate me.

Secondly, when you ordered your items, they should have told you its coming in 27 boxes. Also on one of the boxes somewhere SHOULD be a packing slip that contains a detailed list of the contents of the entire shipment, very similar to a receipt, but normally has prices and such blacked out.

If my (as a driver) says 3 pallets – 27 boxes, thats all I care about, and is all I am required to deliver to you, and is all I should have on the truck for you. The receivers job is to go and count the 27 boxes and then sign for said boxes. At that point, the drivers job is done. If there is a discrepancy in your order, and all the containers listed are there, then its up to the new owner to file a claim with the shipper.

Hope that makes sense….

Peace and Fair Journeys…

Dominic LaMilza August 4, 2011 at 8:56 am

Does F.O.B also include duty and taxes in addition to freight charges when importing product?

Greg December 9, 2011 at 5:46 pm

It would be simpler and not require a month of studying to say-
seller pays shipping SPS
buyer pays shipping BPS
Damaged goods are damaged goods. No need for fancy words and labels and who’s what where, when, why and it is still your problem because your nice.
Call and figure it out! We don’t need all these B.S.A.’s on everything.

Nancy January 20, 2012 at 7:25 am

George, Thank you so much for this article. However, I have some questions. We are a manufacturer. We produce custom goods and ship wherever our customers specify. We have one broker (in the private sector) who insists that he does not pay freight. When billing is done, I see no quotation regarding freight charges. I did notice that our quotes say “F.O.B. Our plant.” There are no additional charges in his quote. Recently, our CEO has been trying to reduce shipping costs. With the private sector, we charge freight based on our cost. Should the quote specify, F.O.B. Freight Collect and then we charge the customer for freight? If not what should it be?

Anne51 May 22, 2012 at 9:44 am

i remember the “old” days when you simply indicated FOB Factory meaning seller ships material, pays the freight and includes the freight charges for said shipment on the invoice. FOB Delivered meant shipper paid freight. Some companies now charge freight based on total dollar amount of shipment, what day of the week it is or whatever other whim they decide at the moment.  In those cases, I still place the order FOB Factory and indicate in the body of the order that item to ship via UPS/Fedex, etc along with my respective account number.  I have been using these terms for the 40 years I’ve been in business and it is amazing to me that no one understands the term FOB anymore.  Perhaps as everything else in society, people have made it up as they go along with no one taking the time to correct the error or educate the individual.  Now according to this site, you not only have to indicate FOB Origin (formerly FOB Factory), but you have to further clarify.  This says to me that the new term FOB Origin still isn’t understood which is why it must be clarified further.  I fully expect that the “current” language and terminology to be expanded further so that by the time I retire in 6 years it will take the equivalent of a sentence to specify how to ship material.  Why do we persist in making a simple task so very complicated?

George Muha May 22, 2012 at 1:23 pm

 Anne, thanks for your comment.  However, I don’t mean to bust your bubble but FOB has always been defined as above.  But most people define it as the way you do and it’s even drawn into purchasing agreements that way.  Although people use it to decide who’s responsible for the payment, it only has to do with when ownership of the product gets transferred.  But with six years left to retirement, don’t sweat these details…especially when most people define FOB the same way you do.  Cheers!

AMERICANWIGSOCIETY@YAHOO.COM May 22, 2012 at 7:19 pm

 in one word
 TRUE!

Tee July 10, 2012 at 8:35 pm

I have a purchase order stating:  Deliv. terms: FOB PREPAY & ADD.
What does this mean?

George Muha July 12, 2012 at 2:19 am

Hi Louie, yes you got your verbiage correct!  However, you’re vendor has to buy in as well.  This may get bargained differently if the vendor is not comfortable with holding liability until it is delivered.  But if they do go for it, you have the wording right.

George Muha July 12, 2012 at 2:26 am

Hi Tee, this verbiage is not clear as they did not indicated an FOB point.  So it leaves a lot to interpretation.  So I’ll try to guess.  If this is from a vendor, I’d guess they are trying to say it is FOB Origin (so liability is on you as soon as it is shipped) and they are going to pay the freight and charge you on their invoice.  If it is from a customer, I’d guess it means they want it FOB Origin (so liability is on them when it ships) and they want you to pay the freight and add it to the invoice. Bottom line though is they are not being clear (without indicating “origin” or “destination”) as to where they are saying liability should transfer.  Since they are not, there leaves too much up to interpretation if it game to a court of law.  In the end, if there is not a huge liability factor, I wouldn’t sweat it.

amit September 22, 2012 at 10:24 pm

can you tell me ,who is responsible for the charge that is rise during unloading of the goods at the buyers point.it is generally charged by local manpower in india.

Fan November 7, 2012 at 10:30 pm

Hi George,
Thanks for your article,it helps. I have a question regarding a claim from my customer. The trading term was F.O.B. Origin, Freight Collect. After my customer has received the goods, the entire shipment was rejected due to the quality issue. Due to the urgent need of the product, the customer has placed an urgent order, half to be shipped via AIR freight, and the remaining q’ty to be ship via LCL,sea freight. After investigation, my company has admitted that the defection was our responsilitiy, and agreed to credit the cost of the entire order to the customer. However, not only the cost of the product itself, the customer has also claimed for the Air freight cost to ship the partial q’ty due to the urgent need. Based on F.O.B. Origin, Freight Collect term, should my company be responsible for the air freight cost? Your advices & comments are highly appreciated. Thank you!!

George Muha November 8, 2012 at 12:50 pm

Fan, your question has more to do with purchasing terms and agreements your company has regarding replacement orders then FOB terms. At the end of the day, sometimes we need to do what we need to do to make customers are happy.

Nadia February 12, 2013 at 1:30 am

Aw, this was an extremely good post. Taking the time and actual effort to make a
good article… but what can I say… I put things off a whole lot
and don’t seem to get anything done.

Javier March 1, 2013 at 9:23 am

Great information! I am in the process of establishing a relationship with a vendor and was clueless until I read your article. Thanks for sharing!

b dayhoff March 27, 2013 at 7:37 am

I often have customers call with a list of parts they need for various waterworks projects, and they usually want the quotes to include shipping. I fill out the FOB field as I’ve been taught, but never knew exactly what it meant. Apparently as crazy as it seems no one at my company knew it’s definition. I’d wondered for quite a while what exactly FOB stood for, and now I know. I thought the article was very informative, and well written. Thank you for the great explanation!

Jennie April 17, 2013 at 1:28 pm

Thank you for the clarification on FOB but I still have a question.

I received a quote that states:

The FOB guangzhou price is 270USD/set.

Will this include actual delivery to my address since I don’t live near any ports? Who is responsible for any damage?

thank you!

Jon April 20, 2013 at 9:44 pm

A truly great article, clear and concise. THank you so much.

FOB seems to only note who owns the goods and when that changes. Also FOB states who is paying the freight charges but nothing about insurance.

I have checked some websites but they are not really clear as to the differences and I dont trust them after reading your detailed explanation of FOB as they just make general statements. So if you could please state what are the differences between FOB & CIF. Many thanks.

Green Horn.

Kate July 26, 2013 at 2:42 am

I need some advice. I am the buyer and i agreed on FOB (destination) pricing with the seller. It wasn’t specified anywhere the type of F.O.B.
In such a scenario, what does such an F.O.B price include apart from the price of the goods?

Scott F. October 25, 2013 at 10:58 am

Kate, I’d need another piece of information to make a firm comment–who is paying for freight? It is prepaid [allowed or added to your invoice] or collect?

I’ll assume that you have negotiated F.O.B. Destination, Freight Prepaid because many companies will want control of the freight until it is signed for at the receiving dock. So here are my thoughts: (1) F.O.B. Destination means that all risk of carriage, loss, and/or damage is on the seller, e.g., it is not “yours” until it is signed for at your receiving dock and (2) the seller has buried the cost of freight in your product. Let’s break this out into two segments: F.O.B. and Freight Terms.

From a risk standpoint, F.O.B. Destination places the carriage risk on the seller, so if the shipment is damaged or lost, the seller is responsible for filing the freight claim. Again, the buyer is not responsible until the shipment has been signed for at the receiving dock. Inspect your shipment carefully and note any loss or damage on the driver’s delivery receipt before the driver leaves!

From a cost standpoint, if the seller is shipping Freight Prepaid [allowed or added to your invoice], you may be able to get better rates with little effort. Or, depending on your current shipping volume, your rates may be better than the seller, so why would you not manage your own freight spend? So, if your rates are better, why not ask the seller to mark the bill of lading collect so your rates apply?

A little exercise – get the shipment details [origin and destination zip codes, class, and gross shipping weight; this will be enough to get a LTL or full truckload rate depending on volume of freight] and call your carriers to for pricing. Now, go back to the seller and ask them: “If I provide trucking for this shipment, what is my F.O.B. shipping dock price?” A majority of the time, you will get resistance from the seller as they do not want to lower their price and reveal how much freight is hidden in their price.

Years ago as a buyer of building products, I found this is a good way for cost savings—our supplier of silt fencing had a delivered price to us. Our company moved around 600 flatbed loads a week, so we had incredible leverage in this market. I asked the supplier for my new product cost if I provided trucking and the price came down $1200 over the product cost…my cost per load was $575, all-in. The $625 savings resulted in a cost reduction for the product—more profit [and a win] for the company.

After this exercise, see if the seller will allow you to keep the F.O.B. Destination terms and choose freight terms which will keep the risk on the seller and save you the most money!

jorosales November 25, 2013 at 1:13 am

Hi,

I am having this issue with some client. I was given FOB destination prices. I delivered the material yet I am been charged with all customs ans taxes duties. According to my customers, not only I have to pay freight from south to north america but also pay for all customs process, importation taxes in destination and broker fees in destination. Are all these really my responsability in a FOB destination agreement?

Thanks for your answers in advance.

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