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Moving cargo between seaports doesn’t always go smoothly, especially when you take into account the risk of damage to goods and financial loss. As an importer drafting shipping documents, you need to consider shipping terms that offer optimal liability protection. Free On Board (FOB) is an incoterm that provides a safety net when importing goods.
Here’s an in-depth look at FOB and how different FOB terms affect the transfer of liability, ownership of goods and inventory costs in international shipping.
And here are the four takeaways:
- Free On Board terms stipulate when liability for damaged goods shifts from the seller to the buyer.
- With FOB shipping point, the buyer takes over responsibility for the shipment after loading onto the freight vessel.
- Under a FOB destination contract, the seller retains liability for the consignment until delivery at the buyer’s loading point.
- FOB terms impact the buyer’s inventory costs.
What Does FOB Mean in Shipping?
As an importer, you’ve taken the necessary measures to protect your commodities in transit, including using air pillow packaging or sturdy cardboard boxes. However, for additional peace of mind, a FOB protects your company against loss if the unforeseeable occurs, damaging your goods before delivery.
Use Air Pillow Packaging to Protect Your Goods and ProductsFOB is one of the several International Commerce Terms (Incoterms) applicable to shipping contracts between importers and exporters. You can use it to explicitly state the time and place of delivery.
A FOB contract also specifies the terms of payment between you and your international supplier. It stipulates when liability for damaged goods shifts from the seller to the buyer, and it indicates the party responsible for freight and insurance costs.
An international commerce contract may use the term FOB along with either “shipping point” or “destination.” The two qualifiers limit or extend the seller’s liability for the shipment’s condition in a FOB shipping contract.
Why Use FOB Terms in Shipping?
Many different terms and rules apply to international trade today. The most common are Incoterms as determined by the International Chamber of Commerce (ICC) and the Uniform Commercial Code (UCC). The many sets of rules can be confusing, especially to trade partners from different countries.
Buyers and sellers must specify the terms governing their transactions to eliminate any ambiguity. FOB contracts serve this purpose, which is why suppliers may include terms like FOB shipping point or FOB destination in their price quotes.
What Are the Implications of FOB Shipping Point?
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With FOB shipping point, the supplier bears full responsibility for insuring and moving the commodities ordered to the port of origin. The seller also takes care of warehousing and packaging issues, such as how to use bubble wrap to secure the cargo.
Custom Size Cardboard Boxes Can Fit Your Exact Needs and SpecificationsOnce the seller has loaded the shipment onto the freight carrier, they’re no longer responsible for the goods’ safety and transportation costs.
If you’re importing goods under FOB shipping point terms, here’s how the international contract might occur:
- You order goods from a supplier overseas.
- The supplier takes care of packaging to protect the goods, such as using custom size cardboard boxes. They also bear the cost of loading and transporting the goods to the port of origin.
- The supplier loads the shipment onto the shipping vessel. Their responsibility for the condition of the goods ends at this point.
- With the shipment on board the freight vessel, you—the buyer—take over liability for its condition and transportation for the rest of the journey.
If it takes $1,000 to ship the commodities, you pay the cost of shipping. It is also now your responsibility to insure the cargo under the FOB shipping point agreement.
FOB Destination Implications
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With FOB destination, the international seller retains liability for freight costs and the shipment’s condition until delivery at the buyer’s loading dock. They’re also responsible for insuring the commodities from the point of origin to the destination.
FOB Inventory Cost Implications
Inventory cost implications are some of the most important practical considerations in drafting FOB terms. Under a FOB shipping point agreement, the buyer should record an increase in their inventory when the supplier loads the goods onto a freight carrier. From that point, the buyer recognizes the shipment’s insurance cost and purchasing price as an inventory cost.
Likewise, the buyer may incur other costs after assuming responsibility for their shipment, including warehousing, utilities and security, which are also considered inventory costs. By treating these items as inventory costs instead of expenses, the buyer impacts their net income.
The Takeaway
When shipping goods overseas, FOB contracts let you take control of your shipment by stipulating when liability and ownership shifts between the importer and supplier. Such agreements can impact your freight and inventory costs.
If you’d like to explore more practical ways to lower freight costs, such as using efficient packaging, Air Sea Containers can help. Call us at (866) 596-9448.
