If the goods are sent FOB Origin Freight Prepaid, the buyer accepts the goods when they leave the seller’s dock, but the seller still pays the freight charges. Jeff’s pickup company purchases $10,000 of wiring parts from Ann’s Wiring, Inc. Jeff pays the shipping costs and the parts are shipped FOB Ann’s Wiring, Inc. (also known what does fob stand for in accounting as FOB shipping point). On the way to Jeff’s factory, the trucker gets into an accident and the parts are ruined. Jeff tries to sue Ann, but he can’t because the title of the goods already passed to him. FOB shipping point transfers the goods to the buyer at the point the goods are loaded into the truck or the shipping point.

Example of FOB Destination

With the advent of e-commerce, most commercial electronic transactions occur under the terms of «FOB shipping point» or «FCA shipping point». International shipments typically use «FOB» as defined by the Incoterms standards, where it always stands for «Free On Board». Domestic shipments within the United States or Canada often use a different meaning, specific to North America, which is inconsistent with the Incoterms standards. If the same seller issued a price quote of «$5000 FOB Miami», then the seller would cover shipping to the buyer’s location. Our team of experts can help you assess your options and choose the best shipping agreement for your needs so that you can make an informed decision about whether FOB is right for your business. The point of risk transfer from seller to the buyer depends on whether you’re using FOB origin or destination.

FOB Shipping Point vs. FOB Destination: What’s the Difference?

For instance, DDP may not be the best choice when importing expensive goods like electronics or jewelry because of the significant customs charges that must be paid at the border. The seller has more control so they may opt for a preferred shipper who might be more costly. They might also choose higher insurance limits because they want to ensure that the goods are delivered in excellent condition. FCA or “free carrier” means a seller is obligated to deliver goods to a specified location or carrier where the buyer will take responsibility for transit. From that point, the buyer is responsible for making further transport arrangements. Hopefully, the buyer in this example took out cargo insurance and can file a claim.

FOB Shipping in History

However, the buyer subtracts the shipping charges from the supplier’s bill rather than footing the bill out of pocket. If a seller ships goods to a customer that are lost in transit, the shipper must compensate for the loss by replacing the products or reimbursing the buyer for the cost. Communication can also be problematic if the buyer relies solely on people who act for the seller.

• If a shipment is sent FOB shipping point, the sale is considered complete as soon as the items are with the shipment carrier.
• The specific definitions vary somewhat in every country but both contracts generally specify origin and destination information that’s used to determine where liability officially begins and ends.
• From that point, the buyer is responsible for making further transport arrangements.
• The concept, outlined in the Incoterms list by the International Chamber of Commerce, streamlines shipping contracts and facilitates trade negotiations.

It defines the point when a buyer or seller becomes liable for goods transported by sea. Overall, FOB shipping offers a straightforward way to manage the logistics of international shipments. Conversely, if the companies agreed to FOB Destination terms, the buyer would pay for the cost of goods and freight, while the seller bears responsibility for delivering them to their destination. Depending on the agreement with your supplier, your goods may be considered delivered at any point between the port of destination and your final delivery address. Cost, Insurance, Freight (CIF) puts the liability of payment for – you guessed it – cost, insurance, and freight on the supplier.

In an FCA agreement, the seller is responsible for all the costs and risks of getting the goods to the named destination, on a specific date, at a specific loading dock. If no freight-payment terms follow the FOB designation, then the costs and risks of shipping are transferred from seller to buyer at the named port. These provisions outline the point when responsibility for risk of loss shifts to the buyer, who covers the freight charges, delivery location and time, and the payment terms for the shipments. For international trade, contracts establish and outline provisions–such as the FOB designation, payment terms, time and place of delivery–for shipments that are being made out of the country.

CIF is an expense paid by the seller to cover the freight costs, insurance, and shipping of a buyer’s order while being transported to the buyer’s destination. With FOB destination, the sale of goods is finalized once they arrive at the buyer’s destination. In this case, the seller may take care of the shipping costs and be responsible for any transportation liabilities.

Such disagreements, especially when goods are in transit or have already been delivered, can be both financially and operationally taxing. If the transfer point isn’t meticulously defined, documented, and understood by both parties, it can lead to disputes. A standout advantage of FOB terms is the clarity they bring to the trading table. With clearly defined points for risk and cost transfer, both parties can better understand and plan for their respective responsibilities. Other terms, like CIF (Cost, Insurance, and Freight) or EXW (Ex Works), offer different arrangements regarding costs, responsibilities, and risk points. Throughout the transportation process, the seller remains the legal owner of the goods.