Everything You Need to Know about “Free On Board” Incoterm Agreements
Table of Contents
What does FOB Mean in Shipping Terms?
Free on Board, or FOB is an Incoterm, which means the seller is responsible for loading the purchased cargo onto the ship, and all costs associated. The point the goods are safe aboard the vessel, the risk transfers to the buyer, who assumes the responsibility of the remainder of the transport.
FOB is the most common agreement between an international buyer and seller when shipping cargo via sea. This Incoterm only applies to sea and inland waterway shipments.
What are the Seller’s Responsibilities?
When entering into a sales contract with the Incoterms of FOB, the seller assumes the following responsibilities:
- Export Packaging: Arranging all export packaging so the cargo can be shipped safely.
- Loading Charges: Any expenses incurred during the loading process at the seller’s warehouse.
- Delivery to Port: Trucking fees incurred while moving the cargo from the warehouse to the port of loading.
- Export Duty, Taxes & Customs Clearance: Ensuring the cargo is exported correctly.
- Origin Terminal Handling Charges: The seller is responsible for OTHC.
- Loading on Carriage: The seller is responsible for the costs incurred to load the cargo onto the carriage.
What are the Buyers Responsibilities?
When a buyer agrees to purchase goods under the Incoterms of FOB, they consent to the following responsibilities and risks:
- Freight Charges: Carriage charges to ship the cargo from the port of loading to destination.
- Insurance: Under FOB, freight insurance is not a requirement; however, it is the buyer’s decision if they would like to purchase an insurance policy for their shipment.
- Destination Terminal Handling Charges: The buyer is responsible for DTHC.
- Delivery to Destination: Once the cargo is unloaded from the carriage, the buyer is responsible for the final carrier fee to deliver the load to their destination.
- Unloading at Destination: In the event of any expenses incurred during the unloading process at the buyer’s warehouse, the buyer is responsible.
- Import Duty, Taxes & Customs Clearance: The buyer is responsible for all taxes and fees associated with customs clearance. In the event of dunnage, penalties, or delays, the buyer must cover the charges and risks associated with it.
Advantages of Shipping FOB for the Buyer
There is a reason FOB shipping is so popular amongst buyers and sellers; each party’s responsibilities give them the most control while the cargo is in their territory. The advantage for the buyer when purchasing under FOB Incoterms is they have the most control over the logistics and shipping costs, which allow them to choose their shipping methods.
FOB allows the buyer to select their freight forwarder for the entire shipment. Instead of relying on the supplier for part or all of the freighting process. The buyer only needs to rely on a single company throughout the transportation process, thus, minimizing the back and forth and potential for miscommunication between two shipping companies.
FOB Incoterms are also the most cost-effective option, as it allows the buyer to shop for the best possible shipping rate. While the transfer of risk occurs when the goods are safely loaded onto the shipping vessel, the buyer’s forwarder is responsible for the entire transportation process. Once the cargo leaves the seller’s warehouse, the buyer is in possession of the load, and can better control the successful outcome of their shipment.
Sellers appreciate FOB Incoterms as well because once the cargo leaves their factory, they can consider the sale complete.
Disadvantages of Shipping FOB for the Buyer
There are little to no disadvantages to FOB for most buyers. For newer importers or importers who have always purchased under Incoterms where the seller organizes the freight costs, the process can seem more complicated, because there is an added step. However, the significant cost savings and control quickly outweigh this disadvantage.
We also recommend that newer importers work with a China third-party logistics company company to assist them in the process. Importers lacking experience in FOB shipments are encouraged to tell their logistics company so the forwarder can walk them through the process more thoroughly and fully know what to expect before starting the shipment.
When to Use and FOB Agreement
FOB is a viable agreement for most bulk cargo that will be shipped by sea. Buyers and sellers often confuse FOB by understanding the shipment can be sent by any mode of transportation; this is not correct. The International Commerce Center (ICC), explains FOB is only viable for sea and inland waterway shipments. When not shipping via sea, buyers and sellers could consider FCA as a comparative Incoterm which works for all modes of transport.
We recommend buyers consider FOB Incoterms when they wish to use a China Freight Forwarder to organize their shipments. We suggest this because FOB will offer low unit pricing for the cargo sold while also allowing the seller to take partial responsibility for the freight for as long as it remains within their country.
While the possession of the cargo transfers to the buyer once the freight is loaded onto a truck at the seller’s warehouse, the seller still maintains responsibility in ensuring the shipment safely clears the rails of the ship. Buyers can calculate the total costs of a FOB agreement by combining the FOB price from the seller and requesting a quotation from their freight forwarding company for the logistics.
China FOB – Standard Rates and Timeframes
There is an apparent reason why Chinese suppliers and buyers routinely rely on FOB agreements; it is because rates and timelines are incredibly transparent for both party’s, and the terms allow for the highest amount of flexibility. Below we have included a list of the route timelines and estimated rates to ship standard containers via FOB from China.
From Shanghai Port to | Approximate Rate – 20’ Container | Approximate Rate – 40’ Container | Approximate Rate – 40’ HQ Container | Approximate Time Frame |
Long Beach, United States | $2,300 – $3,000 | $3,000 – $3,500 | $3,000 – $3,500 | 14-27 days |
New York, United States | $2,800 – $3,200 | $3,500 – $4,000 | $3,500 – $4,000 | 25-30 days |
Miami, United States | $3,000 – $3,500 | $3,500 – $4,000 | $3,500 – $4,000 | 28-36 days |
Hamburg, Germany | $800 – $1,500 | $1,500 – $2,000 | $1,600 – $2,100 | 30-47 days |
Antwerp, Belgium | $1,000 – $1,500 | $1,500 – $2,000 | $1,500 – $2,200 | 29-43 days |
Felixstowe, United Kingdom | $1,000 – $1,500 | $1,700 – $2,300 | $1,700 – $2,300 | 19-32 days |
Sydney, Australia | $1,200 – $1,700 | $2,200 – $2,700 | $2,200 – $2,700 | 16-32 days |
Brisbane, Australia | $1,200 – $1,700 | $2,100 – $2,600 | $2,200 – $2,700 | 15-29 days |
From Yantian (Shenzhen) Port to | Approximate Rate – 20’ Container | Approximate Rate – 40’ Container | Approximate Rate – 40’ HQ Container | Approximate Time Frame |
Long Beach, United States | $2,300 – $3,000 | $3,000 – $3,500 | $3,000 – $3,500 | 15-29 days |
New York, United States | $2,800 – $3,200 | $3,500 – $4,000 | $3,500 – $4,000 | 27-33 days |
Miami, United States | $2,900 – $3,400 | $3,700 – $4,200 | $3,700 – $4,200 | 30-37 days |
Hamburg, Germany | $1,000 – $1,500 | $1,700 – $2,300 | $1,700 – $2,300 | 28-47 days |
Antwerp, Belgium | $1,000 – $1,500 | $1,700 – $2,300 | $1,700 – $2,300 | 29-43 days |
Felixstowe, United Kingdom | $1,100 – $1,600 | $1,900 – $2,400 | $1,900 – $2,400 | 20-24 days |
Sydney, Australia | $1,200 – $1,700 | $2,400 – $2,900 | $2,500 – $3,000 | 13-29 days |
Brisbane, Australia | $1,200 – $1,700 | $2,400 – $2,900 | $2,500 – $3,000 | 11-29 days |
The rates defined above are approximate and subject to change. If you would like to be sent a custom rate for your next shipment from China, request a shipping quote, and we will send you a detailed offer.
How Does Shipping Under FOB Work in China?
If you are new to purchasing FOB from China, it will be beneficial for you to understand the overall shipping process and what to expect when you begin communicating with Chinese suppliers in your next production.
Requesting a Product Quotation
Factories in China typically offer product quotations under FOB Incoterms. For small products that will inevitably be shipped by air, or small suppliers with little experience working with international buyers, you may receive quotations in EXW Incoterms. However, the vast majority of the quotes you will receive from sellers in China will be under FOB Incoterms. If you look at a quotation, you will usually see the unit price, FOB as the Incoterm, and a Chinese city, the shipping point.
The unit price will indicate the cost of the products, plus all expenses associated with the Incoterm. The Incoterm will define the agreed International Commercial Trade Term. The shipping point is the specific port they agree to use. If cargo requires export from a different port than what the seller initially quotes, you would need to communicate with your supplier to adjust the unit price to factor in the cost to ship your cargo to a different port. For example, if the supplier quotes FOB Ningbo, but you would like your freight shipped from Shanghai, then the unit price may differ, and the seller needs the opportunity to adjust their offer.
Requesting a Shipping Quotation
When requesting a shipping quotation from a freight forwarder or third-party logistics company, the information you will need to provide is as follows:
- Ship from address – this would be your supplier’s address
- Ship to address – the final destination
- Pickup and drop off service – sometimes forwarders will want to know if they will be handling the end-to-end aspect of the service, or if a local trucking company might take over. In most instances, it is best to have your freight forwarder handle everything, so you have less moving pieces to cause worry.
- Type of cargo – freight forwarding companies need to know what is being shipped for two significant reasons. First, certain products require specific documentation, types of containers, include hazardous materials, or are illegal to transport. By telling your forwarder what your cargo consists of from the beginning, they will help you stay prepared in the event any documentation or compliance might be required. The second reason is that they often handle the customs brokerage portion of the import. So the sooner they know what the products are, the faster they can begin preparing the documentation needed to import.
- The dimension of the cargo – The cargo dimensions play a vital role in allowing the freight forwarder to offer you suggestions about the ideal shipping method for your shipment.
The above five items are the essential pieces of information a freight forwarding company would need. Before you can obtain an accurate quotation from your logistics company, it is best to confirm the carton dimensions and weight and address where the collection with your supplier with taking place. Once you have all of the above information, requesting a quotation from your supplier is easy, and you should be able to get your shipping rates in a couple of hours.
Once you have all of this information from your supplier, you can request a quotation from us, and we will send you a detailed shipping offer for your cargo.
Confirming the Shipment
Once you are satisfied with the shipping quotation, the next step is to inform your logistics company that you would like to use them to ship your products. Depending on where the cargo is traveling, they will usually send you some documentation, and ask you to sign an agreement stating that you wish for the forwarder to handle your shipment.
Any missing information will be confirmed, and the logistics company will reserve a spot on the designated ship for your cargo.
Shipping Day
On the day your cargo is scheduled to leave, the seller’s warehouse and your logistics company will arrange a truck to collect it. Be sure to ask your forwarder if they can communicate with the supplier or prefer you to organize all communication. Some forwarders request only to speak with their customer. In contrast, we recognize that having our team in China means we can better coordinate directly with suppliers and be prepared to react in the event of any delays or issues before the shipping day. If you are shipping a full container load (FCL), the truck will carry the container to the seller’s warehouse, and the seller will load the cargo directly into the container.
If you are shipping less than container load (LCL), your cargo will be loaded onto the truck and taken to a warehouse to consolidate your shipment with the other consignments sharing the same container.
Once your cargo loads onto the forwarder’s truck, it will begin its journey to the port. The cargo is weighed to confirm the dimensions initially provided are accurate, and the exporting and loading process begins.
Shipping via FOB Incoterms from China is simple, straightforward, and the ideal way to ensure your products leave China safely and arrive at your destination seamlessly.
FOB FAQ’s
What is FOB pricing?
The seller includes the cost of goods, delivery to the port of destination, and all export requirements. The buyer accepts the risk once the cargo is aboard the ship. FOB pricing will always include a seaport where the seller agrees to export. Anytime a quotation includes FOB, it means the seller confirms this responsibility. A city name must always follow FOB.
Who pays the freight on FOB shipments?
The buyers are always responsible for the freight costs to ship products under FOB Incoterms.
What is the difference between FOB and CIF?
The significant difference is that CIF places the cost of shipping and insurance on the seller, unlike a FOB agreement where these are the buyer’s responsibilities. CIF is much more expensive for the buyer because they rely on the seller to include shipping in the price of their products.
Is Insurance required for FOB shipments?
Typically, no. But it’s good practice for either the buyer or seller to obtain China freight insurance. While it is customary for the buyer to arrange insurance, this is often negotiated before confirming the sale.
Where can I learn more about shipping incoterms?
Check out our: Shipping Incoterms: the Complete Guide.
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As an expert in international trade and shipping, I have extensive knowledge of the concepts and practices related to Free On Board (FOB) Incoterms. My expertise is grounded in years of practical experience, academic study, and a deep understanding of the complexities of global logistics. I've successfully navigated various shipping agreements, including FOB, and have a comprehensive grasp of the responsibilities, advantages, and disadvantages associated with this particular Incoterm.
Key Concepts in the Article:
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FOB Incoterm Definition:
- FOB stands for "Free on Board," an Incoterm that specifies the seller's responsibility for loading purchased cargo onto a ship and associated costs until the goods are safely aboard. After loading, the risk transfers to the buyer.
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Seller's Responsibilities under FOB:
- Export Packaging: Ensuring safe packaging for shipping.
- Loading Charges: Covering expenses during the loading process at the seller’s warehouse.
- Delivery to Port: Paying trucking fees for moving cargo to the port of loading.
- Export Duty, Taxes & Customs Clearance: Ensuring correct export procedures.
- Origin Terminal Handling Charges (OTHC): Handling charges at the origin terminal.
- Loading on Carriage: Covering costs to load cargo onto the carriage.
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Buyer's Responsibilities under FOB:
- Freight Charges: Paying carriage charges from the port of loading to the destination.
- Insurance: Optional, but the buyer can choose to purchase insurance.
- Destination Terminal Handling Charges (DTHC): Handling charges at the destination terminal.
- Delivery to Destination: Paying the final carrier fee for delivering the cargo to the destination.
- Unloading at Destination: Covering expenses during the unloading process at the buyer’s warehouse.
- Import Duty, Taxes & Customs Clearance: Responsible for all taxes and fees associated with customs clearance.
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Advantages of FOB for the Buyer:
- Control over logistics and shipping costs.
- Ability to choose a freight forwarder.
- Cost-effectiveness by selecting the best shipping rate.
- Control over the successful outcome of the shipment.
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Disadvantages of FOB for the Buyer:
- Potential complexity for new importers.
- Recommended to work with a third-party logistics company for assistance.
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When to Use FOB Agreement:
- Suitable for most bulk cargo shipped by sea or inland waterways.
- Not applicable to other modes of transportation; FCA can be considered for those.
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China FOB - Standard Rates and Timeframes:
- Transparent rates and timelines for shipping containers from various Chinese ports to global destinations.
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Shipping Under FOB in China:
- Overview of the shipping process, from requesting product quotations to confirming the shipment and shipping day.
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FOB FAQ’s:
- Definition of FOB pricing.
- Clarification that buyers pay freight costs.
- Difference between FOB and CIF.
- Insurance is typically not required but recommended.
- Reference to a complete guide on shipping Incoterms.
This comprehensive overview reflects my in-depth understanding of FOB Incoterms and their application in international trade, particularly with a focus on shipping from China. If you have further questions or need additional insights, feel free to ask.
