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International trade — specifically the procurement of goods — has its own specialized terminology. Every entrepreneur should understand key concepts and shipping terms. What FOB delivery terms mean is explained in this article by the experts at Dragon Logistics.
What is FOB: key features and advantages
Free on Board — this is the literal meaning of the FOB abbreviation. The term defines the delivery conditions as well as the responsibilities of the seller and the buyer under internationally accepted trade and transport rules. FOB rules apply to inland waterway transport and sea freight. Under FOB terms, responsibilities are divided as follows:
- the seller ensures delivery of the goods to the vessel along with all required shipping documentation;
- the buyer arranges transportation, insurance, and proper import clearance.
- The key feature of FOB is the clear allocation of responsibility and risk between the parties. The buyer’s responsibilities include:
- selecting the vessel and providing the seller with transport details and loading instructions;
- paying freight charges and transportation costs from the port of arrival to the final destination;
- arranging cargo insurance;
- preparing import documentation and paying customs duties and taxes.
Seller’s responsibilities:
- export customs clearance and preparation of documents, including the commercial invoice, export declaration, quality certificates, and other documents depending on the type of goods, packing list, and bill of lading (confirming shipment);
- delivery of the goods and loading them onto the vessel nominated by the buyer.
FOB shipments offer advantages to both parties under certain conditions. This delivery term is beneficial for the buyer if they have a reliable carrier, experience in customs clearance, and want to control the delivery process themselves. In this case, the buyer can optimize costs related to insurance, transportation, and customs brokerage services. The seller, in turn, is relieved of responsibility for transporting the goods to the final destination — their responsibility ends once the cargo is loaded onto the vessel.
It is important to note that container shipments typically use a different term — FCA (Free Carrier). The key difference is that under FCA, the seller’s responsibility ends once the goods are handed over at a warehouse or port terminal. This term is applicable to all modes of transport.
FOB delivery: possible misunderstandings and disputes
The FOB term has a specific meaning and defines precise conditions. A lack of understanding by one or both parties regarding the allocation of responsibilities and risks can lead to errors related to:
- the point of transfer of the goods;
- lack of insurance;
- vessel delays;
- documentation mistakes.
As a result, additional costs arise and legal disputes are common. One frequent source of confusion is the distinction between FOB and CIF terms. The meaning of Free On Board is explained above, while CIF stands for Cost, Insurance, and Freight — the price of the goods plus insurance and freight paid by the seller.
The difference between FOB and CIF is clear: FOB represents the net cost of the cargo once it is loaded onto the vessel, while CIF additionally includes insurance and freight costs covered by the seller.
Key difference:
- FOB — the buyer pays the freight and assumes responsibility for the cargo after shipment at the port;
- CIF — the seller pays the freight, the buyer bears the risks, but the cargo is insured by the seller during transportation.
FOB delivery terms are easier to understand with a practical example. The buyer is a retail company in Ukraine, the seller is a manufacturer in China, and the goods are interior décor items.
The seller-manufacturer’s responsibilities include producing the batch of goods and preparing it for export in accordance with the agreement. This includes:
- preparation of the export declaration;
- cargo certification;
- proper packaging of the goods;
- delivery from the factory to the port in China;
- loading onto the vessel specified by the buyer and handing over the shipping documents.
The buyer enters into a contract with a logistics company in Ukraine, which organizes shipment and delivery of the cargo to the port of Odesa. The buyer’s responsibilities include:
- payment of vessel freight and cargo insurance;
- customs control and payment of duties and taxes;
- delivery from the destination port to the buyer’s warehouse.
For Ukrainian importers, FOB delivery provides greater control over transportation. As practice shows, this is especially advantageous for large shipment volumes. By delegating responsibilities to a reliable logistics operator, buyers can optimize delivery costs and focus on growing their business.
At the same time, it is essential to choose a logistics company with experience, a strong reputation, and a professional team. Dragon Logistics meets these criteria. As a logistics operator, the company provides a full range of international shipping services: verification of cargo documents at the port of departure, shipment tracking, customs clearance and related costs, and delivery to the client’s warehouse.