The transportation marketplace is full of terminology, documentation and regulations. People who haven’t worked in or around the transportation industry for an extended period can sometimes feel intimidated at all there is to “know.” In fact, even the most seasoned transportation professionals stumble across something new every now and then.
Although this industry has a lot of depth, some things are more important to understand than others. Topping the list of things you absolutely need to know are terms related to payment, liability and responsibility. These set the guidelines for many of your company’s transactions and shipments.
“Free on Board (FOB)” is one of these terms. Maybe you’ve seen it on your bill of sale(s), indicating when you become liable for a shipment and setting your responsibility to it.
When “FOB” appears on your shipping documents, you need to understand what it means; if you don’t, and something goes wrong, you may be left with unexpected expenses which are the last things you need.
As an industry-leading transportation company since 1955, here at Anderson Trucking Service (ATS), we offer a mix of U.S. domestic and international transportation services. Most of the transactions we’re involved in include some sort of FOB distinction between a buyer and seller.
In this article, we’ll outline everything you need to know about FOB including:
- What does FOB mean?
- What does FOB origin mean?
- What does FOB destination mean?
- The relationship between FOB and freight prepaid/freight collect
What Does Free on Board (FOB) Mean?
The term “Free on Board” (also sometimes notated “Freight on Board”) or acronym “FOB” indicates at which point the liability for, and costs associated with, a shipment is applied to the seller (the shipper) or the buyer (the consignee). Also commonly noted as “F.O.B.” this is used to denote where ownership of — and liability for — a shipment officially changes or begins.
Two modifications can be made to FOB to further specify when each party assumes liability, these are:
- FOB Origin
- FOB Destination
What Does FOB Origin Mean?
Also commonly inscribed as “FOB Shipping Point” or “FOB Place of Origin” when it appears on your shipping documents, FOB Origin indicates the buyer of the product (who is often the consignee) assumes liability for it at its origin — receiving ownership of the goods at that time. Under this term, the buyer takes on all risks associated with the cargo’s transportation and the seller (the shipper) isn’t responsible for lost, damaged or stolen items.
What Does FOB Destination Mean?
Also regularly notated as “FOB Place of Destination,” FOB Destination appoints the liability and ownership of products in transit to the seller (the shipper) until they are received by the buyer (the consignee). Under this term, the seller of a shipment maintains its ownership until it delivers, making them responsible for any lost or stolen products.
Note: FOB, is also one of the 11 international commercial terms (incoterms) and sets more specific duties and payment responsibilities for buyers/sellers in international transactions.
The Relationship Between FOB and Freight Prepaid/Freight Collect
The acronym FOB is often used in conjunction with the freight-payment terminology “freight prepaid” or “freight collect.” While a shipment’s FOB term establishes where liability and responsibility rest at each juncture of a shipment’s journey, freight prepaid and freight collect signify which party must pay the freight bill.
“Freight collect,” when it appears on your shipping documentation, signifies the buyer (the consignee) is responsible for paying for the cargo’s transportation costs from origin to destination. “Freight prepaid,” on the other hand, places this burden on the seller (the shipper).
Related Content: Freight Prepaid vs. Freight Collect: What’s the Difference?
Altogether, there are four ways for these notations (FOB origin/destination and freight collect/prepaid) to appear on your freight’s documentation — depending on the agreement you’ve made with your counterpart:
- FOB Origin, Freight Prepaid
- FOB Origin, Freight Collect
- FOB Destination, Freight Prepaid
- FOB Destination, Freight Collect
Here is what each combination means for the buyer and the seller respectively:
What Does FOB Origin, Freight Prepaid Mean?
The buyer (consignee) is the official owner of the cargo starting at its origin, they assume all liabilities at this point. However, the seller (shipper) pays for all transportation costs.
What Does FOB Origin, Freight Collect Mean?
The buyer (consignee) becomes the owner of the cargo at its origin, this party assumes all liabilities at this point. The buyer of the freight is also responsible for paying its transportation costs.
What Does FOB Destination, Freight Prepaid Mean?
The seller (shipper) retains ownership of the freight until it delivers, making them liable for lost, stolen or damaged products from origin to destination. Under this term, the seller also pays any freight bills.
What Does FOB Destination, Freight Collect Mean?
Under this term, a shipment’s buyer (consignee) agrees to pay for its transportation. That said, the seller (shipper) remains the shipment’s owner until its final delivery, making them liable for it until that time.
Questions About Shipping Freight? Here’s the Resource For You. . .
Understanding what “Free on Board (FOB)” means when it appears on your purchase orders and contracts is important. Now you have a thorough understanding of this terminology and how it relates to your risk/ownership during your cargo’s transportation. You also have a pretty good idea of how FOB is used in conjunction with the payment terms “Freight Prepaid” and “Freight Collect.”
That said, if you have any questions, don’t hesitate to contact us here.
At the end of the day, when it comes to the transportation industry’s rules, regulations, terminology and cost factors, terms like “Free on Board” and “Freight Prepaid” are only the tip of the iceberg.
That’s why, in a role like yours, it’s important to continuously self-educate.
Here at ATS, we publish fresh educational content (in the form of articles, videos, podcasts and downloadable tools) multiple times every week. If you’d like to receive a rundown on this new content when it “goes live” subscribe to the Learning Hub here. By doing so, you’ll get a healthy dose of tips, tricks and best practices sent directly to your inbox on a regular basis to help you become the best logistics professional you can be!