Free on Board Shipping vs. Free on Board Destination: What's the Difference?

International transportation contracts generally contain abbreviated trade terms that set such factors as the agreed upon time and place of delivery and payment terms. These contracts will further detail when the risk of loss shifts from the seller to the buyer and specify who pays the costs of freight and insurance.

Free on board (FOB) shipping point and free on board destination are two of several International Commercial Terms (Incoterms) published by the International Chamber of Commerce (ICC) to standardize shipping by sea and on waterways. FOB shipping point and FOB destination detail where the title of goods transfers from the seller to the buyer. The distinction is important in specifying who is liable for goods lost or damaged during shipping. The primary difference between the two contracts is in the timing of the transfer of the title for the goods.

The U.S. Department of Transportation, Bureau of Transportation Statistics (BTS) finds in 2015 884 million tons of product moved by water. Of this total, 95 million tons were export goods, 246 million tons were imported goods, and the remaining 544 million tons were moved by water within the United States. Further, BTS projects the amount of cargo transport to increase each year at around 1.4% until 2045.

FOB shipping point, also known as FOR origin, indicates that the title and responsibility of goods transfer from the seller to the buyer when the goods are placed on a delivery vehicle.

Since FOB shipping point transfers the title of the shipment of goods when the goods are placed at the shipping point, the legal title of those goods is transferred to the buyer. Therefore, the seller is not responsible for the goods during delivery.

For example, assume Company ABC in the United States buys electronic devices from its supplier in China, and it signs a FOB shipping point agreement. If the designated carrier damages the package during delivery, Company ABC takes full responsibility and cannot ask the supplier to reimburse the company for the losses or damages. The supplier is only responsible for bringing the electronic devices to the carrier.

Conversely, with FOB destination, the title of ownership is usually transferred at the buyer’s loading dock, post office box, or office building. Once the goods are delivered to the buyer’s specified location, the title of ownership of the goods transfers from the seller to the buyer. Consequently, the seller legally owns the goods and is responsible for the goods during the shipping process.

For example, assume Company XYZ in the United States buys computers from a supplier in China, and it signs a FOB destination agreement. Assume the computers were never delivered to Company XYZ's destination, for whatever reason. The supplier takes full responsibility for the computers and must either reimburse Company XYZ or reship the computers.

Shipping terms affect the buyer's inventory cost because inventory costs include all costs to prepare the inventory for sale. This accounting treatment is important because adding costs to inventory means the buyer does not immediately expense the costs and this delay in recognizing the cost as an expense affects net income.

• Free on Board is a trade term used to indicate whether the buyer or the seller is liable for goods that are lost, damaged, or destroyed during shipment.
• Free on Board Shipping Point indicates that the buyer takes responsibility for loss or damage the moment the goods get to the shipper.
• Free on Board Destination indicates that the seller retains liability for loss or damage until the goods are delivered to the buyer.
• FOB contracts have become more sophisticated in response to the increasing complexities of international shipping.