FOB Incoterms 2020: Who Pays, Who Carries Risk

FOB means Free On Board, followed by a named port of shipment — "FOB Shenzhen", never "FOB Los Angeles". The seller delivers by placing the goods on board the vessel the buyer has nominated, and risk passes to the buyer at that point. Not at the factory gate, not when the container is gated into the terminal, and not when the bill of lading is issued.

The old wording about the ship's rail was removed when Incoterms 2010 replaced the 2000 edition: delivery is complete when the goods are on board, which is a measurable event rather than a line on a drawing of a ship. If a purchase order still says "FOB ... Incoterms 2000", it is describing a delivery point both parties are unlikely to agree on if a claim is ever made.

Two obligations come with the term and are easy to miss. The seller handles export clearance — declaration, any export licence the goods need, and the security filing that goes with it. The buyer must nominate the vessel and give the seller enough notice to deliver to that ship, in the window the contract sets. FOB is a two-sided obligation, and a buyer who nominates a vessel late is in breach of it, not merely inconvenienced.

A FOB price is the ex-works cost plus everything needed to get the goods on board: material and processing, export-grade packing, inland haulage, the customs broker, origin terminal charges and the lift onto the ship. The ocean leg is not in the price, and neither is insurance. That is the whole commercial appeal — the buyer keeps control of the freight contract, and the seller is not exposed to a rate that moves between quotation and shipment.

Where FOB prices go wrong is that the boundary is not always itemised. Origin terminal handling, documentation fees and the forwarder's local charges all sit on the seller's side of the line in principle, but a forwarder nominated by the buyer can invoice the seller for its own handling and release fees. Two FOB quotations for the same part from two factories are only comparable if both are quoted from the same named port and both include the same list of origin charges. Ask for the list, not just the unit price.

For sheet metal specifically, packing is not a rounding error. An enclosure or a chassis travels as a boxed volume with a low density, so it pays for space rather than weight, and export packing — foam, edge protection, a crate for anything over roughly 25 kg, palletisation that a container can actually be loaded around — is a real cost line that a domestic price does not carry.

FOB was written for break-bulk cargo lifted directly onto a ship. A container is not that. It is gated into a terminal, stacked in a yard, and loaded days later — and under FOB the seller still carries the risk until it is on board, even though the goods have already left its control and are sitting in a terminal it does not operate.

This is the gap the ICC has pointed at since the 2010 edition: for containerised cargo it recommends FCA (Free Carrier), where risk passes when the goods are handed to the carrier at the named place. A fire, a crane failure, a port closure or water damage in the yard falls on whoever holds the risk at that moment, and under FOB with a container that is still the seller.

In practice FOB remains the dominant term for Chinese exports because buyers want their own forwarder and their own freight rate, and because that is what their systems expect. The honest position is to know the exposure rather than to assume the term covers it: either accept the gap, move containerised shipments to FCA, or write an explicit risk clause into the contract — and understand that the third option is no longer FOB, whatever the heading says.

Almost none of them are about the definition. They are about the edges of it. The first is the vessel: FOB requires the buyer to nominate a ship and a loading window. When that slips — the booking is rolled, the vessel is omitted, the container misses the cut-off — storage and demurrage start accruing at a terminal the seller never chose. The contract needs to say who pays for that, because the Incoterms text allocates costs up to delivery, not the cost of the buyer's delay.

The second is the bill of lading. Under FOB the seller is the shipper, but the booking belongs to the buyer's forwarder, and the document is often issued in a form that hands control of the cargo to the buyer before payment clears. On a deposit-plus-balance order that is the whole commercial risk in one page of paper. If terms are open account, this is where the exposure lives; if they are a letter of credit, the document set has to match the credit exactly, including whether the freight terms shown are "freight collect".

The third is inspection. Pre-shipment inspection arranged by the buyer is at the buyer's cost under Incoterms, because it is done for the buyer's account — unless a regulation in the exporting country requires it, in which case it is the seller's. Buyers who assume inspection is free on the seller's side are usually reading a different clause than the one they signed.

The comparison that matters is not which term is cheapest on paper. It is which party can actually control the thing being bought. A buyer with a forwarder and a freight contract gets more from FOB than from CIF, because CIF bundles the freight the buyer can already buy better. A first-time importer with no customs presence gets more from DDP, and pays for the convenience through a supplier who has priced the unknown.

CFR and CIF sit in between: the seller contracts and pays the ocean freight (and, under CIF, insurance at minimum cover), but risk still passes on board, exactly as under FOB. That split — cost to the seller, risk to the buyer — is what surprises people who read CIF as "the supplier is responsible until it arrives". They are not.

Our quotations are FOB, and the port is named on the quotation. That is a deliberate choice on both sides: you keep the freight contract and the insurance, which means you can see the ocean cost rather than a number folded into a unit price, and we are not quoting a rate that expires before the parts are ready.

It also means ocean freight, insurance, destination charges and import clearance are yours to arrange, and the production lead time we quote is production — not transit. If your forwarder needs the shipping documents in a particular form, or the crates have to fit a specific container loading plan, say so with the drawing rather than after the goods are packed: those are the two details that most often delay a FOB shipment at the last step.