FOB Incoterm: Meaning, Obligations and Price (Incoterms 2020)

FOB stands for Free On Board. It is one of the eleven Incoterms in the 2020 edition, published by the International Chamber of Commerce and in force since 1 January 2020. The ICC revises the Incoterms roughly every ten years; the previous edition dates from 2010.

FOB belongs to a small group of four rules reserved for sea and inland waterway transport, alongside FAS, CFR and CIF. The other seven Incoterms 2020, such as FCA, CPT, CIP, DAP, DPU, DDP and EXW, suit any mode of transport, including multimodal.

Under FOB, the seller fulfils its delivery obligation once the goods are loaded on board the vessel nominated by the buyer, at the agreed port of shipment, for example FOB Shenzhen or FOB Ningbo. Before that point, the seller handles packaging, transport to the port, and export customs clearance.

The seller chooses and pays for transport to the quay, arranges loading on board, and hands the buyer the documents needed to receive the goods and continue transport, notably proof of delivery on board.

The buyer nominates the vessel and the port of shipment, then arranges and pays for the main carriage contract to destination. From the moment the goods are on board, everything that follows is the buyer's responsibility: ocean freight, insurance if it chooses to take one out, unloading, import customs clearance, duties and VAT.

The buyer also bears any additional costs if the vessel it nominated fails to arrive on time, leaves before the agreed date, or cannot take the goods on board, provided the goods have been clearly identified as intended for the contract.

Risk of loss or damage passes from seller to buyer at the exact moment the goods are loaded on board the vessel, at the agreed port of shipment. This benchmark, in force since the Incoterms 2010 revision and kept in 2020, replaced the older rule of the goods passing the ship's rail, judged too imprecise for modern vessels.

This transfer point does not depend on who pays for the main carriage: under CIF, for example, the seller pays the freight and a minimum insurance up to the port of arrival, but risk passes at the same moment as under FOB, as soon as the goods are loaded at the port of departure. Damage occurring at sea therefore remains the buyer's responsibility, even when the seller has paid for transport.

An FOB price covers the cost of the goods, packaging, transport to the port of shipment, export customs clearance and loading on board. It includes neither international ocean freight, nor insurance, nor import customs clearance, nor the destination country's duties and taxes: these items still need to be added to know the real cost landed at the buyer's premises.

For an import into the European Union, the customs value is assessed at the first point of entry into the Union's customs territory. Under Article 71 of the Union Customs Code, transport costs, insurance for the main carriage and handling costs up to that point are added to the invoiced price to establish the taxable base. An FOB price is therefore never, on its own, the customs value: freight and insurance up to entry into the Union must be added, which produces a value close to a CIF quotation.

FOB remains a common benchmark when a Chinese factory ships a full container directly to a European port: the seller controls transport to the quay and export clearance, while the buyer chooses its freight forwarder and keeps control of international freight. It is also the simplest term for comparing several factory quotes on the same scope: asking for an FOB price at a Chinese port avoids mixing quotations built on different bases.

The International Chamber of Commerce recommends reserving FOB, like the other three sea Incoterms, for port-to-port transport, and using FCA for containerised or multimodal shipments, particularly when the goods travel as groupage or pass through several modes of transport before reaching the vessel. In that case, the moment the goods are actually loaded on board is no longer a practical benchmark for the buyer, who does not track its own lot to the quay.

Compared with EXW, FOB commits the seller further: under EXW, the goods are made available at the supplier's premises, and loading, inland transport and export clearance stay with the buyer, which requires a local agent to get the goods out of China. Many Chinese factories actually prefer quoting FOB rather than EXW, since they control transport to the port and export formalities.

Compared with CIF, the difference lies in costs, not risk: the CIF seller pays the freight and a minimum insurance up to the port of arrival, but risk passes at the same moment as under FOB, as soon as the goods are loaded at the port of departure. A buyer comparing an FOB quote with a CIF quote must therefore add freight and insurance to the first one to put them on a comparable basis.

Sorva, a brokerage and trading house between Europe and China, negotiates FOB terms with factories from Guangzhou, where our Chinese-speaking team works. We have the port of shipment, the exact scope of the FOB price and the loading date confirmed, then coordinate the freight forwarder and the pre-shipment inspection to secure the risk transfer at the right moment.

Our Produce and Deliver package handles the case from production through to delivery, freight and customs clearance included; a factory quote review also lets you check within 24 hours what an FOB price quoted by a supplier actually covers before you commit. Sorva earns mainly through a commission on the value of the goods ex-factory, with the case opening fee deducted from that commission once an order is placed.