FOB (Free On Board) is the Incoterms rule under which the seller clears the goods for export and loads them on board the vessel nominated by the buyer at the named port of shipment. Risk passes to the buyer the moment the goods are loaded on board. Ocean freight, insurance and destination costs are for the buyer. It is used only for sea and inland waterway transport.
Where exactly does delivery take place under FOB?
Under Incoterms® 2020, delivery under FOB takes place when the goods are placed on board the vessel nominated by the buyer, or when goods already so delivered are procured. The "ship's rail" criterion in older versions was dropped with Incoterms 2010; what counts now is that the goods are on the vessel's deck or in its hold. The correct wording is: "FOB Port of Mersin Incoterms® 2020".
What does each party take on?
| Obligation | Seller | Buyer |
|---|---|---|
| Packing the goods and carrying them to the port | ✔ | |
| Export clearance and export licences | ✔ | |
| Port charges and loading on board | ✔ | |
| Nominating the vessel and ocean freight | ✔ | |
| Risk and insurance after loading | ✔ | |
| Transit, import customs and duties | ✔ |
The seller has no obligation to take out insurance. Since the buyer bears the risk from the moment of loading, it should start its own cargo insurance from that moment.
How does FOB work?
- The buyer nominates the vessel or shipping line and notifies the seller of the vessel name, loading date and terminal.
- The seller brings the goods to the port, files the export declaration and completes the customs formalities.
- The goods are loaded on board; risk passes to the buyer at that moment.
- The seller sends the buyer the document proving delivery, usually a shipped on board bill of lading.
If the vessel does not arrive on time or does not load, the resulting additional costs and risk pass to the buyer, provided the goods have been clearly identified as the contract goods. The vessel nomination and loading window should therefore be written into the contract with dates.
Why do problems arise with containerised cargo?
With containerised cargo, the seller hands the container over at the port terminal days before it is loaded on board. The container is no longer under the seller's control, but under FOB the risk is still with the seller. Damage occurring at the terminal falls into this gap. For this reason, the ICC recommends using FCA instead of FOB for containerised cargo; under FCA, risk passes when the goods are handed over to the carrier. The subject is detailed in the entry FCA instead of FOB for container cargo. FOB is really suited to shipments where the seller has direct access to the vessel, such as bulk cargo, iron and steel, and project cargo.
How FOB differs from related rules
- FAS: Delivery ends when the goods are placed alongside the vessel; loading is for the buyer.
- CFR: Risk still passes on loading, but the seller pays the freight.
- CIF: In addition to CFR, the seller takes out insurance with minimum cover.
The role of FOB value in Turkish statistics
In the foreign trade statistics of TÜİK (Turkish Statistical Institute), exports are published on an FOB basis and imports on a CIF basis. This is a statistical method independent of the delivery term in the contract: even for goods sold CIF or DAP, an FOB value is calculated for statistics in the export declaration. The "85% of the FOB value" criterion required for the wage tax exemption in free zones is also based on this concept.
Common mistakes
- Writing FOB for road or air transport; FOB is used only for sea and inland waterway.
- Leaving the split of loading costs at the port (including THC) to port custom.
- Using expressions with an unclear port name such as "FOB Istanbul"; Ambarlı alone has more than one terminal.
- Starting the buyer's insurance from arrival rather than from the moment of loading.
How does Voltim Global help with this?
Within its sea freight and regulatory consulting services, Voltim Global assesses whether FOB or FCA is more suitable for the type of cargo, and runs the export declaration and the timing of delivery to the port in the same plan.