The term FOB stands for Free on board, which means "free on board".
It is a clause used for international transactions that concerns the price of the final goods, including the expenses incurred by the exporter up to the loading onto the ship.
The only thing not included in the expenses are the transport costs that allow for arrival at the port of destination, which are borne by the importer.
This type of clause is used for international trade as established by the Incoterms (an abbreviation of International Commercial Terms) and by the International Chamber of Commerce (ICC).
Incoterms is an indicator of the obligations and risks borne by the seller and buyer during a transaction involving the transfer of goods from one nation to another.
This establishes how and when the goods can be delivered and the allocation of transportation, insurance, and customs costs.
Incoterms Clause
Under Incoterms, the FOB clause entails that the seller assumes responsibility, at their own risk, for the expenses of the goods aboard the ship.
The sales quote includes the cost of expenses incurred up to the time of boarding.
Among the most widespread clauses in international trade contracts, we also find the CFR clause (Cost and freight).
This involves a total price that covers both the cost of the goods and transportation expenses to their destination.
Furthermore, we find the EXW clause (Ex Works), which means that the seller only makes the goods available to the buyer without assuming any cost or risk for the transportation of the goods from the seller's plant to the destination.
Purchasing products through FOB
When negotiating products on FOB terms, one must consider the total landed cost of a given product, and that shipping expenses are borne by the buyer.
The total landed cost is composed of 3 elements:
- The price paid to the supplier for the product;
- The price for transportation and associated costs to bring the product to its destination;
- Any applicable duties and taxes.
Therefore, when purchasing a product under this clause, the supplier will include local transportation costs in the price of the product.
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