FOB (Free On Board): Costs, Risks and Documents Explained

FOB Free On Board, Incoterms 2020: risk passes once goods are on board, who pays loading, the bill of lading, a worked example and why FCA suits containers.

FOB, Free On Board, is the most famous trade term in the world and one of the most misused. Under Incoterms® 2020, the seller clears the goods for export and delivers them on board the vessel nominated by the buyer at the named port of shipment. Once the goods are on board, risk passes to the buyer, who has already contracted and will pay the sea freight, and who handles insurance, import clearance and duties.

FOB was designed for ships loaded at the quay with goods the seller can see and control until they are on deck. That is still how bulk and break-bulk cargo moves. For containers, it is not, and that gap is behind many disputes. This lesson covers both sides.

When should you use FOB?

FOB is appropriate for sea and inland waterway transport when the seller itself brings the goods to the ship and has them loaded:

• bulk cargo loaded by conveyor, grab or pipeline: cereals, clinker, fertilisers, liquids;
• break-bulk cargo loaded piece by piece: steel products, bagged goods, vehicles on ro-ro vessels;
• commodity trades where cargo already on board is resold along a chain of buyers.

Do not use FOB for goods handed to the carrier before loading, typically containers delivered to a terminal or groupage cargo delivered to a forwarder. Use FCA. And do not use it for air or road freight: it is a maritime rule.

Where does delivery happen and when does risk pass?

The seller delivers by placing the goods on board the vessel nominated by the buyer, at the loading point indicated by the buyer in the named port of shipment, or by procuring goods already delivered on board. Risk passes at that moment. The old reference to the "ship's rail" disappeared in 2010: the test is simply whether the goods are on board.

The buyer must give the seller sufficient notice of the vessel's name, the loading point and the loading time. If the vessel is not nominated, does not arrive on time, cannot take the goods or closes for cargo early, the buyer bears the risk and additional costs from the agreed date, provided the goods are identified as the contract goods.

Who pays what under FOB?

Port costs before loading are the seller's, since it bears all costs until the goods are on board. But stowing and trimming the cargo in the hold are often disputed. Incoterms do not define variants like "FOB stowed" or "FOB trimmed": if you use them, explain in the contract exactly which operations and costs each party bears. See ocean freight costs for how charges are billed.

Documents and payment

The seller provides the commercial invoice, the export declaration and the usual proof of delivery on board, such as a mate's receipt or, more often, the bill of lading issued by the buyer's carrier with the seller named as shipper. If that is not the usual proof, the seller must help the buyer obtain a transport document, at the buyer's request, risk and cost.

FOB works well with a letter of credit: the credit typically requires a full set of clean on-board bills of lading marked "freight collect", which the shipping line issues once the goods are loaded. The seller presents them to the bank and is paid, while the buyer has paid the freight directly.

Insurance under FOB

Neither party must insure for the other. The seller should cover the risks until the goods are on board, and the buyer from that moment. A buyer who imports regularly usually holds an open cover policy that attaches automatically to each FOB purchase.

Worked example: steel reinforcing bars from Oran

An Algerian steel mill sells 3,000 tonnes of reinforcing bars to a trading company, FOB Port of Oran, Incoterms® 2020, loaded break-bulk on a vessel chartered by the buyer.

The total contract value is USD 1,680,000. The buyer nominates the vessel and gives notice of its arrival for 18 May 2026. During loading, a sling breaks and a bundle falls into the harbour before reaching the deck: the loss is the seller's, because the goods were not yet on board. Once the remaining bundles are stowed, the shipping line issues on-board bills of lading, and the seller presents them under the letter of credit.

FOB compared with FCA, CFR and CIF

The CFR and CIF lessons show what changes when the seller pays the freight. All eleven rules are in the Incoterms matrix.

Common mistakes with FOB

• Using FOB for containers, leaving the seller with risk between the terminal gate and the vessel.
• Using FOB for air freight, where it has no meaning: use FCA.
• Naming the destination port, as in "FOB Shanghai" for an Algerian export. FOB names the port of shipment.
• Assuming FOB includes insurance or freight: it includes neither.
• Leaving loading variants undefined, so stowage and trimming become a dispute.