What is Free On Board? Distinguish The Difference Between FOB And CIF

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What is free on board? FOB is an important term in import and export, playing an essential role in choosing the appropriate form of delivery, clearly dividing responsibilities, and calculating product costs. To understand better, please refer to the article below with Dolphin Sea Air.

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Table of contents

1. What is free on board?

FOB stands for Free On Board; this is a common shipping term in the set of international trade rules (Incoterms). Under this clause, the seller's liability ends when the goods have been loaded on board the vessel at the agreed port of loading. If the goods have not been loaded onto the ship, the seller is still responsible for the shipment. The seller's responsibility will be completely transferred to the buyer after the goods have been transferred to the ship.

The ship's rail plays an important role in determining the point of transfer of risk in FOB terms. When goods are transported by sea, the travel distance is long, and there are many potential risks, such as tsunamis, pirates, etc., affecting the safety of the goods. Under FOB terms, the seller is only responsible until the goods pass the ship's rail at the port of loading. After this point, all risks will transfer to the buyer. Therefore, purchasing insurance for the shipment is extremely necessary to ensure the interests of the buyer.

Understand terms related to FOB:

FOB Shipping Point (FOB delivery point): Determines the delivery location on the ship's rail. Ownership and responsibility for the shipment will pass from the seller to the buyer once the goods are loaded onto the vessel.
FOB Destination: Responsibility and ownership will be transferred to the buyer when the shipment is delivered to the designated point specified in the contract.

For example, with the condition FOB Cat Lai, Cat Lai Port is identified as the location for two important activities:

Loading goods onto the ship: The seller is responsible for bringing the goods to Cat Lai Port and loading them onto the ship.
Transfer of responsibility: After the goods are loaded onto the ship at Cat Lai Port, responsibility and risk will transfer from the seller to the buyer.

2. What does the free on board price include? How to calculate FOB costs in detail

FOB price (abbreviation for Free on Board) is the value of goods calculated at the exporting country's border gate.

Recipe: FOB price = value of finished goods + domestic transportation costs + export procedure costs + incurred fees

Details of each item:

The value of finished goods: includes the production price, the seller's profit, and other costs related to the production of goods.
Domestic transportation costs: include the costs of transporting goods from the factory to the export port and loading and unloading fees at the port.
Export procedure costs: include customs clearance fees, quality inspection fees, and origin certification fees (if any).
Fees incurred: Includes fumigation fee, sterilization fee, insurance fee, and maintenance fee (if any).

For example, suppose you are a coffee exporter in Vietnam and want to sell 10 tons of coffee to a customer in the United States. After negotiation, the two sides agreed on a selling price of 2,000 USD/ton under FOB delivery terms at Cat Lai port, Vietnam.

To calculate the FOB price for this coffee shipment, you need to determine the following costs:

Price of finished products:
- Coffee selling price: 2,000 USD/ton
- Total value of goods: 2,000 USD/ton x 10 tons = 20,000 USD
- Cost of transporting goods to port:
Domestic shipping cost: 500,000 VND/ton
- Cost of loading and unloading goods at the port: 200,000 VND/ton
- Total shipping cost: 500,000 VND/ton + 200,000 VND/ton = 700,000 VND/ton
Cost of export procedures:
- Customs clearance fee: 300,000 VND/ton
- Quality inspection fee: 100,000 VND/ton
- Total cost of export procedures: 300,000 VND/ton + 100,000 VND/ton = 400,000 VND/ton
Export tax:
- Coffee export tax: 0%
Other incurred costs:
- Insurance fee: 0.5% of the value of the goods
- Certificate of origin (C/O) fee: 100 USD
FOB price calculation:
- FOB price = finished product price + shipping costs + export procedure costs + export taxes + incurred costs
- FOB price = 20,000 USD + (700,000 VND/ton x 10 tons) + (400,000 VND/ton x 10 tons) + 0% + (0.5% x 20,000 USD) + 100 USD
- FOB price = 20,000 USD + 7,000 USD + 4,000 USD + 100 USD + 100 USD
- FOB price: 31,200 USD

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3. Responsibilities and obligations of seller and buyer in free on board contracts

FOB contracts are one of the most common delivery terms in international trade. This contract stipulates the responsibilities and obligations of the seller and the buyer during the delivery process.

Responsibility	Explain
Payment obligations	Seller's responsibilities: Delivery to ship at port. Provide full commercial invoices or electronic documents of equivalent value. Provide proof of delivery. Buyer's Responsibilities: Pay all costs of goods to the seller as committed, as clearly stated in the contract signed by both parties.
Licenses and procedures	Seller: Proactively carry out export procedures, including applying for an export license, declaring customs, paying export tax (if any), and completing other requirements according to prescribed regulations. Provide complete documents and information related to the shipment, including the sales contract, commercial invoice, bill of lading, insurance certificate (if any), export license, and other documents as required. request of the buyer or authorities. Ensure exported goods meet the importing country's standards and regulations, including quality, safety, hygiene, and other requirements. Responsible for the goods until they are handed over to the buyer at the port or place of delivery according to the contract. Buyer: Prepare an import license, if necessary, according to the regulations of the importing country. Complete customs procedures in the importing country, including customs declaration, payment of import tax (if any), and completion of other requirements according to regulations. Responsible for the goods from the time they are handed over from the seller at the port or place of delivery according to the contract. Pay the seller according to the agreement in the sales contract.
Contract of carriage and insurance	Seller: Responsible for costs and risks for shipments from the inland warehouse to the port. This responsibility ends and transfers to the buyer once the goods are placed on board the vessel. Buyer: Responsible for paying the cost of transporting goods from the port of origin to the final port of destination. The destination port can be an inland warehouse or a discharge port, depending on the agreement between the two parties. Buyers are not required to purchase an insurance policy.
Delivery	Transport: Seller: responsible for shipping the goods from the designated port of export. Shipping costs: The seller is responsible for paying the costs of bringing the shipment on board. Delivery: Buyer: takes possession of the goods in his possession immediately after the shipment has been unloaded at the port of destination.
Risk transfer	Costs: Once the goods are placed on board, all costs are transferred from the seller to the buyer. Risk: The buyer is responsible for all risks after the goods have passed the ship's rail. Risks include loss during transportation.
Postage	Seller: Responsible for all costs until the goods are placed on deck. Including customs declaration fees, taxes,... Buyer: Responsible for paying freight for the shipment from the moment the goods are placed on the ship's deck.
Buyer information	The seller is responsible for notifying the buyer that the goods have been completely transferred over the ship's rail. The buyer is responsible for notifying the seller that the goods have been loaded onto the ship.
Proof of delivery	Seller: Responsible for providing the buyer with transport documents related to the delivery of goods from warehouse to port. Purpose: as authentic proof that delivery has been made. Buyer: We need to provide the seller with proof of shipment. The most common type of proof is the bill of lading.
Inspection - Packaging - Goods symbols	The seller is responsible for paying all costs for inspection and quality management of the shipment. In cases where the goods are specially packaged, the seller needs to notify the buyer to agree on costs and packaging methods. The buyer is responsible for all costs incurred if the shipment is inspected by the exporting country's customs.
Other obligations and responsibilities	To ensure successful shipping and delivery to the destination, the seller is responsible for providing all necessary information and documents. All costs associated with collecting these documents will be paid by the buyer.

4. Distinguish the difference between FOB and CIF in detail

CIF and FOB are two common shipping terms in Incoterms used in international trade. These two terms stipulate the responsibilities of the seller and the buyer in transporting goods, including costs and risks..

Different	FOB	CIF
Port is declared	Loading port	Destination port
Regulation content	Delivery on board	Including the commodity price, shipping fee, and insurance fee
Responsibility for chartering ships	Buyer	Seller
Cost transfer point	Loading port	Unloading port
Alike	Both CIF and FOB are terms specified in Incoterms (International Commercial Terms), a set of international standard rules widely used in international sales. Both identify the point of transfer of risk between buyer and seller as the port of loading. Responsibility for customs clearance: The seller is responsible for export customs clearance, and the buyer is responsible for import customs clearance.

5. Some related terms about free on board

Under FOB terms, the seller is responsible for the goods until they are loaded onto the ship at the port of export. The buyer is responsible for all costs and risks therefrom. Here are some terms related to FOB that you need to know:

FOB Shipping Point is a term in international trade, meaning "free delivery on board at the point of delivery." The delivery point is specified in the sales contract, usually on the ship's rail at the export port.
FOB Destination is a delivery method in which the seller is responsible for the goods until they are delivered to the location specified by the buyer. Once the goods have arrived, title and responsibility for the goods will pass completely to the buyer.

Above is all the information to answer the question "What is free on board?" that you can refer to. Dolphin Sea Air hopes this will be useful information for you. If you have any questions, don't hesitate to contact us via our hotline or website.

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