FOB meaning: what Free On Board covers when you buy from a factory

Incoterms are 11 three-letter trade terms published by the International Chamber of Commerce (ICC). Each one says which party pays for which part of the trip, who handles export and import formalities, and the exact point where the risk of loss or damage moves from seller to buyer. FOB is one of the 11.

Under FOB:

You (or your freight forwarder, acting for you) have to tell the seller which ship, and where and when it loads. In practice your forwarder books the space and sends the factory the booking details.

The term only works with a named port: "FOB Shenzhen" or "FOB Ningbo". An FOB price with no port is not a complete offer, because you can't tell how far the factory's costs run.

The ICC is explicit that Incoterms leave several things out. Among them:

• When you own the goods. Incoterms move cost and risk, not title. Ownership is something your sales contract has to say.
• When and how you pay. A 30% deposit and 70% before shipment is a payment term, separate from FOB. Write both on the purchase order.
• What happens on a breach. Late delivery, defects and remedies are contract terms too.
• Tariffs and import rules. FOB says you handle import clearance. It doesn't tell you the duty or whether the product is allowed in.

Incoterms only apply when the contract says so. Write the term with its port and version on the PO, for example "FOB Ningbo, Incoterms 2020".

Because FOB covers so little of the deal, the purchase order has to carry the rest. The Product Sourcing Secrets course has a full lesson on what that PO must state, from the approved-sample reference to the remedies if a shipment fails.

If a US supplier invoices you "FOB shipping point" or "FOB destination", they are usually using the Uniform Commercial Code's meaning, not the ICC's. Section 2-319 of the UCC says, unless the contract says otherwise:

• FOB shipping point (FOB place of shipment): the seller pays for and carries the risk of getting the goods into the carrier's hands at that place. After that, transit risk and cost are yours.
• FOB destination: the seller pays for and carries the risk of transporting the goods to the named destination and tendering delivery there.
• FOB vessel, car or other vehicle: the seller also pays for and carries the risk of loading the goods on board.

You may read that the UCC dropped these FOB rules. A 2003 revision of Article 2 would have removed them, but no state adopted it, and the Uniform Law Commission and the American Law Institute withdrew it in 2011. Section 2-319 is still in the sales law the states have enacted, though each state's code can differ slightly and a contract can define FOB its own way.

The difference from Incoterms matters in two ways.

1. 01Incoterms FOB is for sea and inland waterway only. The ICC puts FOB in the group of four rules (with FAS, CFR and CIF) for goods delivered on board or alongside a ship. A UCC "FOB shipping point" can be a truck leaving a warehouse in Ohio.
2. 02"FOB destination" is not an Incoterm. If you want an overseas factory to deliver to your door with duty paid, the Incoterm for that is DDP. Some explainers say FOB destination means the seller pays import duty; that mixes the two systems. Say what you mean with the right term.

For a factory overseas, use Incoterms and name the version. For a US blank supplier or printer, check which meaning the invoice uses, and ask your accountant how it affects when inventory hits your books.

These are the terms you will see on factory quotes. A plain-English summary, not the ICC's wording:

Two traps:

• Under CIF, risk still passes at the port of shipment, even though the seller pays the freight. If the goods are damaged at sea, you claim on the insurance; you don't get to refuse them because the seller paid for the ship.
• EXW leaves loading and export clearance to you. The ICC's own introduction notes this can cause problems for both sides and suggests FCA as the safer choice for international sales. If a factory quotes EXW, ask who will load the truck and file the export paperwork before you accept.

FOB is built around goods loaded straight onto a ship. Container cargo usually doesn't move that way: the factory trucks the cartons to a container yard or, for a shared container, a consolidation warehouse, where they wait to be loaded. Under FOB, the factory still carries the risk while the goods sit in a terminal it doesn't control.

The ICC's own introduction to Incoterms 2020 advises sellers of containerized goods handed to a carrier before loading to use FCA rather than FOB, and ICC Academy says the same: FCA works for any mode and for container handovers, FOB is for port-to-port sea shipments. FCA in Incoterms 2020 also gained an option, if both sides agree it, for the buyer's carrier to issue the seller an on-board bill of lading, which is what banks often want under a letter of credit.

What this means for you:

• An FOB price is still a useful price basis. Factories commonly quote FOB, and FOB quotes from different factories are easy to compare.
• For the contract, consider FCA at the factory or the consolidation warehouse if your goods go in a container, so the risk point matches where the handover really happens. Ask your forwarder which point they collect from.
• For air freight, don't use FOB at all. It is a sea term. FCA at the factory or the airport is the Incoterm that fits.

An FOB quote should cover the product, its packing and carton marking, delivery to the port, export clearance and the origin charges up to loading. Ask the factory to confirm that in writing, and ask who pays any origin terminal or documentation fees so they don't turn up on a second invoice.

To get from an FOB price to your cost, add:

• Ocean freight (full container or shared, LCL)
• Insurance for the ocean leg, if you buy it
• Destination charges at the US port or warehouse
• Customs broker fees and US government fees
• Duty at your product's rate, plus any additional duties for its country of origin
• Delivery to your warehouse

The US customs value is roughly the FOB-level price, not the delivered price. The primary basis of US customs value is transaction value: the price you paid the seller, excluding international freight, insurance and related charges from the country of export to the US (19 CFR 152.102(f)), plus some additions such as packing costs you paid (19 CFR 152.103(b)). If you buy CIF, the freight and insurance are taken out for valuation, so ask the seller to show them separately on the invoice. If you buy EXW, the inland trucking in the seller's country isn't added to the value. Your customs broker will apply the details; this is why the invoice wording matters.

Full method in our landed cost guide.

Example (illustrative numbers): a factory order of 500 hoodies, with three offers. The duty rate here is a made-up 10% to show the arithmetic; your real rate depends on the HTS code and country of origin.

What the example shows:

• The lowest unit price was not the lowest cost. EXW looked $0.60 a unit cheaper and came out a few cents more.
• Duty is charged on the goods value, not the delivered total. The freight lines don't attract duty in this model (see the section above on customs value).
• DDP is simple and costs more here, and you give up control of the freight and the customs filing. It can still be the right call for a first small order if your time is worth more than the difference.

Get your own freight numbers from a forwarder for each quote, on the same carton count and weight. Then compare per sellable unit: the free landed cost calculator does the arithmetic, and our landed cost guide explains each line.

Use this when you turn an FOB quote into an order:

• The term, the named port and the version: "FOB Ningbo, Incoterms 2020" (or FCA at a named place if your goods go in a container)
• Who books the freight, and your forwarder's contact for the factory
• The cargo-ready date and the latest date the goods must be on board
• Who pays origin terminal and documentation fees
• Packing, carton marks, carton count and the packing list you need
• The commercial invoice showing goods value, with any freight and insurance listed separately
• Payment milestones (deposit, balance), which FOB does not cover
• When you take ownership, if it matters to you (FOB does not cover it either)
• The inspection before the balance is paid, and what happens if it fails