Logistics Pricing: Getting to know F.O.B. terms
Ray Bohman -- Logistics Management, 7/1/2009
Just about every domestic commercial purchase order is subject to written terms of sale called F.O.B. (Free on Board) terms. You’ve heard them stated many times, such as “F.O.B. factory” or “F.O.B. warehouse.”
F.O.B. terms determine when title to goods passes from the seller to the buyer. However, I’m sure you often hear something like the following stated: “F.O.B. plant, freight collect.” While these two terms are generally uttered in the same breath, they each have a different meaning.
As mentioned above, F.O.B. determines when title to the goods passes from seller to buyer, while “freight collect,” “freight prepaid,” or “freight prepaid and add” indicates who pays the freight charges—the seller, the buyer, or a designated third party.
Let’s look closer at F.O.B. terms. If the terms of sale, normally set by the seller, are “F.O.B. factory,” the seller is responsible for placing the goods on a conveyance such as a trailer, container, or a rail car at its expense.
Once it does that and the carrier signs the bill of lading, the title passes to the buyer. From that point on, the buyer, now the owner of the goods, assumes all the inherent risks and burdens in transportation, including loss or damage. Should the goods be damaged in transit and it is later determined they were improperly or inadequately packaged, the buyer would have a right of action against the seller.
There are many, many different F.O.B. terms such as “F.O.B. factory,” “F.O.B. warehouse,” “F.O.B. mine,” and so on. The terms you want to watch out for are F.O.B followed by the name of a city, like “F.O.B. Chicago.” If the buyer has a consolidation point on the opposite side of Chicago, the seller would be required to transport the goods across town to the consolidation point at the seller’s expense.
While it’s the seller that normally sets F.O.B. terms, if the buyer is a major customer and has a great deal of leverage, there’s nothing to stop the buyer from trying to change the F.O.B. terms to its advantage. An example might be trying to get the seller to retain title to the goods until they reach destination. Under “F.O.B. destination” terms, the seller would assume all the essential risks and burdens in transportation including loss or damage until the goods are delivered at destination.
Bear in mind that F.O.B. terms generally apply on domestic transportation. When you are shipping or receiving goods from overseas, international terms, called Incoterms, apply.
As far as terms like “freight collect,” “freight prepaid,” “freight prepaid and add,” or “freight prepaid bill to a named third party” are concerned, while generally uttered in the same breath with F.O.B. terms, these are separate from such terms; but like F.O.B. terms, these too can be negotiated.
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