FOB (Free On Board), which is often called "FOB Shipping Point" or "FOB Port of Shipment," is one of the most used Incoterms in international trade. The seller is responsible for all costs and hazards until the items are put onto the ship at the port of shipment, according to FOB agreements. The customer is responsible for fees and dangers once the cargo goes over the ship's rail.
But what does FOB price really mean? Both exporters and importers need to know the full cost structure so they can keep their budgets in check and avoid unforeseen costs.
What Costs Are Included in FOB?
FOB costs are mostly made up of costs that happen in the US before the items are put on the ship. Most of the time, the seller pays for the following nine things:
Processing & Finishing Fees – Any expenses related to preparing goods for export, such as product inspection, labeling, or finishing touches.
Packaging Costs – Materials and labor for packing goods to meet shipping and safety requirements.
Storage Fees – Warehouse rental, handling charges, and security prior to loading.
Domestic Transportation Costs – Moving goods from the factory or warehouse to the port (including trucking, rail freight, or barge transport).
Documentation Fees – Costs for official export documents such as export licenses, inspection certificates, and certificates of origin.
Loading Charges – Port terminal handling fees, crane or forklift charges, and barge transfers to the vessel.
Bank Charges – Fees for processing export payments, letters of credit, or foreign exchange transactions.
Estimated Cargo Loss/Damage Costs – Coverage for short shipments, breakages, or other pre-shipment losses.
Communication Costs – Telephone, email, and courier expenses related to shipment coordination.
The seller is also responsible for export customs clearance and any applicable export duties before shipment.
Detailed Breakdown of FOB Cost Components
Includes shipping from the factory to the port, as well as storage, insurance (such fire insurance), and coverage for losses that happen while the goods are in the country.
2. Paperwork and formalities for exporting
Includes costs for consular authentication, customs clearance, inspection reports, and export permits. If the buyer asks the seller for help getting shipping papers such the Bill of Lading, the seller may have to pay extra service fees.
3. Costs for loading and handling at the port
Includes the cost of moving items aboard the ship, handling fees at the port, and the cost of a feeder vessel if you use a smaller ship to get to the main ship. The ship's rail is the line that separates costs and risks in FOB terms.
How to Calculate FOB Price
A common FOB price calculation formula is:
FOB Price = { [1 - (Export Rebate Rate / (1 + VAT Rate)) ] × RMB Tax-Inclusive Price } / Spot Exchange Rate
This formula takes into account export tax rebates, VAT, and currency exchange rates, ensuring accurate profit margins for the seller.
Risk Management Under FOB
FOB offers the buyer authority for the major freight and insurance, but it also makes it risky for the seller to get paid and transport the goods.
Tips for controlling risk:
- To avoid fraud like "release without Bill of Lading" or not paying, use T/T prepayment.
- Don't use the buyer's chosen international freight forwarder unless they are government-certified and give you a letter of indemnity for the initial B/L release.
FOB vs. CIF and CFR - Key Differences
FOB – Seller covers costs to load goods onboard; buyer arranges and pays for main carriage and insurance.
CFR (Cost and Freight) – Seller pays ocean freight to destination port, but buyer still handles insurance.
CIF (Cost, Insurance, and Freight) – Seller covers both freight and minimum insurance to the destination port.
When to use FOB:
Buyer has strong logistics capabilities and wants control over freight arrangements.
Buyer can secure better freight rates than the seller.
When to avoid FOB:
Buyer has poor credit or limited experience in international shipping - in these cases, CIF may be safer for the seller to protect payment security.
Key Takeaway
FOB pricing covers all expenditures in the country before the items are put on the ship, such as processing, packaging, local transport, paperwork, and loading fees. Sellers need to be wary about risks and make sure they get the right payment conditions, even when buyers have more control over shipping.
Both exporters and importers may get better bargains, make sure the costs are right, and prevent expensive misunderstandings if they know exactly what FOB costs are and how they are different from other Incoterms.
FAQ
1. What does the FOB price cover?
The FOB price covers all costs up to the point where the products are loaded onto the ship at the port of export. This includes costs for shipping within the country, packaging, storage, paperwork, port management, loading, and customs processing for exports.
2. Is foreign freight included in FOB?
No. The seller only pays for domestic costs before loading under FOB arrangements. After the products are on board, the customer makes arrangements and pays for international shipping and insurance.
3. Who is responsible for paying for insurance under FOB?
Once the products are aboard the ship, the buyer is in charge of insurance. Under FOB arrangements, the seller doesn't have to get maritime insurance.
4. What are the dangers for sellers who use FOB?
If buyers don't pay or disagree after the goods are loaded, sellers could lose money. To lower risk, sellers should get payments in advance or utilize letters of credit. They should also not rely only on the buyer's freight forwarder without any protection.
5. How do you figure out the FOB price?
A normal FOB formula takes into account the domestic selling price, the VAT rate, the exchange rate, and the export tax rebate rate:
FOB = { [1 - (Rebate Rate / (1 + VAT Rate)) ] × Price with Taxes } / Exchange Rate
6. What is the difference between CIF and FOB?
When you use CIF (Cost, Insurance, and Freight), the seller pays for both the freight and the insurance to the destination port. The buyer pays for these charges and is responsible for them once the products are on board.
7. Is FOB better for buyers or sellers?
FOB is good for purchasers that wish to be in charge of shipping and maybe get better shipping costs. When working with buyers who are high-risk, sellers may prefer CIF since it gives them more control over the payment and shipping procedure.
