If you’ve ever shipped anything, you’ve likely seen the acronym FOB — but what does it mean? Read on to discover FOB’s meaning and more.
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Kevin
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January 20, 2022
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Common Questions
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What Does FOB Mean?
Simply put, shipping is a series of exchanges through shipping companies. In addition to ownership and responsibility, goods and precious cargo must be transferred from one party to another using an orderly and efficient process.
With that in mind, to officially transfer responsibility between buyers and sellers, many companies rely on agreements known by the acronym FOB. In fact, FOB is arguably one of the most essential terms to understand in commercial law. So, what does FOB stand for?
In regards to freight transport, FOB stands for “free on board” or “freight on board” and is a designation that is commonly used in retail to indicate when liability and ownership of goods are transferred from seller to buyer.
The original definition of FOB was used exclusively for maritime transport, but today, the acronym can now be used on any transit mode of shipment.
Free on Board vs. Freight on Board
To be clear, “free on board” does not mean “free” by any means, and failure to understand this term can result in discrepancies and other problems when shipping products.
According to the Legal Information Institute of Cornell Law School, free on board indicates that the seller is in charge of getting the goods onto a shipping vessel designated by the customer.
At this point, the risk of loss passes directly from the seller to the customer. When followed by an identified physical location, the designation determines which party has responsibility for paying the freight costs and at what point the title for the shipment passes from the seller to the buyer.
Freight on board is a synonym of free on board. However, unlike its counterpart, freight on board is not an official term. In addition, freight on board is not defined in recognized domestic and international codes like the Uniform Commercial Code (UCC) and Incoterms.
Free on board, on the other hand, is a shipping term defined in these sets of codes, making it the preferred phrase for freight shippers around the globe.
Types of FOB Agreements
In the United States, free on board can refer to either land or maritime shipments. Generally speaking, there are four main types of FOB agreements, which we will go over next. But first, it’s essential to understand that there are two parts of each kind of FOB agreement:
- FOB Origin. FOB origin designates whether the buyer assumes total liability for the shipment at the point of origin or at the destination.
- FOB Destination. FOB destination designates whether the seller prepays the freight charge or if the buyer pays on delivery.
For example, if a jewelry company in New York City sends a shipment of earrings to a boutique in Dallas, the FOB classification would indicate who is responsible for the goods once they leave the jewelry warehouse in New York City.
If the jewelry company assumes responsibility for the goods until they reach Dallas, they write FOB Destination or FOB Dallas on the freight invoice. However, if the boutique agreed to be liable for transporting the goods, they write FOB Origin or FOB New York City.
What Are the Most Common FOB Agreements?
With all of this in mind, here are the four most common types of FOB agreements:
- FOB Origin, Freight Prepaid. Also called a FOB shipping point agreement, this is when the shipper pays the cost of shipping while the buyer assumes responsibility for goods the moment a carrier picks them up and leaves the seller’s shipping dock. The seller prepays the freight charges.
- FOB Destination, Freight Collect. Similar to freight prepaid, this is when the shipper bears the responsibility for a shipment, but the customer receiving the shipment is responsible for paying for freight costs upon delivery.
- FOB Origin, Freight Collect. For a FOB origin, freight collect delivery, the buyer has legal responsibility for all of the shipped goods from the moment the carrier picks them up from the seller’s shipping dock until they reach the buyer’s chosen destination.
- FOB Destination, Freight Prepaid. In this arrangement, the seller assumes total responsibility for damage or loss until the transfer point at the customer’s receiving dock. Once the transfer of goods is complete, the seller is no longer liable if the product gets damaged.
What Is Uniform Delivered Pricing?
In cases where the seller maintains ownership of the goods until they have successfully reached the buyer, it’s common for the seller to offer uniform delivered pricing — or UDP for short. UDP covers all transportation costs for a set fee.
Also called postage stamp pricing, carriers may offer UDP as single-zone pricing where all buyers pay the same price regardless of their geographical distance from the seller. In addition, it can also be offered in a multi-zone pricing model, where buyers pay different amounts depending on the proximity of their geographical zone to the seller’s dispatch zone.
Does FOB Mean Anything Else?
FOB has several other meanings as well. According to the Cambridge Dictionary, the term FOB is both an acronym and a noun.. A fob is an electronic device connected to a key ring. This device locks and unlocks a car’s doors from far away.
Additionally, a fob can be a short chain, ribbon, button, or strap that fastens a pocket watch to a vest, a pair of trousers, a waistcoat, or a person’s waistline.
Conclusion
To recap, the acronym FOB is essential for many reasons. Most importantly, carriers and shippers must understand FOB designations in damage situations. While it might be a little confusing at first, we hope this guide provided you with a clear understanding of the meaning behind FOB.
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