Marcus Weber
Senior Trade Finance Advisor
Two decades in trade finance across European and Asian banks, advising corporates on payment instruments, credit structures, and documentary risk.
Short answer
FOB (Free On Board) means the seller delivers the goods on board the buyer's nominated vessel at the named port of shipment, export-cleared. Risk transfers when the goods are on board; the buyer pays ocean freight and insures from that point. FOB applies only to sea and inland waterway transport — for containerized cargo, the ICC recommends FCA, because containers are handed over at terminals before they reach the ship.
What FOB (Free On Board) Means
FOB belongs to the F-group of Incoterms® 2020 rules (main carriage unpaid — sea transport only) and applies to sea and inland waterway transport only. The rule's operative mechanics: risk transfers when the goods are on board the vessel nominated by the buyer at the named port of shipment. Costs follow a different line — seller bears costs through on-board delivery including export clearance; buyer bears ocean freight, insurance, and all destination costs.
Seller and Buyer Obligations Under FOB
| Seller Obligations | Buyer Obligations |
|---|---|
| Deliver the goods on board the vessel nominated by the buyer at the named port | Nominate the vessel and give the seller sufficient shipping instructions |
| Clear the goods for export — licenses, formalities, security filings | Contract and pay ocean freight from the port of shipment |
| Provide commercial invoice and clean on-board bill of lading | Bear all risk from the moment goods are on board |
| Bear all risk and cost until the goods are on board the vessel | Clear the goods for import and pay duties, taxes, and onward costs |
Incoterms® deliberately cover only the sale contract: they allocate delivery, risk, cost, and clearance — never ownership transfer, payment terms, or breach remedies. Those belong in the sales contract itself, which should cite the rule precisely: "FOB [named place] Incoterms® 2020."
Risk Transfer and Cost Allocation
| Dimension | FOB Position |
|---|---|
| Risk transfer point | When the goods are on board the vessel nominated by the buyer at the named port of shipment. |
| Cost split | Seller bears costs through on-board delivery including export clearance; buyer bears ocean freight, insurance, and all destination costs. |
| Insurance | No obligation on either party. The buyer insures from the port of shipment, since risk passes once goods are on board. |
| Transport modes | Sea and inland waterway transport only |
| Export clearance | Seller |
| Import clearance | Buyer |
When to Use FOB — and When Not To
- Bulk commodity trades — grains, minerals, oils — where chartering practice is built around FOB
- Breakbulk and project cargo loaded directly alongside the vessel
- Trades where the buyer's freight volumes secure better ocean rates than the seller's
- Markets where FOB quotation is the commercial convention (many agricultural and metals trades)
Avoid FOB for containerized cargo — the rule's risk point (on board) doesn't match container reality (terminal handover days earlier). The ICC's own guidance: use FCA for containers. FOB also misfits air freight and multimodal shipments entirely.
Common FOB Mistakes
- Using FOB for container shipments — risk sits in limbo between terminal gate and ship's rail
- Writing 'FOB Shanghai' without specifying the port terminal or berth for bulk cargoes
- Buyer delaying vessel nomination, triggering deadfreight and storage charges against the seller
- Assuming FOB includes insurance — it does not; the buyer's coverage must start at the port of shipment
Most FOB disputes trace to imprecise contract language — an unnamed place, an unspecified edition, or a rule chosen for quotation convenience rather than operational fit. The discipline is simple: name the exact place, cite "Incoterms® 2020," and choose the rule whose risk point matches where control of the cargo actually changes hands.
Key takeaways
- FOB = seller delivers export-cleared goods on board the buyer's vessel at the named port.
- Risk transfers when goods are on board — a clean line for bulk and breakbulk.
- Sea-only rule: containers belong under FCA per ICC guidance.
- The buyer controls freight and nominates the vessel — FOB is a buyer-carriage rule.
- FOB quotations exclude freight and insurance — compare landed costs before choosing.
Frequently asked questions
No. Under FOB neither party has an insurance obligation to the other, and risk passes to the buyer at the port of shipment — so the buyer arranges cargo insurance from that point. Sellers sometimes quote CIF when the buyer wants insurance bundled.
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