What is included in the FOB price?

There is a lot of confusion among international trade community around what is included in FOB prices. Since the volatility of Freight charges have been increasing exporters have start preferring FOB prices for new trades to avoid losses due to rising freight cost.

What is FOB?

FOB is an Incoterm that signifies the seller is responsible for loading the purchased cargo onto the ship, as well as all associated charges. When the items are safe aboard the ship, the risk is transferred to the buyer, who is responsible for the rest of the transportation.When transporting cargo by sea, the most frequent agreement between an international buyer and seller is FOB. This Incoterm only refers to shipments by sea and inland waterways.

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FOB is pricing for a product that does not include any of the following costs.

Loading
Insurance
Freight
Unloading
Customs
VAT
Import Duty
Transportation (from the port to the final destination)

Seller Side:

The seller assumes the following responsibilities when engaging in a sales contract using the Incoterms of FOB:

Packaging: Organize all export packaging so that the cargo may be sent safely.
Loading Charges: Any fees incurred during the loading process at the seller's warehouse are referred to as loading charges.
Delivery to Port: The cost of transporting the cargo from the warehouse to the loading port.
Export Duty, Taxes, and Customs Clearance: Assuring that the goods are correctly exported.
Origin Terminal Handling Charges (OTHC): OTHC is the seller's responsibility.
Cargo Loading: The seller is responsible for the charges of loading the cargo into the carriage.

Buyers side:

When a buyer agrees to buy goods under the FOB Incoterms, he or she accepts the following obligations and risks:

Freight Charges: Charges for transporting cargo from the loading port to the final destination.
Insurance: Freight insurance is not required under FOB; instead, it is up to the buyer to decide whether or not to obtain a policy for their shipment.
Handling Fees at the Destination Terminal: DTHC is the responsibility of the customer.
The buyer is responsible for the final carrier price to deliver the load to their destination once the goods have been removed from the carriage.
Unloading at Destination: The buyer is responsible for any costs incurred during the unloading procedure at the buyer's warehouse.
Import Duty, Taxes, and Customs Clearance: All taxes and costs related to customs clearance are the responsibility of the buyer. In the event of dunnage, penalties, or delays, the buyer is responsible for all costs and risks.

Advantages of Using FOB:

Some purchasers mistakenly believe FOB isn't a good fit for them. This is not the case, as it provides various benefits to customers, such as:

Buyer's Control over Freight: The buyer has more control over freight and freight prices, which is one of the most significant advantages. The buyer has complete control over the freight carrier, as well as the route and transit time. If the buyer does not opt for FOB, he will have no control over freight carriers or delivery times. For this reason, most customers prefer FOB over other delivery choices. Since the buyer has no choice except to wait for the goods and pray that nothing goes wrong in route, the producer can choose any freight firm.

Safety of Goods: Because the buyer is accountable for the products, FOB allows him to obtain insurance. He has the option of insuring the goods up to their final destination. Many alternative shipping choices, where the seller is responsible for delivery and insurance, do not allow for this. In most cases, products are only insured up to the target port. Furthermore, the seller is not responsible for damage caused by the port to the buyer's address.

Choice of Freight Forwarders for Buyers: When the buyer has more shipping control, he can hire whatever freight business he wants. Because he is the central contact, the buyer knows the status of the package at all times during transportation. The customer is not in direct contact with the shipping business if the seller arranges for shipping. Furthermore, if the seller chooses to use various delivery firms, it may be difficult for the buyer to acquire up-to-date shipment information.

FOB allows the buyer to choose the freight firm that gives the best shipping and insurance rates for the merchandise. It allows him to have more control over both shipping and the overall cost of the merchandise. However, if the buyer is responsible for the seller's shipping arrangements, it can be rather costly, especially if the seller decides to hire different businesses to handle freight and in-land transportation.

When to use FOB:

For most bulk cargo that will be carried by sea, FOB is a valid agreement. FOB is frequently misunderstood by buyers and sellers, who believe the shipment can be sent by any form of transportation; however, this is not the case. FOB is only practical for marine and inland waterway goods, according to the International Commerce Center (ICC). When shipping by land, buyers and sellers can use FCA as a comparable Incoterm that applies to all modes of transportation.

When using a China Freight Forwarder to organize their shipments, we propose buyers use FOB Incoterms. We recommend this because FOB will provide a low unit cost for the cargo sold while also allowing the seller to assume some responsibility for the freight while it is still within their nation.

While the buyer takes custody of the cargo once it is put onto a truck at the seller's warehouse, the seller retains responsibility for ensuring the consignment safely clears the ship's rails. Buyers can assess the overall expenses of a FOB agreement by adding the seller's FOB price and receiving a logistics quote from their freight forwarding provider.