FOB shipping point vs FOB destination

What FOB means in US shipping

In the US, FOB comes from the Uniform Commercial Code, the sales law adopted by nearly every state. Section 2-319 gives the two meanings. FOB the place of shipment: the seller must ship the goods and bear the cost and risk of putting them in the carrier's hands. FOB the place of destination: the seller must, at its own cost and risk, get the goods to that place and offer them for delivery there.

Two other sections follow the same line. Ownership (title) passes when and where the goods ship under a shipment contract, and on delivery under a destination contract (UCC 2-401). The risk of loss passes when the goods are handed to the carrier, or when they are offered to the buyer at the destination (UCC 2-509). Federal buying rules use the same split: FAR 47.303-6 makes a supplier selling FOB destination responsible for any loss or damage before the receiver takes the shipment.

FOB and the freight bill: prepaid or collect

The FOB point says who owns the goods on the road. The freight term says who pays the carrier. Freight prepaid means the seller pays. Freight collect means the buyer pays. The two are chosen separately, which is why purchase orders spell out both. These are the six combinations you will see most:

The freight term also goes on the bill of lading, in the box for prepaid, collect or third-party billing. The carrier bills whoever that box names, so make it match the purchase order. Extra services such as a liftgate or a residential delivery usually land on the same freight bill. Check the accessorial charges a delivery will need before you agree who pays freight, or the payer may get a bigger bill than planned.

When the freight arrives damaged

This is where the FOB point matters most. Under federal law (49 U.S.C. 14706), the carrier owes the “person entitled to recover under the receipt or bill of lading”. In practice that is the party who owned the goods in transit: the buyer under FOB shipping point, the seller under FOB destination. Carriers cannot give you less than 9 months to file a claim, or less than 2 years to sue once they deny it.

Whoever owns the claim, the receiver is the one at the dock. Count the pieces and look at every pallet before you sign. Write any shortage or damage on the delivery receipt, because a clean signature is evidence the freight arrived in good order. Under FOB destination the claim is the seller's, so tell the seller about the damage the same day.

Which one should you use?

Buyers who want one landed price and no claim work can ask for FOB destination, freight prepaid. The seller picks the carrier, pays it and handles any damage. The trade-off is that the freight is built into the price and you cannot see it.

Buyers with their own freight rates can use FOB shipping point, freight collect. You book the carrier, control the service level and see the real cost, but you own the goods and the claims from the seller's dock. Before you take on the freight, compare a few carriers with the freight quote builder, and check the class with the freight class calculator so the quote holds.

Sellers who want to keep their own carrier can offer FOB shipping point, freight prepaid and add: they book the carrier at their rates, the buyer owns the goods on the way, and the freight shows up as a line on the invoice. For a typical pallet shipment, see how LTL freight is priced.

FOB in accounting

Accounting follows ownership. Under FOB shipping point, the seller records the sale when the goods ship, and the goods count in the buyer's inventory while they are on the truck. Under FOB destination, both sides wait until delivery. At a month or year end, goods in transit belong on the books of whoever owns them under the FOB terms.

FOB in international shipping is different

Overseas trade uses the Incoterms rules from the International Chamber of Commerce, and their FOB is not the US domestic one. Under Incoterms 2020, FOB is only for sea and inland waterway freight and names a port, as in “FOB Shanghai”. The seller clears the goods for export and loads them on the ship. The risk passes to the buyer once they are on board. For trucks, air or container freight, use one of the Incoterms rules written for any mode, such as FCA (free carrier). On any import or export, write the Incoterms edition next to the term so nobody reads it as the US meaning.