Free on Board: An Introduction
When it comes to a trade agreement, signing on the dotted line to get your products at a specified price and within a specified period is only a part of the challenge. The manufacturer can make arrangements regarding raw materials, labour and other sources of capital in order to manufacture the finished good. But that’s not the end of the issues that would be featured in a trading agreement. Free on board or FOB is a type of business agreement clause designed to answer key questions regarding shipping of finished products.
A common point of contention is – who would be responsible for getting the finished goods shipped to the destination or in other words, who pays the shipping charges. This is because transport of goods features potential problems ranging from delays and pilferage to spoilage and more. These problems have the potential of causing quite a dent in the profitability of the deal, hence the need to get the consignment insured arises. The cost of such insurance would definitely not be cheap and that’s the reason why the FOB concept takes this into account and helps clarify the responsibilities of the trading parties i.e. buyer and seller.