On a purchase order, FOB (Free on Board) names the physical location where responsibility for the goods passes from the seller to the buyer. That one notation decides who owns the shipment in transit, who absorbs the loss if a pallet is destroyed on the highway, who pays the carrier, and whose books the inventory sits on at month-end. Everything else about the shipping clause flows from it.
FOB Shipping Point vs. FOB Destination
Every FOB term reduces to a location. That location is where the seller’s job ends and the buyer’s exposure starts.
FOB Shipping Point (also called FOB Origin) means the seller’s obligations end the moment the goods are handed to the carrier at the seller’s facility. Once the truck leaves the loading dock, the buyer owns the goods and carries the risk. If a crate falls off that truck in Kansas, it is the buyer’s problem to sort out.
FOB Destination works the opposite way. The seller stays responsible through the entire journey. Ownership and risk do not transfer until the shipment physically arrives at the buyer’s specified location. The same crate falling off the same truck is now the seller’s loss and the seller’s replacement to arrange.
The practical bias is clear. FOB Shipping Point favors sellers because their exposure ends early. FOB Destination favors buyers because they take on nothing until goods are on their dock. Which term ends up in the purchase order usually comes down to negotiating leverage and how much each side trusts the carrier.
Who Pays the Freight Is a Separate Question
The FOB term tells you who bears the risk. A separate freight notation tells you who actually pays the shipping bill. These are independent choices, and treating them as one is one of the most common purchase order mistakes.
- FOB Origin, Freight Prepaid: The buyer owns the goods from the moment they ship, but the seller pays the carrier up front. The seller handles logistics as a courtesy; the buyer still carries the transit risk.
- FOB Origin, Freight Collect: The buyer owns the goods from shipment and pays the carrier directly. Both risk and cost sit with the buyer.
- FOB Destination, Freight Prepaid: The seller owns the goods during transit and pays the shipping charges. The buyer has no exposure until delivery.
- FOB Destination, Freight Collect: The seller keeps the risk during transit, but the buyer pays the carrier on arrival.
Two further arrangements appear in longer-term supply contracts. “Prepaid and Add” means the seller pays the carrier at dispatch and adds the freight charge to the buyer’s invoice for reimbursement. “Collect and Allowed” means the buyer pays the carrier and then deducts that amount from what they owe the seller. Both shift the cash flow of freight without changing who bears the underlying risk.
Insurance generally follows risk of loss. Whichever party owns the goods in transit has the financial reason to insure them. The purchase order should specify who arranges coverage so no shipment travels with a gap where each side assumed the other was handling it.
What the UCC Says When the Purchase Order Is Silent
Domestic commercial shipments in the United States fall under Article 2 of the Uniform Commercial Code, which every state has adopted in some form. UCC Section 2-319 treats FOB as a delivery term tied to a named place: when the purchase order says FOB at the place of shipment, the seller bears the expense and risk of getting the goods into the carrier’s possession; when it says FOB at the place of destination, the seller bears that expense and risk all the way to delivery.1Legal Information Institute. UCC 2-319 – F.O.B. and F.A.S. Terms
Section 2-509 fills in when risk of loss actually shifts. For a shipment contract (FOB Shipping Point), risk passes to the buyer when the goods are delivered to the carrier. For a destination contract (FOB Destination), risk passes only when the carrier tenders the goods at the destination in a way that lets the buyer take delivery.2Legal Information Institute. UCC 2-509 – Risk of Loss in the Absence of Breach The parties can override these defaults by agreement, but if the purchase order is silent, the UCC fills the gaps.
What the FOB Section of a Purchase Order Should Say
A well-drafted FOB clause removes ambiguity before it causes a dispute. At minimum, the purchase order should state:
- FOB type. “FOB Origin” or “FOB Destination,” spelled out rather than abbreviated.
- Specific location. A named facility, city, or street address where the transfer occurs. “FOB Seller’s Warehouse, 1500 Industrial Blvd, Dallas, TX” is far better than “FOB Origin.” When a shipment passes through multiple distribution centers, a vague location invites arguments about where risk actually transferred.
- Freight payment terms. “Freight Prepaid,” “Freight Collect,” “Prepaid and Add,” or “Collect and Allowed.”
- Carrier information. The preferred carrier and the account number to be charged.
- Insurance responsibility. Which party arranges and pays for cargo insurance during transit.
- Governing law. Whether UCC Article 2 or Incoterms 2020 applies, which matters most for shipments that might cross a border.
Matching these details to any existing master service agreement between the parties prevents the kind of administrative confusion that stalls receiving and payment. When the purchase order contradicts the master agreement, the more specific document usually controls, but that is a dispute neither side wants to have.
Filing Claims for Damaged or Lost Freight
When goods arrive damaged or never arrive at all, the party bearing the risk of loss files the claim. Under FOB Shipping Point, that is the buyer. Under FOB Destination, that is the seller. Knowing which side you are on before a problem happens saves real time, because federal law sets strict deadlines.
The Carmack Amendment, codified at 49 U.S.C. ยง 14706, makes motor carriers and freight forwarders liable for actual loss or injury to property they transport. A carrier cannot contractually shorten the claim-filing window to less than nine months from delivery, or from expected delivery if the goods never arrived. After a claim is denied, the claimant has at least two years to file suit.3Office of the Law Revision Counsel. 49 USC 14706 – Liability of Carriers Under Receipts and Bills of Lading
A few practical habits make these claims much easier to win. Inspect shipments on arrival and note any visible damage on the delivery receipt before signing. For concealed damage discovered after unpacking, industry practice calls for notifying the carrier within five business days. Photograph everything and keep copies of the bill of lading and the purchase order. A carrier’s offer to settle does not count as a formal denial unless the carrier states in writing that part of the claim is disallowed and explains why.3Office of the Law Revision Counsel. 49 USC 14706 – Liability of Carriers Under Receipts and Bills of Lading
Inventory and Accounting Consequences
FOB terms do not stop at logistics. They decide which company lists goods in transit on its balance sheet, which affects financial reporting, tax calculations, and period-end inventory counts.
Under FOB Shipping Point, the buyer records the inventory as soon as the carrier picks it up, even though the goods are still on the road. The purchase shows on the buyer’s books while the shipment is somewhere between Texas and Ohio. Under FOB Destination, the seller keeps those goods on its inventory records until delivery is confirmed. The seller does not remove the items until the shipment reaches the destination.
This matters at quarter-end and year-end. A company that ignores FOB terms when counting inventory can overstate or understate assets. Auditors pay close attention to goods in transit precisely because the correct treatment depends entirely on which three-word term appears on the purchase order. For a high-value shipment that crosses a reporting deadline, getting this wrong misstates results.
A Note on International Shipments
FOB does not mean the same thing in every legal framework, and the gap matters for anyone whose purchase orders ever cross a border.
Under the UCC, FOB works for any mode of transport. A domestic purchase order can say “FOB Dallas” for a truckload and the term functions exactly as intended, whether the goods move by truck, rail, or vessel.1Legal Information Institute. UCC 2-319 – F.O.B. and F.A.S. Terms Under Incoterms 2020, published by the International Chamber of Commerce, FOB is restricted to sea and inland waterway transport. It is one of only four Incoterms limited to water-based shipping.4International Trade Administration. Know Your Incoterms Using “FOB” on an international air freight or trucking contract governed by Incoterms creates ambiguity about which rules actually apply, and in international trade ambiguity turns into unexpected liability.
Because of that split, any purchase order involving cross-border shipments should state whether UCC or Incoterms 2020 governs.5International Chamber of Commerce. Incoterms Rules A domestic purchase order between two U.S. companies does not need the clarification, since the UCC applies by default, but adding “per UCC Article 2” costs nothing and removes doubt.
Common FOB Mistakes
- FOB with no location. Writing “FOB” on a purchase order without naming a city or facility is nearly meaningless. The whole point of the term is to identify a geographic transfer point.
- Treating freight payment as risk. The party paying for shipping is not automatically the party bearing the risk. A seller can prepay freight on an FOB Origin order while the buyer carries all the transit risk. State the two separately.
- Skipping the FOB check before insuring. When neither party looks at the FOB designation before arranging cargo insurance, shipments sometimes travel with double coverage or none at all. The risk-bearing party should confirm coverage is in place.
- Carrying FOB into international air shipments. Companies that ship both domestically and internationally sometimes copy FOB terminology onto international air shipments where it does not apply under Incoterms. The gap only surfaces when something goes wrong.
The FOB clause occupies a small space on the purchase order form, but it answers every question that matters when a shipment goes sideways: who owns it, who is out the money, who files the claim, and whose books record the loss. Getting those few characters right at the start saves meaningful cost and argument later.