Incoterms, short for International Commercial Terms, are a set of rules established by the International Chamber of Commerce (ICC) to define the responsibilities of buyers and sellers in international trade. These rules cover aspects such as shipping, insurance, and taxes.
This article focuses on two closely related Incoterms: FCA (Free Carrier) and FOB (Free On Board). While they are similar, they have important differences that are crucial to understand for ensuring smooth transactions and effectively managing risks. You’ll learn the meaning of each term, their advantages, and when to use them, helping you make informed decisions and avoid potential issues in international trade.
What is the FCA Term in Incoterms ?
Definition of FCA (Free Carrier)
FCA, which stands for ‘Free Carrier,’ is an Incoterm where the seller is responsible for delivering the goods to a specified location agreed upon by both the buyer and seller. Once the goods are delivered to this location, the responsibility and risk transfer from the seller to the buyer. The seller is responsible for covering all costs and risks up to this point, including export packaging and customs clearance.
When to Use FCA Incoterms
FCA is a versatile Incoterm suitable for various modes of transport, including air, sea, and land. It is particularly useful for containerized shipments where the buyer wishes to oversee the loading process, especially when consolidating multiple goods into a single container. Additionally, FCA offers flexibility in selecting the delivery point, whether it’s a warehouse, port, or the seller’s premises.
Advantages of FCA for the Seller and Buyer
For the Seller:
- The seller is responsible until the goods are delivered to the agreed location.
- The seller manages export formalities and documentation, ensuring compliance with local regulations.
For the Buyer:
- The buyer can choose cost-effective and reliable shipping options, managing transportation from the agreed point.
- The buyer gains control over the loading process, allowing for the consolidation of orders if needed.
- The buyer handles major logistics after the goods are loaded, reducing dependence on the seller.
What is the FOB Term in Incoterms?
Definition of FOB (Free on Board)
FOB, which stands for ‘Free on Board,’ is an Incoterm that specifies when the buyer takes ownership and assumes the risk for goods during transport. Under FOB, the seller is responsible for covering the costs and managing the logistics until the goods are loaded onto the shipping vessel at the port of shipment. This includes tasks such as export packaging, documentation, and customs clearance. Once the goods are on board the vessel, the buyer assumes all further costs and risks associated with the shipment
When to Use FOB Incoterms
FOB is ideal for sea or inland waterway transport, particularly when the buyer wants control over shipping from the port of origin. It works best when the seller can manage all export formalities and costs up to the point of loading the goods onto the vessel, and when the buyer has the competence to arrange the onward transport and handle the necessary import clearance.
Advantages of FOB for the Seller and Buyer
For the Seller:
- Responsibility ends once the goods are loaded onto the vessel, providing clear risk transfer.
- The seller manages the export process, ensuring compliance with regulations.
For the Buyer:
- The buyer gains control once the goods are on board, allowing choice of carriers and routes.
- FOB offers flexibility in managing the main shipping leg, leading to potential cost savings and better logistical arrangements.
Main Differences Between FOB and FCA
| Aspect | FCA (Free Carrier) | FOB (Free on Board) |
|---|---|---|
| Delivery Point | Named place (warehouse, port, etc.) | Port of origin (loaded onto vessel) |
| Seller’s Responsibility Ends | Upon delivery to named place | Upon loading cargo onto the vessel |
| Buyer’s Responsibility Begins | Upon delivery to named place | Upon loading cargo onto the vessel |
| Risk Transfer Timing | At delivery to named place | At loading onto the vessel |
| Suitable for Transport Modes | Air, sea, land, multimodal | Sea and inland waterway |
| Seller Handles | Export packaging, documentation, customs clearance | Export packaging, documentation, customs clearance |
| Buyer Handles | Transportation, import duties, customs clearance | Sea freight, insurance, further transportation |
Responsibilities of the Seller and Buyer
In an FCA agreement, the seller is responsible for delivering the goods to a specified location, handling tasks such as export packaging, documentation, and customs clearance. The seller’s responsibility ends once the goods reach the agreed-upon place. From that point, the buyer takes over, managing all subsequent transportation, risks, and costs, including import duties and customs clearance at the destination.
In contrast, with FOB (Free on Board), the seller’s responsibilities extend until the goods are loaded onto the shipping vessel at the port of origin. The seller covers all costs up to this point, including export packaging, documentation, and customs clearance. Once the goods are on board, the buyer assumes full responsibility, including sea freight, insurance, and any additional costs required to transport the shipment to the final destination.
Named Place vs Port of Origin
Under FCA, the seller delivers the goods to a named place. This flexibility allows FCA to suit different logistical needs.
In contrast, FOB requires the seller to deliver the goods to the port of origin and load them onto the shipping vessel.
Risk Transfer Timing
The timing of risk transfer is a key difference between FCA and FOB. For FCA, risk transfers from the seller to the buyer once the goods are delivered to the named place and unloaded, ensuring the buyer assumes risk only after taking possession.
For FOB, risk transfers from the seller to the buyer once the goods are loaded onto the shipping vessel at the port of origin. This means the buyer assumes risk as soon as the goods are on board, even before leaving the port.
Based on Mode of Transport
The mode of transport is key in choosing between FCA and FOB. FCA suits all transport types, including air, sea, land, and multimodal.
FOB is specific to sea and inland waterway transport. It is best when goods are shipped by sea, and the buyer takes control at the port of origin. If the shipment doesn’t involve sea transport, FCA is the better choice.
How FCA and FOB Shipping Terms Affect Shipping Logistics
Role of Freight Forwarders
Freight forwarders are essential for managing both FCA and FOB shipments. Under FCA, they coordinate transport from the named place to the final destination, ensuring efficient pickup, transport, and delivery. For FOB, they arrange shipment once the goods are on board the vessel, handling sea freight arrangements, scheduling, route planning, and any transshipments.
Documentation and Compliance Requirements
The major difference in documentation between FCA and FOB is that under FOB, the seller is responsible for obtaining the Bill of Lading after the goods are loaded onto the vessel, whereas in FCA, the seller’s responsibility ends once the goods are delivered to the agreed location, and the buyer then handles all subsequent documentation, including import clearance. The Bill of Lading is specific to FOB and marks the transfer of responsibility and risk once the goods are on board the vessel.
Impact of FCA and FOB on Landed Costs
The landed cost of goods includes all expenses to bring products to the buyer’s location and is directly influenced by the chosen Incoterm. Under FCA, the buyer covers costs from the named place to the final destination, including transport, customs duties, and import taxes, potentially allowing for cost savings through better negotiation or logistics optimization. In contrast, FOB includes costs up to loading the goods onto the vessel, with the buyer then responsible for sea freight, insurance, and further transport.
FCA vs. FOB in Different Sectors
Manufacturing
FCA is preferred in manufacturing for its flexibility. Manufacturers deliver goods to a named place, letting buyers handle further transport. This is useful for multimodal transport involving road, rail, and sea. FOB suits large-scale shipments where manufacturers can load goods onto vessels, ideal for bulk items and heavy machinery.
Retail
Retailers benefit from FCA by controlling the shipping process. They can choose reliable carriers to transport goods from the named place, reducing costs and managing logistics. FOB is less common in retail due to its focus on sea transport but is useful for large imports where the seller handles loading at the port of origin.
Technology
In the tech sector, FCA is good for high-value items. It lets buyers manage transport and ensure careful handling from the named place, crucial for sensitive electronics. FOB can be used for bulk shipments of components but needs careful coordination to ensure safe loading onto the vessel.
Agriculture
FCA is often used in agriculture for exporting grains, fruits, and vegetables. It lets exporters deliver to a named place, like a processing facility or port terminal, which is important for perishable goods needing special handling. FOB suits bulk exports like grains or livestock, where sellers manage logistics up to loading the vessel.
Construction
FCA is useful in construction for shipping materials and equipment. Buyers can arrange transport from the named place, ensuring timely delivery to sites. This helps coordinate large shipments. FOB suits heavy machinery and bulk materials, with sellers handling export logistics and loading goods onto vessels.
