Ex Works (EXW) vs. Free on Board (FOB): An Overview
Ex Works (EXW) and Free on Board (FOB) areboth international trade standards, known as Incoterms, that dictate the responsibilities of buyers and sellers, including which parties are required to cover all costs and arrangements related to the shipping of goods.
If Ex Works is used, the seller is not obligated to load the goods on the buyer's designated method of transport. Instead, the seller must make the product available at a selected location, and the buyer must incur transportation costs.
When using Free on Board, the seller is required to load the goods on the buyer's method of transport at the shipping point and may be responsible for them throughout the trip and to the final destination. Free on Board means the seller retains ownership and responsibility for the goods until they are loaded "on board" a shipping vessel.Once on the ship, all liability transfers to the buyer.
Key Takeaways
- Ex Works and Free on Board are both international shipping terms.
- Incoterms specify the rules and terms used in international and domestic trade contracts.
- Ex Works requires that the seller make the product available at a designated location, and the buyer incurs transport costs.
- Free on Board makes the seller responsible for the goods until they are loaded on a shipping vessel, at which point, all liability transfers to the buyer.
Ex Works
Shipping using the designation Ex Works (EXW) indicates the seller has a responsibility to make sure the buyer can access and pick up the cargo at their place of business. EXW can be chosen for any mode of transportation.
Transportation costs and associated risks are no longer a burden for the seller under the EXW option, which favors the shipper.
For example, say a seller of electronic products is located in San Francisco, CA. The buyer is located in New York, NY. The buyer and seller agree on these products' prices and sign an Ex Works trade agreement. The buyer wants to pick up the products in two weeks, and the seller must have the products ready for transport. However, the buyer is responsible for all of the further costs associated with delivering the goods to New York City. The buyer pays for all the transportation costs; if the products get lost along the way, the seller is not liable.
EXW often results in cheaper goods; however, the supplier's risk is increased as they maintain responsibility for the product for longer.
Free on Board
Unlike EXW, when a buyer and a seller enter a Free on Board (FOB) trade agreement, the seller is obligated to deliver the goods to a destination for transfer to a carrier designated by the buyer. FOB can only be chosen when the goods are delivered by ship.
The location designation in the FOB trade agreement is the point at which ownership is transferred from the seller to the buyer. The responsibility often shifts at this arrival location. The seller is responsible for transporting goods up until this point, but the buyer may or may not be responsible for all transportation arrangements from this point to their location, depending on the terms of the agreement.
For example, suppose a buyer in Los Angeles, CA, wants to purchase computers from a seller in Chicago, IL. The buyer and seller sign a FOB trade agreement. The buyer designates that the computers be shipped by airplane, and the seller is obligated for the transportation expenses associated with transporting the computers to the airport located in Los Angeles. At this point, the responsibilities shift, and the buyer is responsible for all further costs related to transporting the computers to the final destination. The buyer is also liable for any damages that may occur during this phase of the shipping process.
FOB transfers liability from seller to buyer when the shipment reaches the port of origin, not the destination.
Special Considerations
Contracts involving international transportation often contain abbreviated trade terms that describe conditions such as the time and place of delivery, payment, and when the risk of loss shifts from the seller to the buyer. Other items include who pays the costs of freight and insurance considerations. The International Chamber of Commerce (ICC)publishes the standards for the most commonly used delivery contracts.
However, companies that ship goods in the United States must also follow the Uniform Commercial Code(UCC). Because there is more than one set of rules, the parties in a contract must specify which governing laws they use for a shipment.
What Do EXW and FOB Stand for?
EXW stands for Ex Works, an Incoterm whereby the buyer of a shipped product pays for the goods when they are delivered to a specified location. FOB, or Free on Board, instead shifts the responsibility of the goods to the buyer as soon as they are loaded onboard the ship.
Is Ex Works or Free on Board Better?
Goods shipped EXW will usually be cheaper FOB since Free on Board would have the supplier bear the costs of transportation, handling, and customs clearance. EXW terms, however, are often riskier for the seller since they are responsible for the goods until they reach their destination.
What are EXW or FOB Unit Prices?
In shipping, the unit price refers to the cost to ship a good based on a pre-agreed or standardized unit basis. For instance, to ship coal per ton, oil per barrel, or grain per bushel.
The Bottom Line
The International Chamber of Commerce publishes international and domestic standards for the most commonly used delivery contracts. These rules are called Incoterms. ExWorks and Free on Board are two of the rules that define which party is responsible for a shipment and its costs at certain stages of delivery.
