In FOB shipping, the buyer bears all expenses and responsibilities. The buyer decides which port and ship will transport and deliver the goods. On the contrary, the seller bears all the costs in the case of DDP shipping. Let’s learn more about FOB vs DDP.
What is Delivered Duty Paid (DDP)
We widely use Delivered Duty Paid (DDP) shipping in international trade. The International Chamber of Commerce (ICC) published this incoterm as a part of its International Commercial Terms. It defines a deal in which the seller bears all costs until the buyer receives the goods.
They bear the following costs:
- The expense of all transportation
- Any sort of loss owing to damage during transportation.
- Payment of import tariffs, customs duty, and other related charges
The buyer is only responsible for unloading the goods and delivering them from the port to the warehouse (if the buyer’s port is the mutually agreed destination). In certain cases, the agreement is such that the seller has to pay for shipment from the port to the buyer’s destination.
The seller bears most of the risks, so all the related expenses are part of the selling price. Thus, the buyer usually pays a higher cost for the goods.
Understanding Delivered Duty Paid (DDP)
We can understand DDP best through an example. For instance, a buyer in London agrees with a DDP deal with a seller from China to buy freight. The seller from China needs to pay for goods transportation from their warehouse to the China port and the port in London. The seller has to bear the expense in case the goods get damaged during transportation.
After the goods reach the port in London, the buyer only has to pay for the unloading of the freight. The seller has to pay the cost of import tariffs, customs duty, and other local taxes. If the DDP contract declares the terminal endpoint as the port in London, the seller doesn’t have to pay for the additional freight. But, if the terminal endpoint is essentially the buyer’s warehouse, the seller must pay for it.
- Arranging for transportation via a carrier
- Bearing the cost of the carrier and procuring customs clearance in the buyer’s country
- Obtaining correct approvals from the authorities in the buyer’s country
- Acquiring a license for import
- Delivering the goods, formulating a sales contract and relevant documents, packaging for export, and preparing for export clearance
- Fulfilling all export, import, and customs requirements
- Paying all the transportation expenses, including the delivery to the destination agreed in the contract
- Arranging proof of delivery and paying all the inspection-related costs
- Informing the buyer after the goods will reach the destination agreed in the contract
- Bearing the costs in case the goods are lost or damaged during transportation
The shipper can’t always clear the goods via customs in foreign countries. The DDP shipments’ customs requirements are unique in each country. But in certain countries, import clearance is complex and long-lasting. Managing customs is more straightforward if the buyer, who is well-versed with the relevant knowledge, supervises the process.
If a DDP shipment doesn’t clear customs, the customs may overlook the DDP shipping rules, and thus, delay the delivery. Managing customs depend on the customs’ decision and the cost of the delivery method the seller uses.
Before carrying out the FOB vs DDP comparison, you must know the DDP shipping’s special consideration as mentioned below.
- Merchants use DDP shipping when the supply cost is easy to forecast and comparatively stable.
- The seller bears the most risk. Hence, primarily advanced suppliers use DDP.
- Certain experts assume that U.S. importers and exporters must not use DDP.
- The buyer is entitled to receive a VAT refund.
- Exporters may need to pay the unforeseen storage and compensation owing to the delays caused by agencies, carriers, or customs.
- If the merchants handle DDP inefficiently, customs will likely inspect the inbound shipments. This results in delays.
- Late deliveries may occur because a seller might use low-cost, less reliable transportation services to decrease their expenses.
What does DDP mean for an exporter?
DDP indicates that the exporter (seller) bears all the risk and transportation expenses. It also implies that the seller should clear the goods for export at the shipping harbor and for import at the destination. Furthermore, the seller should pay import and export duties for the goods transported under the DDP shipping method.
What is FOB Shipping?
FOB shipping indicates who (buyer or seller) is responsible for compensation when goods are destroyed or damaged during shipping. “FOB origin” or “FOB shipping point” implies that the buyer is at risk after the seller ships the goods. The buyer pays the shipping cost and is accountable for extra expenses if the goods get impaired during transportation. “FOB destination” means the seller is responsible to compensate for loss until the goods reach the buyer.
FOB shipping influences the buyer’s inventory cost. The responsibility for the goods raises the inventory costs and decreases net income. Note that the legal definitions of FOB shipping may vary in certain countries.
FOB definition and meaning
FOB entails relevant costs, obligations, and risks about the goods transaction under the International Chamber Of Commerce issued by the incoterms standard.
FOB not just demonstrates the shipment from the seller to the buyer but also mentions that a seller is responsible for the goods until they load on the ship. After its unloaded, the buyer is solely responsible for all risks related to the goods.
FOB shipping terms | Buyer and seller responsibilities
FOB Shipping Terms for Seller
- Delivering the goods, invoice, and other related documentation
- Delivering the goods to the port of shipment
- Fulfilling export regulations (licences, packaging, expenses)
- Packing the goods on the vehicle pre-arranged by the buyer
FOB Shipping Terms for Buyer
- Paying for the goods as contracted
- Paying the sea freight from the port of shipment to the port of destination
- Paying for insurance for the sea transport (not obligatory with the FOB trade term)
- Unpacking the bulk freight at the port of destination
- Import taxes and duties
- Transporting the goods from the FOB destination port to the warehouse or another endpoint
- Unloading at the final endpoint
FOB shipping | Supplier’s responsibilities
After purchasing goods per the FOB Shipping terms, the supplier’s responsibilities go beyond transporting the goods at the loading port.
The supplier has to cover the following costs:
- Document fees
They include the costs to generate all the shipping documents for the goods.
- Terminal Handling Charge
It involves the expense of loading the goods at the port. If you do not pay the Terminal Handling Charge, they’ll not accept your goods into a container. Cranes lift the vessels once the goods are in the container.
- Entry Summary Declaration (ENS)
The supplier has to pay ENS when declaring the goods to the merchant fleet.
- Customs clearance
You can consider Custom clearance when customs clear the goods in the goods’ country of origin. A customs clearance agent bills for services and expenses from the local customs (if any).
- Licence fee
The seller must own specific licences to export products. If not, they will pay a fee whenever they export goods.
- Telex release
It involves the cost of an electronic message sent from the port of loading (POL) to the agent at the port of discharge (POD).
- Transport cost
It is the cost to load your goods to the agreed outbound port.
The Costs Of FOB Shipping Terms
You need to pay the following costs for your shipment:
Your supplier’s invoice
The supplier is liable for shipping under the FOB shipping terms. Therefore, they have to pay the goods’ local shipping fees. Your invoice includes this fee. Usually, it is not expensive and will suit your budget.
Sea (or possibly air) freight
Whether you choose to ship freight through sea or air, under the FOB terms, you have to pay for goods transportation from the country of origin to the destination country.
Port handling at the destination
After the goods arrive at the buyer’s port, the buyer is liable for paying all the costs incurred for goods’ transportation in the destination country. They would have to pay for various charges ranging from unloading the container from the ship to the goods’ delivery at the specified destination.
Delivery to the final location
It is the cost incurred for transporting goods from the destination port to the final destination. This cost may be higher if you demand quick delivery.
- Customs Clearance Cost
When importing goods, the buyer must be familiar with the customs procedures. They need to pay the taxes and customs duties of their destination country. The customs clearance cost may be a hefty amount. So, it is important to carefully understand how these payments work before importing goods.
What is the Difference Between DDP And FOB?
The DDP vs FOB is primarily based on who pays for the delivery and related costs. In DDP shipping, the seller pays these costs; in FOB shipping, the buyer pays these costs.
FOB To DDP Benefits
The importer can regulate the shipping process from the moment the vessel abandons the port in the seller’s country. They need not concern about the logistics of bringing the goods from the seller’s depository to the port. This can be difficult if the importer is unfamiliar with the seller’s country.
FOB proves to be cost-effective for the seller too. The seller is no longer responsible after they sell the goods. After the goods leave the warehouse, the seller can label the sale as “Complete”. Subsequently, they need not worry about extra costs.
On the other hand, DDP shipping can pose several challenges to sellers due to certain countries’ complex and bureaucratic import clearance processes. Moreover, when using DDP shipping, the buyer must possess the local knowledge to manage some parts of the deal.
- Less burden on the buyer
The seller pays for transportation costs until the goods reach the destination port. The buyers are not responsible for managing the process of local logistics. They don’t face any issues due to the rules of the origin country. They own more flexibility in terms of freight planning and cost. This is because they can choose their freight forwarder. Hence, FOB shipping benefits the buyer in terms of lower cost and less hassle.
DDP shipping gives very little control and flexibility to the buyer.