To facilitate smoother international trade, the International Chamber of Commerce developed international commercial terms — incoterms — so everyone involved could clearly understand their risks, costs, and obligations. There are 11 terms in total. Four of these apply if you’re shipping via seas or inland waterways, and the rest apply to all modes of transportation.
Ex Works (EXW) and Free on Board (FOB) are two commonly used incoterms. If you’re trying to decide between Ex Works vs. FOB, this article outlines the similarities and differences so you can make an informed decision.
What Is Ex-Works (EXW)?
EXW places almost all of the responsibility, risk, and cost on the buyer. The seller has to package the goods appropriately for shipping and make them available for the buyer to pick up. The buyer has to pick up the goods, usually at the seller’s warehouse or manufacturing facility, load them, and handle all aspects of transporting them back to their location.
What Is Free on Board (FOB)?
With FOB, the seller has more responsibility, though most of it is still on the buyer. The seller has to pack the goods for shipping, deliver them to the port, and load them onto the boat. Once they’re on the boat, the buyer assumes all risks, obligations, and expenses.
The Key Differences Between FOB vs Ex Works
The differences between Ex Works vs. FOB are outlined below.
Mode Of Transportation
Ex Works can be used for all modes of transportation, while FOB is primarily used for sea freight — although it can also be used for inland waterway shipping.
Responsibility
With Ex Works, almost all the responsibility is on the buyer. The seller’s sole responsibility is to have the goods packed for shipping and make them available for the buyer to pick up.
Under FOB, the seller is responsible for packing the goods, delivering them to the outgoing port, and loading them on the ship.
Cost
Using EXW, the buyer bears all costs from the time they pick up the goods at the seller’s location. With FOB, the seller is responsible for the costs associated with getting the goods to the port and loaded onto the ship.
Shipping Cost
In Ex Works, the buyer is responsible for all shipping costs. With FOB, the seller is responsible for shipping costs to the port, and the buyer is responsible for shipping costs from the port to their location.
Control Over Freight
The buyer has full control over freight under EXW. Using FOB, the buyer has control over freight after the goods are onboard the vessel.
Export and Import Duties
EXW puts the onus of all export and import duties on the buyer. FOB assigns export duties to the seller and import duties to the buyer.
Documentation
Sellers using EXW are only responsible for providing the documentation necessary for pickup, such as invoices. The buyer is responsible for all remaining documentation related to import and export.
FOB places the responsibility for export documentation on the seller and import documentation on the buyer.
Risk Transfer
EXW transfers all risk to the buyer when they pick up the goods. Under FOB, the transfer of risk from seller to buyer occurs once the goods are loaded on the vessel.
Suitability
EXW is most suitable for experienced buyers who want total control over shipping and have established logistical capabilities. FOB is more appropriate for buyers who prefer sellers to handle the initial shipping stages and export processes.
Insurance Coverage
With EXW, the buyer handles insurance at all stages. With FOB, the seller handles insurance to the port, and the buyer handles it from the port to the final destination.
How To Choose the Best incoterm for Your Trade
Whether EXW or FOB is the best option for you will depend on several factors, including:
- Type of Goods: EXW is better suited for nonperishable, low-risk goods. FOB can be a good option for bulk goods that will travel by boat.
- Budget: With EXW, the buyer will have to budget for a larger share of transportation, insurance, and handling costs. Under FOB, the seller will need to budget for delivering the goods to the port and loading them on the vessel.
- Customs Experience: EXW can be the best option for experienced buyers who have resources and procedures for dealing with logistics, customs, and other duty regulations and procedures. Inexperienced buyers may prefer FOB, which only requires you to handle importing responsibilities.
- Bargaining Power: EXW can give buyers bargaining power. Since the seller’s cost is lower, the buyer can ask for a lower cost of goods. The buyer should also be able to negotiate deals throughout the logistics chain to keep overall costs lower. With FOB, the buyer may have to pay more for the goods because the seller is taking on extra costs. However, if the buyer doesn’t have the resources to handle all the logistics in a cost-effective manner, they may still come out ahead with FOB.
Why Your Business Needs a Logistics Expert Like Deringer
Choosing the right incoterm for your trade deal can have a tremendous impact on your overall costs and profitability. Dealing with multiple international regulations requires deep expertise to understand the implications of different incoterms on your bottom line.
Partnering with an expert frees you up to focus on your primary business operations instead of the legal and logistical aspects of importing and exporting products. Our team stays updated on political, environmental, and regulatory changes related to international trade.
We can advise you on the most cost-effective incoterms for your specific situation, so you can optimize your logistics process. Reach out today to talk with one of our experts.
