Ex Works (EXW) vs. Free on Board (FOB): What’s the Difference?

Ex Works (EXW) vs. Free on Board (FOB): An Overview

Ex Works (EXW) and Free on Board (FOB) are international shipping standards known as Incoterms that dictate the responsibilities of buyers and sellers. The Incoterms used determine which parties are required to cover the costs and arrangements related to the shipping of goods.

When Ex Works is used, a seller is not obligated to load its goods onto the buyer’s designated method of transport. Instead, the seller makes the products available at a selected location, and the buyer incurs transportation costs for them.

When using Free on Board, a seller is required to load the goods onto the buyer’s method of transport at the shipping point and may be responsible for them throughout the trip and to the final destination. 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 and the buyer is located in New York. The buyer and seller agree on the products’ prices and sign an Ex Works trade agreement. It spells out that the seller must have the products transport-ready for the buyer to pick up in two weeks. After the pickup, the buyer is responsible for all of the further costs associated with transporting the goods to New York City. If the products get lost along the way, the seller is not liable.

Important

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 designated location in a 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 purchases computers from a seller in Chicago and they sign a FOB trade agreement. The buyer determines that the computers are to be shipped by airplane, and the agreement obligates the seller to pay the transportation expenses associated with getting the computers to the Los Angeles airport. At this point, the responsibilities shift, and the buyer must cover 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.

Important

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. 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 to the buyer as soon as the goods are loaded onboard a ship.

Is Ex Works or Free on Board Better?

Goods shipped EXW will usually be cheaper since a Free on Board agreement means the supplier bears 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. Examples include 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.