F.O.B. - What it means to you

F.O.B. destination. F.O.B. point of origin. Both are terms that many are familiar with, or at least have come across a time or two. Unfortunately, these important contract terms are often misunderstood, leading to confusion and difficulty.

F.O.B., Free On Board, is a shipping term which indicates the point at which title to goods is transferred. This is important because it determines who has ownership and control of the materials, and when that ownership and control was achieved. With ownership and control comes the ability to determine the means and routing for shipping. Ownership and control also determines who is responsible for the materials should there be a problem during shipping.

There are two F.O.B. points; origin and destination. Each provide certain rights and place certain responsibilities on the parties to a contract. The chart below provides an overview of the F.O.B. points and the rights and obligations of each.

F.O.B. Point of Origin
Purchaser assumes title the moment carrier signs the bill of lading.
Purchaser assumes risk of transportation.
Purchaser is entitled to select carrier and route the shipment.
Purchaser is responsible for filing claims for loss or damage.
Purchaser assumes transportation and related charges by payment or allowance, unless stated otherwise in the F.O.B. clause.
Most common term for seller controlled procurement, i.e., catalog purchases. / F.O.B. Destination
Seller retains title& control of goods until the contract of carriage is completed.
Seller assumes risk of transportation.
Seller selects carrier and is entitled to route shipment.
Seller is responsible for filing claims for loss or damage.
Seller assumes transportation and related charges by payment or allowance, unless stated otherwise in the F.O.B. clause.
Most common term for district controlled procurement, i.e., bids, proposals & quotes.

F.O.B. modifiers indicate the payment terms for shipped goods. While determining responsibility, timing and means for paying shipping costs, F.O.B. modifiers do not affect transfer of title. The most common F.O.B. modifiers, and an explanation for each, follow.

Point of Origin Modifiers

F.O.B. Point of Origin, Freight Collect: Purchaser bears and pays freight charges.

F.O.B. Point of Origin, Freight Prepaid: Seller pays and bears freight charges.

F.O.B. Point of Origin, Freight Prepaid and Charged Back: Seller pays freight charges and invoices purchaser.

Destination Modifiers

F.O.B. Destination, Freight Collect: Purchaser bears and pays freight charges.

F.O.B. Destination, Freight Prepaid: Seller bears and pays freight charges.

F.O.B. Destination, Freight Collect and Allowed: Purchaser pays freight charges and deducts the amount from seller’s invoice.

F.O.B. Destination, Freight Prepaid and Charged Back: Seller pays the freight and charges back the purchaser by adding freight charges to its invoice.

What does it all really mean? If the shipping terms are F.O.B. destination, regardless of the payment modifier, the seller owns the materials until the buyer accepts them at its location. Any mishap or damage incurred during shipping must be resolved by the seller, and the buyer is not obligated to pay for the goods until they are in an acceptable condition. If the shipping terms are F.O.B. point of origin, again regardless of the payment modifier, the buyer has title to the goods as soon as the seller signs the bill of lading at the shipping point. Resolving mishaps or damage incurred during shipping, including filing of freight claims, is the responsibility of the buyer. Assistance from the seller can be requested, but the seller is under no obligation to resolve a freight claim. The buyer is obligated to pay for the goods, even if an acceptable resolution to the freight claim cannot be achieved.

Warranties

Express Warranties

Express warranties are created as follows:

A statement of fact or a promise made by the seller becomes an express warranty of that statement of fact or promise, if it relates to the goods being sold and becomes part of the buyer’s basis for the purchase decision.

If a description of goods becomes part of the basis for the buyer’s purchase decision, an express warranty that the goods will conform to that description is created.

A sample or model that becomes part of the basis for the buyer’s purchase decision creates an express warranty that the delivered goods will conform to the sample or model.

Implied Warranties

Unless expressly excluded or modified, a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Said warranty is known as an implied warranty of merchantability.

Unless expressly excluded or modified, where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is an implied warranty that the goods shall be fit for such purpose. Said warranty is known as an implied warranty of fitness for a particular purpose.

RFP Determinations

Prior to using the competitive sealed proposal method of procurement, R7-2-1041 requires the governing board to determine in writing that competitive sealed bidding is not practicable or not advantageous to the school district.

The USFR Compliance Questionnaire requires auditors to test for compliance with the requirement. The questionnaire’s requirements are listed below.

Determine, with the specific reason(s) in writing that the use of competitive sealed bids was either not practicable or advantageous to the cooperative’s members for specified types of materials or services (R7-2-1041)?

Determine, with the specific reason(s) in writing that the use of competitive sealed bids was either not practicable or advantageous to the cooperative’s members because it was necessary to:

(a)Use a contract other than a fixed-price type

(b)Conduct oral or written discussions with offerors concerning technical and price aspects of their proposals

(c)Afford offerors an opportunity to revise their proposals

(d)Compare the different price, quality, and contractual factors of the proposals submitted

(e)Award a contract in which price was not the determining factor

Maintain documentation that supported the basis for the determinations in (1) and (2) above?





Alternative Project Delivery Methods for Construction Contracting

One Step Selection Process

  • Used for Design-Build, Construction Manager at Risk and Job-Order-Contracting.
  • Prepare and issue a Request for Qualifications.

Do not request fees, price, man hours or any other cost information.

  • Evaluate Statements of Qualifications with a selection committee.

Committee may include up to seven members.

Committee must include a senior member of management of a licensed contractor & a licensed architect or engineer.

Evaluation is based upon the criteria in the solicitation.

  • Discussions can be conducted, if noted in the solicitation.
  • Shortlist and rank the firms (top three firms on the shortlist).
  • Negotiate a contract with the top ranked firm.

Negotiation includes the firm fee or cost for the project.

  • If unsuccessful, negotiate with remaining shortlist vendors in rank order, until a contract is awarded or the solicitation is cancelled.

Two Step Selection Process

  • Follow one step process through the shortlist.
  • Prepare and issue a Request for Proposals.

The vendor’s response will include both technical and price proposals.

Price proposal is submitted in a separate sealed envelope.

  • Evaluate the proposals with a selection committee.

Make-up of the committee is the same as one step selection.

  • Technical proposals are evaluated first.

Revision is permitted after discussion.

Technical proposals are scored and ranked.

Shortlist the top three vendors.

  • Open and score price proposals.
  • Award to the responsive and responsible offeror with the highest total score.

Considerations

  • Successful use of alternative project delivery methods requires a culture of cooperation.
  • Alternative project delivery is not the cure-all for all construction projects.
  • Alternative project delivery requires a commitment to project management to be successful.
  • Successful use of CM@R requires good contract development to avoid loopholes that increase cost.
  • The legislation for alternative project delivery methods procurement has very specific requirements.
  • JOC has a $1M limit for any single job order (project). The law indicates that job orders shall not be divided to avoid the single job order limit.
  • Schools using alternative project delivery methods must file a report with the Secretary of State on or before January 15 of each year. The report shall include the number of projects completed in the preceding calendar year, cost and description of each project, and estimate of any cost savings or other benefits realized through the use of alternative project delivery methods.
  • The maximum term for a JOC contract is five years.

USFR Compliance Questionnaire

Expenditures
YES/NO / COMMENTS
15.If the District used construction-manager-at-risk, design-build, or job-order-contracting to procure construction services, did the District comply with the requirements of Title 41, Chapter 23 (until ASBE adopts rules for these procurements, after which the District should comply with those rules)?
c.If the District used a qualified select bidders list to procure construction services, did the District receive approval from the School Facilities Board (until ASBE adopts rules for these procurements, after which the District should comply with those rules)?
d.If the District procured goods and information services using electronic, on-line bidding, did the District comply with the requirements of Title 41, Chapter 23, Article 13 and the rules adopted by the Department of Administration in implementing that article (until ASBE adopts rules for these procurements, after which the District should comply with those rules)?
e.For purchases made through the Simplified School Construction Procurement Program (R7-2-1033), did the District:
1)Ensure that construction costs did not exceed the maximum amount specified in A.R.S. §15-213(A)(2)?
2)Submit solicitations to bid and all other information related to the project to all vendors included in a list maintained by the CSS?
3)Open the bids at a public opening?
4)Keep the bids confidential until the public opening?
5)Encourage competition to the maximum extent possible?
Complete question 9 if the District acted as the lead District (i.e., obtained bids/proposals) in a purchasing cooperative.
9.Based upon review of at least two purchases in question 8 for which the District was the lead District in a procurement for a group of districts, did the lead District follow the procurement procedures required for competitive sealed bidding and competitive sealed proposals and take into consideration the estimated volume of purchases for other districts in the group? If at least two lead District purchases were not selected in
question 8, select additional purchases to obtain two and test accordingly.
10.Did the District refrain from purchasing goods or services using another district’s or cooperative’s contract in which it was not a part of the original invitation/request where the additional purchase by the District would have materially increased the estimated volume stated in the original invitation/request?
11.Based upon review of (_____) purchases costing at least $5,000 but less than $15,000, did the District obtain and document oral price quotations from at least 3 vendors and follow the guidelines governing competitive purchasing below the dollar limits for sealed bids prescribed by the USFR?
12.Based upon review of (_____) purchases costing at least $15,000 but less than the amount requiring sealed bids, as calculated by ASBE in accordance with A.R.S. §15-213, did the District obtain written price quotations from at least 3 vendors and follow the guidelines governing competitive purchasing below the dollar limits for sealed bids prescribed by the USFR?
13.Based on the test work performed in questions 8, 11, and 12, did the District analyze the known requirements for an item or a collection of items that, in the aggregate, would result in the purchase of the item or items from one vendor through the use of oral quotes, written quotes, or formal competitive bids/proposals?
14.Based upon review of all emergency and sole source procurements:
  1. Did the District maintain a written statement for each emergency procurement documenting the basis for the emergency, the selection of the particular contractor, and why the price paid was reasonable, and was such statement signed by the individual authorized to initiate emergency procurements? R721057

  1. Did the District retain written documentation of the Governing Board’s determination that there was only one source for required materials, service, or construction items purchased through sole source procurement? R7-2-1053

15.Were purchases under current General Services Administration (GSA) contracts authorized by the Governing Board?
16.Did the Governing Board determine in writing that all of the criteria listed in A.R.S. §15-213(J) applied to a GSA contract before authorizing purchases under the contract?
17.Did the District perform due diligence related to purchases it made through a cooperative during the audit period to help ensure that those purchases were in compliance with the School District Procurement Rules?

What Should You Do?

The boss comes in with a requisition. It’s for $20,000. No quotes are attached. You ask the boss for quotes, and he responds, “I don’t have time to get quotes. Besides, no one else can do this."

What are the problems with this purchase?

What are your options?

What Should You Do?

You’re signing requisitions for Smith Elementary School. You notice that there have been a number of requisitions for P.E. equipment from Widget Industries. The requisitions are for various amounts of money between $100 and $2,500, and you think there have been quite a few over the last 2 months.

Do you have anything to be concerned about?

What should you do?

1/14/04

JTP