While construction abbreviations can be confusing, some merchandising terms are frightfully alien.
Too many half-tone, small print disclaimers are listed on the back of contracts with all the conditions you are agreeing to. The average estimator cannot understand much of the language, let alone all the abbreviations and calculations. As with laws, ignorance of some purchasing terms does not excuse an estimator from asking for bids on materials that will ensure timely delivery. Estimates based on having used the cheapest shipper, rather than the most direct, will only lead to hard-to-win claims. Worse, such delays can send a job into the liquidated damage area.
Cash or collect on delivery (C.O.D.) requires the person accepting delivery or picking the item up at another location to pay cash up front. Cash payments are an exception, usually reserved for unknown contractors, odd items purchased at a business outside the contractors’ normal field of suppliers, or a company that has trouble paying its bills. It could just be the vendor’s policy that all sales are C.O.D. If the materials purchased C.O.D. are not met with an acceptable payment, delivery will not take place. Worse is the distinct probability that an added delivery charge will be tacked onto the next attempt.
F.O.B. means “free on board,” although some insist it means “freight on board.” Either way, F.O.B. is misunderstood and can cause problems. F.O.B simply means the seller delivers materials to a shipper. Responsibility for their condition passes to the buyer at that point, making any delay or damage claims the buyer’s headache, unless the transportation company can be nailed. When quotes come in on bid day, it is critical to get a firm quote and understanding of the shipping terms. Naturally, suppliers will opt for F.O.B. because it is unilaterally in their favor.
Much of the “boilerplate” of terms and conditions in small type and on the back of quotations limits the options to F.O.B., but there are others.
F.O.B. POINT. This is yet more specific and is usually what the seller has intended. F.O.B. POINT can be a negotiable item. If the freight terms are a considerable amount compared to material costs, it may be worth accepting the quote in this manner and then make your own arrangements. Arranging freight shipping should not be an estimator’s job, but it is worth investigating. The best example occurred after an earthquake in the Los Angeles area. An engineering contractor, working on a $50,000-per-day penalty or equal bonus, found that his steel had to come from Tennessee. In checking transportation costs and delivery times, he found the time frame to be undesirable. The contractor then leased a train for almost a quarter of a million dollars and cut the delivery time significantly. The bonus not only paid for the train, but also kept his crews working on time while earning more bonus money. Setting up a shipment through a trucker’s agent has worked well also.
F.O.B. Shipping Point. Here, “freight prepaid” means the shipper pays the freight costs. “Freight allowed” means the seller reimburses the buyer for the freight costs. “Freight collect” means the buyer pays the freight charges.
F.O.B. DESTINATION. This is the ideal situation for the electrical contractor and obviously the toughest to negotiate. Here, the seller’s responsibility remains with it and relieves the buyer. From an estimating standpoint, this option is the most desirable but very elusive. With this option the seller is only responsible to deliver to the “curb,” as the saying goes. Shipments showing up at inopportune times (i.e., Friday afternoon) and unloading are still the contractor’s responsibility. Once it’s off the truck, it belongs to the contractor.
All these terms refer to ownership and damage claims. The materials will either remain the shipper’s property or become the buyer’s property.
Most quotes are made as F.O.B., meaning point or factory. Estimators and contractors, though, are not traffic managers, and have no idea of freight costs and routing methods. Prices will often be quoted inclusive of freight costs, but on closer examination this is the same as F.O.B. freight allowed. The contractor is still responsible for the shipment.
“Demurrage” is a charge that a transportation company can levy against a buyer if the transportation equipment is detained beyond a prescribed period. I learned its meaning through a hard experience. A load of fixtures was found on a railroad siding some 30 days after the promised date of arrival. We received a bill for the demurrage, which hit like a bolt of lightning. We didn’t have to pay, but we became extremely cautious about how we shipped our materials. Unfortunately, no matter how well the estimator and purchasing agent are versed in terms and methods, only experience and caution can prevent the obvious horror stories.
DAVID is a professor of electrical technology at Long Beach City College, Calif., a consultant and an expert witness. He can be reached at (562) 597-1877or by e-mail at email@example.com.