Freight Basics - What is a Fuel Adjustment Factor?
The Fuel Adjustment Factor or FAF is a surcharge added to your freight rates to cover the cost of fuel. You will find that most established freight forwarders will provide the FAF surcharge as an additional cost to your agreed freight rates. This can many advantages to your business.
Working out the FAF surcharge
Fuel is a dynamically priced commodity causing the FAF surcharge to change constantly. A FAF calculation table is commonly used to determine the FAF surcharge. The applicable fuel adjustment is based on the average pump price which is calculated from an independent source. The pump price is based on data collated from fuel purchases made every 24 hours, ensuring the Fuel Adjustment Factor is up to date and correct.
Keeping FAF Separate
The cost of fuel is a major variable cost in transport but you don’t want to be renegotiating your rates every time fuel prices change. There are benefits in keeping your freight rates and the FAF as separate charges:
- Transparency - FAF provides a predictable model for determining the effect of fuel price changes allowing you to prepare for change
- Benefiting from lower fuel prices
- If fuel is bundled in an "all in one" rate then carriers have to factor in a "safety margin" to protect themselves from increasing fuel cost, meaning you will pay more overall
- With a FAF based rates system, you know that when fuel prices drop you'll see that saving
- Freight rates with longer validity
- To account for changes in fuel cost, carriers with "all in one" pricing will have to review your base freight rate more often
- Carriers with FAF can lock in your base rate for longer giving you certainty around your base cost
With many factors contributing to fuel prices today having an understanding of the Fuel Adjustment Factor can help towards saving your business money.