Freight Basics - What is Fuel Adjustment Factor (FAF)?
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 in that you can see the cost of fuel price volatility
- Benefiting from lower fuel prices
- If fuel was bundled entirely into your freight rates then carriers would have to factor in a "safety margin" to protect themselves from increasing rates, meaning you will pay more overall
- Freight rates with longer validity
- To account for any dramatic changes in the FAF, freight rates including FAF will have a shorter validity date
With many factors contributing to fuel prices today having an understand of the Fuel Adjustment Factor can help towards saving your business money.