How to Manage Fuel Adjustment Factor (FAF) in an Unstable Market

By Roy Moody, CEO of vWork

Average fuel prices in Australia hit record highs in October 2023 at $2.11 per litre, while data from the Australian Institute of Petroleum shows prices have remained volatile for the past two years. Fluctuations in fuel prices can have a substantial impact on the operating costs of transportation companies which is why so many include a Fuel Adjustment Factor (FAF) in their pricing structure – typically calculated as a percentage of the base rate for shipping which varies depending on fuel costs and other factors.

In a market that’s increasingly becoming difficult to keep pace, managing FAF in a way that ensures fuel surcharges are fair for the customer while protecting the bottom line can be a real headache for businesses in the transport space. Here are some tips and techniques that will help make your FAF calculations and processes more accurate and less painful.  

Determine the Frequency of Updates

According to historical year-on-year data, the rise and fall of fuel prices have become increasingly drastic. Taking a ‘set and forget’ approach to FAF is risky in a volatile market. While there is a possibility the business will absorb sudden increases in transportation costs due to jumps in fuel prices, customers will quickly become disgruntled and lose trust if surcharges remain high despite price falls.

To ensure your company or customers don’t lose out, it’s important to keep a close eye on market trends to decide how often it will be necessary to reevaluate and potentially update your FAF rate.

Consider Regional Variations

If operations are spread over a large geographical area, there may be regional variations in fuel price trends to justify setting a different FAF for each area. Importantly, compared to applying one nationalised rate, responding to regional economic conditions and other diverse factors when calculating an individual FAF for operational areas can result in more competitive pricing for customers, who may be considering localised transport providers as alternatives. 

While fuel prices can vary significantly from one region to another, other localised factors to consider include the costs of transporting goods across challenging terrains as well as the quality of infrastructure – both of which can impact fuel consumption. Meanwhile, regardless of the hard costs associated with fuel prices and consumption, ensure you evaluate every regional FAF calculation in the context of local market expectations to remain competitive.    

Be Transparent About Changes

Naturally, customers are unlikely to question any reductions in fuel surcharges, but when it comes to raising FAF, it’s best practice to communicate with customers about how the new FAF rate has been calculated. To maintain loyalty and build trust with your customer base, be transparent about how trends in fuel prices have impacted the calculation as well as any other ‘less obvious’ factors that may have been taken into consideration, such as those associated with specific geographical areas or transportation routes.    

Take a Proactive Approach

Waiting for fuel prices to increase before starting the process of adjusting FAF is almost certain to leave your business out of pocket for a period of time. Plus, the bigger the operation, the higher the price will be for any delay. Conversely, if fuel prices drop, customers will expect to see this reflected in your surcharges very quickly.

Continuous monitoring of market conditions, forecasts, and any influential factors affecting fuel prices will ensure the business stays on the front foot, ready to implement an adjusted FAF when the time is right. Effective ways to proactively monitor the market might include using logistics management technologies that integrate with fuel price databases and provide real-time updates, evaluating the activities and rates of competing transport providers, and developing and continually refining internal forecasting models.       

Utilise Automation to Improve Accuracy and Minimise Risk

Some transport operators have many potential FAF variables to consider across their network – from geographical location and route to the vehicle type and final journey length. Manually calculating and adding the right FAF to every customer invoice can be hard work, time-consuming, and fraught with risk, requiring impeccable record keeping.

A dispatch solution that integrates with invoicing software can solve these problems by automatically adding the correct pre-programmed FAF surcharge for each journey. For example, different FAF rate percentages can be set across multiple transport line items which feed through to customer invoices once jobs are recorded as completed by the dispatch software.   

Automating FAF can benefit transport companies in several ways. When employees spend less time crunching numbers and completing documentation, they have more time to redirect to other strategic or revenue-generating tasks. By removing the risk of error, employees will also spend less time responding to customer queries or complaints, or even re-generating invoices. Another key benefit of automating FAF calculations is that any changes to the rate will be automatically recognised and called out on the invoice, supporting the need for clarity and transparency with customers, guaranteeing that you’re not just raising prices.