Most cost estimates are performed as "net present value" which means the estimated cost of delivering the program in today's money. Materials, travel, labor and other direct costs are often estimated based on their cost today, also termed "net present value" or NPV for short.

If you know when, in the future, you anticipate the key program milestones and deliverables you can estimate labor costs based on projected cost rates in future years. The easiest way to do this is to maintain labor rates for future fiscal years in the labor pool or resource group set-up. This still leaves material, travel and other direct costs as net present value.

Another way to estimate costs based on the future year of delivery is to "escalate" these costs, using an escalation factor. Escalation factors typically forecast future changes in price indexes such as consumer price index or the price index for certain commodity codes. If you apply an escalation factor for your material, travel, other direct costs or even to labor (if labor rates are only available up to the current year) then the estimated costs are automatically "escalated" based on the aggregate effect of the future price indexes for each fiscal year from the current until the year when that milestone or deliverable is to be completed.

Select an escalation factor from the list of factored parameters in the "escalation factor" column of your estimate, on the material, travel or other direct cost tab. Show the escalation factor column if it is not currently visible.

Let's assume that today's date is June 2019 and your company's fiscal year runs January-December, on a calendar year basis. The deliverable is due in February 2024. The escalation index selected has the following factors on a year by year basis, shown below. The overall escalation factor is calculated as:

1. 6 months out of 12 for 2019, from end of June to December, resulting in factor of 1.0125 or 1.25% which is half of 2.5%
2. 2% of 1.02 factor each of the year's 2020, 2021 and 2022
3. 1.5% or 1.015 factor for 2023
4. 2 months out of 12 for 2024, from start of January to end of February, resulting in a factor of 1.0025 or 0.25%

The total factor is the product of all of these i.e. 1.0125 x 1.02 x 1.02 x 1.02 x 1.015 x 1.0025 = 1.0933 or 9.33%

Note that applying a 2% factor once for a twelve month period corresponding to a single fiscal year is not the same as applying half of the 2% factor twice, for six months at the end of one fiscal year times six months at the start of the next fiscal year. If today's date and the delivery date corresponding to two "half fiscal years" then applying half of 2% of 1.01 factor twice gives a result of 1.01 x 1.01 = 1.0201 or 2.01%

Escalation factors are actually calculated on a month by month basis so costs in February will be very slightly higher than January for the same resources. Escalation factors are currently computed from today until the date when costs are estimated to be incurred, though options to escalate from the proposal delivery date or start of period of performance might be made available in the future, depending on what date is inferred in the estimated "net present value" costs.