Many cost estimates such as for materials, labor and other direct costs like travel, are often performed as "net present value" which means the estimated cost of delivering the program in today's money. This is also termed "net present value" or NPV for short. So $1000 in today's money or an NPV of $1000 would be worth more in a few years from now, for example $1,124.87 based on 4% inflation over three years, by calculating future value.

For cost estimates and proposals not submitted on a net present value basis, but on the basis of actual amounts which will be invoiced in the future, you must adjust or escalate your costs for inflation by factoring in the inflation adjustment factors for future years. If you know when, in the future, you anticipate key program milestones and deliverables, you can estimate labor costs based on projected cost rates in future years. 

• One way to do this is to maintain labor rates for future calendar or fiscal years in the labor pool or resource group set-up; this still leaves material, travel and other direct costs to be escalated.
• 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, and can be looked up at web-sites such as IHS Global Escalation Rates.

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 calendar or fiscal year, or year and month, from the date of your historical cost source, until the year when that milestone or deliverable is to be provided.

<< WHAT IS THE ABOVE SREEN SHOT, IT SHOWS RISKS AND IS COMPLETELY IRRELEVANT? PLEASE INCLUDE A SCREEN SHOT OF THE BOEMATERIAL OR PROD/PROCUREMETN GRID WITH THE ESCALATION FACTOR/INDEX AND INFLATION ADJUST FACTOR COLUMSN BOTH CLEARLY VISIBLE. ALSO MAKE SURE SOURCE DOCUMENT DATE, START/END DATE COLUMNS ARE ALSO VISIBLE >>

Escalation factors for labor and other costs default from the resource group (labor) or product/service master (other direct costs) when you add a new row or select the labor resource group or product/service code for other costs. You can also manually select the escalation index or factor.

<< TONY PLEASE INCLUDE SCREEN SHOT OF LABOR OR OTHER COST TAB WITH ESCaLATION FACTOR COLUMN AND PICK-LIST VISIBLE, PLUS SOURCE DATE AND START/END DATES AND INFLATION ADJUST FACTOR SIMILAR TO BOEMATERIAL SCREEN SHOT NEEDED >>

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 if calculated on a monthly basis comes out as:

1. 6 months out of 12 for 2019, from end of June to December, resulting in factor of approximately 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 = 1.0933167 or 9.332%

Note that applying a 2% factor once for a twelve month period corresponding to a single fiscal year is not quite 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 can be:

• Calculated on a month by month basis so costs (or rather the inflation rate as a %) in February will be slightly higher than January for the same resources. Future escalation or inflation costs are computed from today until the date when costs are estimated to be incurred, with an option for purchased material costs to calculate escalation up until the anticipated purchase order placement date or expected receipt date minus lead time
• Calculated on an annual basis so costs (or rather the inflation rate as a %) are the same throughout the calendar or fiscal year. The annual inflation rate is adopted for all months in each year so in the above example the total factor would be 1.02 x 1.02 x 1.02 x 1.015 x 1.015 = 1.0932830 or 9.328%. This assumes that the year of the source cost is skipped entirely, something which you can work with your implementation consultant to configure as on or off based on the proposal type or company code setup. The inflation rate overall in the annual cost basis is slightly lower because the inflation index in 2024 (when annual uses the full year vs. 2 months for monthly calculation basis) is only 1.5% vs. in 2019 (when monthly uses half the year vs. 0 month for annual calculation basis) is a much higher 2.5%. That said, both factors are identical up to 2 decimal places, since both numbers round to 9.33%.

Escalation indexes that are calculated on a monthly basis are still maintained with annual calendar or fiscal year factors. It is only the calculation method which is performed on a month to month basis.