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  • Writer's pictureJoel White

Friday Pro Tip: Getting Creative with Inflation

Typical approach to applying inflation on longer-term projects (>12 months):

  • Compound a fixed annual inflation rate over the project timeline.

While this works well when inflation is stable, right now it's not stable and 2%-3% won't cut it.

Conversely, compounding 4%-5% annually over multi-year projects will really blow out your pricing to uncompetitive levels.

Consider instead a tapered approach:

  • Determine your short term (next 12 months) and long term inflation expectations

  • Run 2022-2033 at your short term rate

  • Run 2023-2024 at the midpoint of your short and long term rate

  • Run 2024 and beyond at your long term rate

Bonus tip: for extended durations (7-10+ years), cut inflation off at ~3 years and subject the out years to an index (be sure to disclose this in your proposal and add it to the contract).



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