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Currently my project management colleagues and me are facing a discussion whether inflation has to be considered in a multi-year project calculation or not.

The take of business accounting is "no", as only ascertained costs should go into the calculation and as we do not know external costs in three years, neither shall we assume personal costs.

The possibility of changing costs should be pointed out in the quote and not in the project calculation.

What is your take on considering inflation in cost estimates of multi-year projects?

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  • Depends on the project specifics. Are there things you know about now that you will also need throughout all years of your project? Are those things affected by inflation? Then you could account for inflation. See similar question here. But even if you consider inflation, there is also the question of what value to use for your calculation (looking at the past year for example). But like I said. Depends on the project. Some include it. Some manage it as a project risk.
    – Bogdan
    Feb 23 at 20:05

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This seems more of an accounting question than a PM one because budgets may have financial implications that come within the scope of accounting rules and regulations. If you are proposing to an external customer then maybe there are contractual implications as well. With cost estimates it is generally wise to state a range of numbers whenever possible. You can and should state clearly any underlying assumptions, whether inflation-adjusted or not.

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I have never included inflation in my estimates, however I have always aimed to break down the spend profile so that the business can apply whatever inflation / Net Present Value / Discounted Cash Flow calculation they want to the costs and benefits of a project. If you do anything else you are setting yourself up to fail - especially if wage and / or price inflation (neither of which you can control) change dramatically during the life of the project. However, if you do this you should state clearly that the actual costs to be incurred are likely to be affected by inflation, so that the customer has no surprises in that area.

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I personally do consider in total estimated project costs but not in specific item or activity. To do this I simply spread the non-inflated costs to the estimated duration and then compound it with inflation (For this I consider the inflation of overall economy which you would get from the central bank of your respective country). This is very simple approach and little conservative, other than this it would be very complicated to put inflation to every activity which would require the projection of cash flows and analyze the total estimated project costs. Rest as the above answer the future inflations are projected and it's not under anybody's control.

Moreover I presume the dynamics of any sector except certain sector like oil and gas doesn't change overnight , except in the even of war, riots or act of god. However we estimate little extra to keep factor of safety to our estimates. Hence, till over two to three year period of time there won't be such effect.

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You must include inflation in your estimates. I cannot think of one reason not to.

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