How do you adjust project costs for inflation, risk, and contingencies?

1 What is inflation?

Inflation is the general increase in the prices of goods and services over time. It reduces the purchasing power of money and affects the costs of materials, labor, equipment, and other resources that you need for your project. To account for inflation, you need to estimate the future prices of these resources, based on historical data, market trends, and forecasts. You can use various methods to do this, such as the consumer price index (CPI), the producer price index (PPI), or the escalation rate.

2 What is risk?

Risk is the uncertainty or variability of the outcomes of your project. It can have positive or negative impacts on your project costs, depending on whether they are opportunities or threats. To account for risk, you need to identify, analyze, and prioritize the potential risks that can affect your project, and then plan how to respond to them. You can use various tools and techniques to do this, such as risk registers, risk matrices, risk response strategies, or Monte Carlo simulations.

4 How to calculate project costs with inflation, risk, and contingency?

To calculate your project costs with inflation, risk, and contingency, you need to first estimate your base project costs, which are the costs of the resources that you need to complete your project scope and deliverables. Then, multiply them by the inflation factor, such as the CPI or the PPI. After that, add or subtract the expected value of the risks that can affect your project costs based on their probability and impact. Finally, add the amount of money that you have reserved to cover unexpected or unplanned costs. This will give you your total project costs, which include your baseline budget and your contingency reserve.

5 How to monitor and control project costs with inflation, risk, and contingency?

To monitor and control your project costs with inflation, risk, and contingency, you need to track and measure your actual project costs and compare them with your total project costs. This will help to identify any variances or deviations from your budget and contingency reserve. Analyzing the causes and effects of the variances or deviations will help determine whether they are positive or negative, and whether they are due to inflation, risk, or contingency. Taking corrective or preventive actions is necessary to bring your project costs back on track, or to optimize your budget and contingency reserve; this may involve revising estimates, adjusting the inflation factor, updating the risk register, or releasing or adding contingency.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?