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Richard Minney

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  1. Hopefully this helps. Assume your first labor category is Software Development at $100 per hour. Yay for the rate! If you escalate 2% then in year 2 that is $102/r and in year 3 it's not $104/hr but it is $102 x 1.02 = $104.04 per hour. In other words you must escalate the previous year's escalation. That is why formerfed calculates year 5 as 1.02 x 1.02 x 1.02 x 1.02 = 1.08243 or 8.24% escalation over five years. The math here is that year-n rates are equal to the year 1 rates x ( 1 + annual_escalation_% ) ^ n, where that funny hat ^ symbol means "to the power of". So to achieve a total escalation of 2% in year 5, assuming exactly four escalations in years 2, 3, 4 & 5 you would need the annual escalation of rate increases to be 0.496% instead of 0.5%
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