Work out net present cost of contract instantly with clear inputs, formula shown and shareable results.
Comparing contracts of different terms and escalation profiles requires discounting. Net present cost brings escalating future payments back to today's money, which is the only basis on which a five-year deal with 4% escalation can be compared with a three-year fixed-price alternative.
Payment in year t
Payment = Annual cost x (1 + Escalation)^(t - 1)
Net present cost
NPC = sum of Payment / (1 + Discount rate)^t
Your weighted average cost of capital, or the government discount rate for public sector procurement. Be consistent across all bids.
Because it compounds. A 4% escalation over five years makes the final year's payment 17% higher than the first, which changes the ranking of bids.