What to take into your next appraisal
- Define the delayed event before shifting the cashflow.
- Apply inflation only to spend exposed under the procurement assumptions.
- Compare mitigation cost with avoided cost and timing effects using consistent assumptions.
Fix the baseline and the decision
This fictional example uses currency units, no debt and no taxes. The baseline has 6m of uncommitted construction spend payable in month 12 and a 10m net receipt in month 18. Other costs are unchanged between options and are omitted from the incremental comparison. The question is whether to pay 180,000 for a mitigation package that would prevent a six-month delay.
A delay would move exposed construction spend to month 18 and the receipt to month 24. Holding costs are 30,000 per month for six additional months, paid at month ends 19 to 24. The assumed annual construction inflation is 4%; it is a scenario input, not an observed forecast.
Sources: UK Government: The AQuA Book
Separate the three controlled cases
With delay alone and zero inflation, the additional undiscounted cost is 6 × 30,000 = 180,000. With inflation alone, hold the schedule fixed and apply a separate assumed 4% increase to the 6m budget: 240,000. These are different shocks and their percentages should not be interchanged.
For the combined delay case, the baseline 6m already reflects the month-12 price level. Escalate only the extra six months: 6m × (1.04^0.5 - 1) = approximately 118,823. Add the 180,000 holding cost to get approximately 298,823 of additional undiscounted cost. Do not add the inflation-only 240,000 again.
| Case | Extra holding | Extra construction | Total extra cost |
|---|---|---|---|
| Six-month delay, zero inflation | 180,000 | 0 | 180,000 |
| 4% budget shock, unchanged dates | 0 | 240,000 | 240,000 |
| Six-month delay with 4% annual inflation | 180,000 | 118,823 | 298,823 |
Include the value of time consistently
At an illustrative 12% effective annual discount rate, the 10m receipt has present value 10m / 1.12^1.5 = approximately 8.437m in month 18 and 10m / 1.12² = approximately 7.972m in month 24. Delay reduces its present value by about 0.465m.
Delaying construction spend also defers a cash outflow. Compare the baseline 6m / 1.12 with the delayed 6.118823m / 1.12^1.5. The latter has approximately 0.195m less present cost. Discounting the six additional monthly holding payments gives approximately 0.147m. The combined delay therefore reduces incremental NPV by about 0.417m, rather than the receipt loss plus all nominal added costs.
Compare the mitigation package against the combined case
Assume the 180,000 mitigation payment is due now and completely restores the baseline schedule and costs. It improves NPV relative to accepting the combined delay by approximately 0.417m - 0.180m = 0.237m. On these assumptions, mitigation is preferable.
That conclusion depends on effectiveness. If the package can fail, compare probability-weighted, fully specified outcomes and the cash at risk. An informal claim that mitigation is likely to work is insufficient evidence for assigning a probability. Confirm contractual scope, achievable dates and whether the payment remains due after failure.
Rebuild the comparison for the actual project
Add debt draw timing, maturity, interest, tax, escrow restrictions and receipt dependencies before making a real decision. A contractor with a fixed-price commitment may bear some inflation, while a delayed sales launch may change both price and absorption. Those mechanisms differ from this controlled example.
Keep the scenario definitions and changed input IDs with the recommendation. The useful output is a traceable bridge from the base case to each option, plus a statement of the assumptions that would reverse the decision.
Sources: UK Government: The AQuA Book; ICAEW: 20 principles for good spreadsheet practice, 2024 edition
Sources and further reading
- The AQuA Book UK Government
- 20 principles for good spreadsheet practice, 2024 edition ICAEW
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