Prepayment ability to offset inflation

A model is presented to highlight actions that both owners and contractors, who do construction overseas, need to take in order to obtain cost-effective construction projects. The model delineates a clear relationship between inflation, price escalation, time-lag, prepayment, and the effects of price escalation on the value of the project. To simplify that relationship, the model concentrates inflation, price escalation, time-lag, and profits into one term, the project's net present value. The analysis reveals three major points. First, the prepayment can be viewed and quantified as an additional markup whose benefits should be shared with the owner. Second, there is, indeed, an equilibrium point that defines the extent to which the prepayment accounts for inflation coverage, and thus no price escalation is needed. Finally, price escalation clauses in countries having high levels of inflation do not encourage prudence in spending. On the contrary, price escalation clauses encourage price escalation.