Lesson 92 · The Grant Architect

92. Inflation and COLA

30 min

By the end you'll be able to

  • Distinguish a cost-of-living adjustment from a merit increase.
  • Anchor each escalation assumption to a citable benchmark or policy.
  • Build an escalation table that a reviewer can audit line by line.
  • Defend escalation rates against a "where does that number come from" challenge.

Inflation and cost-of-living adjustments (COLA) are the most common multi-year line items that get budgeted by reflex rather than by evidence. In this lesson you learn the difference between a COLA (an across-the-board salary increase, usually tied to CPI or a published index) and a merit increase (performance-based, applied selectively), and why federal reviewers expect you to distinguish them. Conflating the two is a frequent audit finding because the documentation requirements differ.

You will set defensible escalation assumptions for each cost category. Personnel often escalate at 3 percent annually based on board-approved policy, but you should cite the policy or HR memo. Fringe escalates with the underlying benefit rates, which usually means health insurance renewal letters and FICA caps. Supplies and equipment escalate at a published producer or consumer price index, not at a number you picked because it felt safe. Travel escalates with GSA per diem and airfare benchmarks, both of which are public. Every assumption belongs in the justification with a source.

By the end you should be able to build an escalation table for a five-year award where each rate is tied to a specific, citable basis, and you should be able to explain why "we used 5 percent because that is what we always use" is not an acceptable answer in a federal review.

Common mistakes

These are the traps learners hit most often on this topic. Knowing them in advance is half the fix.

  • Conflating COLA with merit increases.

    A budget that bundles "3 percent annual increase" without specifying whether it is across-the-board or merit-based creates documentation problems at audit, because the two have different evidence requirements.

  • Picking round numbers without a source.

    5 percent feels safe and gets used reflexively. Reviewers read round, unsourced numbers as placeholders and will ask for the underlying basis. Cite the source on the first pass.

Practice problems

Try each on paper first. Click Show solution only after you've made a real attempt.

  1. Problem 1
    Build an escalation table for a five-year award covering personnel (with COLA), fringe, supplies, travel, and indirect, with a citation for each rate.
    Show solution

    Personnel: 3.0% annually, basis Board Policy 4.12 (regional CPI-U cap). Fringe: 28% Years 1-2, 29% Year 3, 30% Years 4-5, basis health insurance renewal letter and FICA projections. Supplies: 2.5% annually, basis BLS Producer Price Index for the relevant commodity group. Travel: 4.0% annually, basis GSA per diem trend and DOT airfare index for the metro pair. Indirect: held at federally negotiated 18% throughout, basis NICRA dated last fiscal year. Every rate cited in the justification narrative.

Practice quiz

  1. Question 1
    What is the key difference between a COLA and a merit increase?
  2. Question 2
    Which justification for a 4 percent personnel escalation is most defensible?
  3. Reflection 3
    Why is "we used 5 percent because that is what we always use" not an acceptable answer in a federal review?

Lesson 92 recap

COLAs are across-the-board, tied to an index or policy, and distinct from merit increases. Every escalation in a multi-year budget needs a citable basis, and "because we always do" is not one.

Coming next: Lesson 93 — Subawards Vs. Contractors

Next, we move from the cost side to the partnership side and tackle the most consequential classification question in federal grants, subaward versus contractor.

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