Why is it important to account for inflation in multi-year projects?

Inflation plays a crucial role in the financial planning of multi-year projects, particularly because it affects the costs of materials, labor, and other expenses involved over the duration of the project. By addressing price changes that may occur during the construction period, project managers can create more accurate and realistic budgets.

Inflation can lead to increased costs over time; therefore, if inflation is not factored into the budgeting process, the initial cost estimates may significantly underestimate the actual funds required. This oversight can result in budget shortfalls, project delays, or the need for additional funding requests as prices rise. By incorporating inflation into the budgeting process, organizations can help ensure that they allocate sufficient resources to meet the financial demands that arise as the project progresses. This consideration aids in maintaining project viability and financial health throughout its lifecycle.