Calculating a Cost Of Living Allowance (COLA): Capturing True Costs

Jul 18, 2017 @ 01:53 PM / by Jonathan Nyquist

What is the true cost of an assignment?

For the sake of argument, let’s say that all the prices in Mbabane, Swaziland are half as much as they are in San Francisco—does that mean I should not receive a COLA to support my move? Not necessarily.

One of the many things that sets AIRINC’s approach to calculating COLA apart is our belief that incorporating change in behavior alongside the simple price change between a home and host location is critical to accurately capturing the true cost of an assignment location. Focusing on prices alone only provides part of the story. For many goods, usage does not change because of an assignment.

If I move from my home in San Francisco to take an assignment in Barcelona, I’ll use the same amount of toothpaste and continue to brush twice a day (unless I’ve had a tasty squid ink paella for dinner, but that’s an exception). What is in my COLA is therefore only the difference in price alone for this item.

Expatriate adjustments while on assignment: Home vs Host Usage

But what if I am actually assigned to Mbabane, as in the case above. It’s one of the places I visited a number of times many years ago as a surveyor—a particular favorite—but living there would require me to adjust some of my behaviors. For example, I’m used to turning on the tap whenever I need a glass of water, but in Swaziland, I would use bottled water for all drinking and cooking.

The price of bottled water is much cheaper than in the US; however, I’m going to use a lot more of it. If I were to focus on price alone, it would negatively impact my COLA calculation. But because we incorporate this change in usage in our home-based approaches, the impact is positive, meaning I am protected from higher levels of usage of this item at host.

There are many categories for which this is true—from transportation to domestic help—and this is going to be unique to each host location. By incorporating both changes in price as well as changes in usage between one’s home and assignment, a much clearer picture of true cost of living differences can be painted and the assignee can focus on the work he or she was sent to do!