Exploring Cost-of-Living Data to Analyze Short-Term Assignments

by Marillyn Tefft, Senior Researcher 1. October 2013 13:42

HR and mobility professionals are facing an increasing demand to use cost-of-living data to analyze expenses for multiple types of assignments such as long-term, short-term, temporary and extended business travel. ERI Economic Research Institute's Relocation Assessor provides data which can be used to benchmark estimated costs for a variety of assignments. We detail the flexibility of data provided in a single report below.

We use an example of a large engineering firm based in the U.S. that builds above water structures for offshore oil rigs in about 25 countries to illustrate the breathe and depth of the expense data. Many of the locations are considered “difficult” due to geographic/political/economic situations. During an average year, they move about 150 employees. These are mostly engineers who are assigned based on technical expertise rather than for talent development.  Engineers are in high demand with limited supply; thus, incentive, recruitment and retention policies must be competitive.

 The breakdown of assignments from the home base of Houston to Luanda is as follows:

  • 15% rotate in a 28-days on, two-weeks off schedule
  • 20% have 1-month up to 1-year assignments
  • 65% have over 1-year assignments 

The company provides all transportation (an on-call car and driver) and security for all assignees to Luanda under a separate contract.  Further, all tax calculations are performed (with a full gross-up paid by the engineering company) by a skilled international CPA firm, so the estimate in the example assumes the same estimated current tax liability for Houston for both base and destination cities.

Below is a Two City Cost Comparison between Houston and Luanda: 

As typical for many international assignments, the housing and consumables differentials are substantial. It is assumed that the assignee to Luanda will live in protected, Western-style accommodations with full amenities. In this example, annual housing costs average about three times more than in Houston ($16,254 versus $46,829). This is for a one-year or longer type lease agreement rather than short-term/temporary corporate housing. It is assumed that the assignee shops in the international shopping venues and purchases similar goods and services that he is accustomed to in Houston. It is common for these imported consumables to be expensive in developing countries as is illustrated by the almost double cost in Luanda.

Based on the data in the screen shot from the Relocation Assessor dataset, the company might consider the following cost estimating strategies:

  • For the rotational assignees on the 28-day schedule, a cost-of-living payment for each rotational period of $16,100 (28 * $405 Per Diem Lodging and 28* $179 Per Diem Food/Other). The Per Diem amount is provided by the U.S. Department of State. In addition, a round-trip flight to Houston for each two-week off period.
  • For the 1-month to 1-year assignees, lengths may need to be treated as 2 or 3 separate groups.
    • For the 9–month to 1-year assignees, a payment of approximately $54,462 ($22,306 consumables and $30,475 housing) plus 50% of the hardship premium. At present, the U.S. Department of State pays a 30% of pay hardship premium in Luanda – many private companies use this rate. This would add $22,500 to the cost estimates.
    • For the 3-month to 9-month assignees, shorter-term accommodations can be expected to add at least 50% to monthly housing cost (about $3,900 per month). A partial hardship premium and partial mobility premium may be included.
    • For the 1-month to 3-month assignees, the Per Diem rates may provide the most appropriate cost estimates. Sometimes a partial mobility premium and/or additional vacation time is offered upon repatriation.
  • The over 1-year assignees might require the $54,462, the full Hardship Premium of $45,000, an additional mobility premium (companies usually allow 10%-30% of pay) and several extended trips home per year.           

A further consideration is the currency in which the cost-of-living differential should be paid. In developing countries, many Western goods and services are priced in the U.S. dollar or Euro. Some countries have specific rules concerning currency for salary payment. Exchange rate fluctuations between the home and host countries’ currencies may not heavily impact expats costs when this pricing behavior is in effect.  In countries where the host currency is used, many companies use the plus or minus 5% rule to adjust cost-of-living payments.

 

It is prudent for HR and mobility professionals to recognize the need for flexibility in COL policy in talent-challenged industries in difficult locations. Use of defensible estimates of global assignment costs needs comprehensive and robust data, as found in ERI's Relocation Assessor.