Cost escalation


Cost escalation

Cost escalation is defined as changes in the cost or price of specific goods or services in a given economy over a period of time. This is a similar to the concepts of inflation and deflation except that escalation is specific to an item or class of items (not as general in nature), it is often not primarily driven by changes in the money supply, and it tends to be less sustained. While escalation includes general inflation related to the money supply, it is also driven by changes in technology, practices, and particularly supply-demand imbalances that are specific to a good or service in a given economy. For example, while general inflation (e.g., consumer price index)in the US was less than 5% in the 2003-2007 time period, steel prices increased (escalated) by over 50% because of supply-demand imbalance. Cost escalation may contribute to a project cost overrun but it is not synonymous with it.

Over long periods of time, as market supply and demand imbalances are corrected, escalation will tend to more-or-less equal inflation unless there are sustained technology or efficiency changes in a market.

Escalation is usually calculated by examining the changes in price index measures for a good or service. Future escalation can be forecast using econometrics. Unfortunately, because escalation (unlike inflation) may occur in a micro-market, and it may be hard to measure with surveys, indices can be difficult to find. For example, the Bureau of Labor Statistics has a price index for construction wages and compensation (what the construction contractor's labor cost), but has none for the prices that owners must pay the construction contractor for their services.

In cost engineering and project management usage, escalation and cost contingency are both considered risk funds, that should be included in project estimates and budgets. When escalation is minimal, it is sometimes estimated together with contingency. However, this is not a best practice, particularly when escalation is significant.[1]

References

  1. ^ "Escalation Estimation: Working With Economics Consultants", John K. Hollmann; Larry R. Dysert, 2007 AACE International Transactions, AACE International, Morgantown, WV, 2007

Wikimedia Foundation. 2010.

Look at other dictionaries:

  • Escalation — is the phenomenon of something getting more intense step by step, for example a quarrel, or, notably, a war between states possessing weapons of mass destruction. Compare to escalator, a device that lifts something to a higher level. While the… …   Wikipedia

  • Cost overrun — A cost overrun, also known as a cost increase or budget overrun, is an unexpected cost incurred in excess of a budgeted amount due to an under estimation of the actual cost during budgeting. Cost overrun should be distinguished from cost… …   Wikipedia

  • Escalation of commitment — was first described by Barry M. Staw in his 1976 paper, Knee deep in the big muddy: A study of escalating commitment to a chosen course of action .[1] More recently the term sunk cost fallacy has been used to describe the phenomenon where people… …   Wikipedia

  • escalation — escalate es‧ca‧late [ˈeskəleɪt] verb [intransitive] if amounts, prices etc escalate, they increase: • They saw costs escalating and sales slumping as the effect of rising oil prices hit the company. escalation noun [uncountable] : • The rapid… …   Financial and business terms

  • Cost contingency — When estimating the cost for a project, product or other item or investment, there is always uncertainty as to the precise content of all items in the estimate, how work will be performed, what work conditions will be like when the project is… …   Wikipedia

  • escalation clause — escalator clause or escalation clause noun A clause in an agreement allowing for adjustment up or down according to change in circumstances, as in cost of material in a work contract or in cost of living in a wage agreement • • • Main Entry:… …   Useful english dictionary

  • Cost of living — For other uses, see The Cost of Living (disambiguation). Cost of living is the cost of maintaining a certain standard of living. Changes in the cost of living over time are often operationalized in a cost of living index. Cost of living… …   Wikipedia

  • escalation clause — A clause in a contract authorizing the contractor to increase the price in specified conditions of all or part of the services or goods he has contracted to supply. Escalation clauses are common in contracts involving work over a long period in… …   Big dictionary of business and management

  • escalation clause — /ɛskəˈleɪʃən klɔz/ (say eskuh layshuhn klawz) noun a provision in a contract allowing for adjustments up or down under specific economic conditions, as in the cost of living in a wage agreement. Also, escalator clause …   Australian English dictionary

  • Technological escalation — describes the fact that whenever two parties are in competition, each side tends to employ continuing technological improvements to defeat the other. Technology is defined here as a creative invention, be it an object or a method of using an… …   Wikipedia