Cost Escalation
The expected rise in material and labor prices between when a project is estimated and when it actually gets built, carried in a budget as its own line item separate from contingency.
Why it matters
Escalation and contingency get confused constantly because they both sit in a budget as a cushion, but they cover different kinds of risk. Contingency covers the unknown, problems nobody can predict yet. Escalation covers something predictable: prices simply go up over time, and the longer the gap between an estimate and actual construction, the more that gap matters.
On a real project
An estimator pricing a project with a fourteen month gap between the signed contract and the start of steel erection adds a percentage escalation allowance to the structural steel and lumber line items, based on recent price trend data, rather than pricing those materials at today's cost and hoping the number still holds more than a year later.
Who this matters most to
An Estimator builds escalation into a bid whenever a project has a long gap between pricing and construction. A Cost Engineer tracks whether actual escalation on a job is running ahead of or behind what was originally budgeted.
Where this goes wrong
An estimate prices lumber and steel at current market rates with no escalation allowance, assuming the eighteen month gap before construction starts won't matter. By the time material gets ordered, prices have climbed well past the original number, and the project absorbs the difference as a loss instead of a budgeted cost.