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Working With Economics Consultants
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Escalation Basics; Definitions
Changes in price levels driven by underlying
economic conditions
Reflects changes in price-drivers such as
productivity and technology as well as changes
in market conditions such as high demand,
labor shortages, profit margins and so on
Includes, but differs from inflation which is a
caused by debasement of a currency
Varies for different cost items, regions,
procurement strategy, etc.
Escalation is a unique “risk” cost that
must be estimated and budgeted for
Can be included in item budgets or given its
own account that is managed
By AACE’s definition, contingency
specifically excludes escalation although
both are “risk” funds
Probabilistic estimating approaches best
Add escalation to contingency?
Indices are measures of price levels,
usually normalized (e.g., 1990 = 1.00)
Economists forecast future price indices
Correlate outcomes of their macroeconomic
models to trends for specific price indices
Escalation is typically estimated using
index ratios
Escalation Basiics;; Composiitte IIndiices
The items we buy often do not have a
corresponding index
For example, the price of fabricated pipe
includes pipe, fittings, and shop labor and
overhead costs