Inflation vs escalation is one of the most common points of confusion on long construction contracts. Both describe prices going up over time, but they measure different things and are treated differently in the contract.
What is inflation?
Inflation is a sustained rise in the general price level of goods and services across an economy, which means money buys less than it used to. In Turkey the best-known measures are the consumer price index (TÜFE) and the domestic producer price index (Yİ-ÜFE), both published by TÜİK, the national statistics office.
Inflation is an average. It does not say every price rose at the same rate; it gives a weighted figure for a basket of items. On its own it cannot explain why costs on a particular site went up.
What is escalation?
Escalation is the increase over time in the cost of the inputs to a specific project or contract: cement, rebar, fuel, labour, plant. General inflation plays a part, but so do supply and demand, exchange rates, energy prices, changes in regulation and local market conditions.
Say general inflation runs at 30 percent. Over the same period the price of reinforcing steel might rise 60 percent, or only 10. What drives the project’s cost is that item-level movement, not the headline rate.
Inflation vs escalation at a glance
- Inflation looks at the whole economy; escalation looks at the inputs to one job.
- Inflation is only one of the factors behind escalation.
- Inflation can be expressed by a single index; escalation is calculated from several indices weighted to the cost structure of the work.
- Some items can keep escalating sharply even while inflation is falling.
How construction contracts deal with escalation
On Turkish public works, cost increases are recovered through price adjustment (fiyat farkı). For works contracts under Public Procurement Law No. 4734 (Kamu İhale Kanunu, the law governing public tenders in Turkey), the price adjustment rules introduced by Council of Ministers Decree 2013/5217 and later amended apply. The formula assigns weighting coefficients to labour, cement, steel, fuel, plant and other inputs, and the ratio between the base index and the current index is applied to each interim payment.
International contracts usually achieve the same thing with a price adjustment clause. Under FIDIC this is the clause on adjustments for changes in cost, with the formula and indices set out in the particular conditions.
If the contract makes no provision for price adjustment, the contractor carries the whole escalation risk. That is why it pays to check at tender stage which items are covered, whether the coefficients reflect the real cost structure of the work, and whether the base index month has been set correctly.
The short version
Inflation tells you about a country’s overall price level. Escalation tells you about your project’s costs. How the contract shares escalation risk can be the difference between a job that makes money and one that loses it.