The difference in one sentence
Fixed price locks the number, and the party who accepted it (usually the supplier) eats every cost swing until the contract ends. Escalation shares a defined slice of that risk with the buyer, in exchange for pricing the contract closer to today's real cost instead of tomorrow's worst case.
Why suppliers pad fixed-price bids
A supplier bidding a 12- to 24-month fixed price against a volatile input doesn't know what that input will cost by the time it's delivered. The rational response is to bid in a contingency buffer sized to the worst plausible swing over the term. The buyer pays for that buffer whether or not the swing actually happens. It's priced into every fixed bid on a volatile input, seen or not. An escalation clause removes the need for the buffer: actual cost changes get passed through when and if they occur, instead of pre-paid for on day one.
When fixed price is the better choice
Short-duration contracts, low-volatility inputs, or cases where the administrative overhead of tracking an index and running the adjustment isn't worth it relative to the contract's size. A one-off, few-month job on a stable input rarely needs escalation: the padding a supplier would add is small, and the complexity of running a clause costs more than it saves.
When escalation is the better choice
Long-duration contracts on inputs that move. See the vertical guides on this site for which materials, labor categories, and commodities that covers. The mismatch between how long the price is locked and how much the underlying cost can move over that time is exactly where escalation earns its added complexity.
A worked example
An 18-month, $1,000,000 contract is 40% weighted to a volatile input. A fixed-price bid pads in a 6% contingency ($60,000) to cover the possibility that input moves hard before delivery, whether it does or not. An escalation clause instead prices the unpadded rate and adjusts only if the index actually moves: if the input stays flat, the buyer keeps the full $60,000 that would have been baked into the fixed price; if it moves 15%, the adjustment on the $400,000-weighted scope comes to $60,000, the same number the fixed bid would have padded in regardless, except this time it's tied to something that actually happened.
Which to choose
Match the tool to term length and volatility, not habit. A short, low-risk job rarely needs escalation. A multi-year supply agreement on a volatile input almost always does. See fixed-price vs. escalation-clause contract reasoning applied to the specific vertical for the numbers that matter to a given deal.