Wow; seems there is quite a bit of interest in this.
From my point-of-view, I would prefer to see it as "terrain" and not "Terrain". The idea would be to create a scenic environment; whether it will be used for gaming or dioramas wouldn't figure into scoring/judging/voting.
I think it could work in an Iron format, but it would take some work to get the details and rules hammered out. As was mentioned, would things like Hirst Arts blocks (which I also enjoy using) be allowed? Would everything have to be scratch-built or would a certain amount of pre-made items be accepted? Would the judges be able to tell the difference?
Having it as a "straight" competition, much like Femme Fatale or Rotten Harvest, would give people more time to work on their entries and things could be broken down into categories. However, we wouldn't want to get over-specialized. It could be broken down into size categories; after that, people can make it whatever setting they want.
Either way, the same questions would be relevant to either format (what is allowed and what isn't).
Like DH, I had the idea of each round being a different size. It could either be that the base size grew larger or smaller as the rounds progressed.
All-in-all, we would want it to stay fun and be something for the community as a whole. I would like to see people that don't usually do terrain getting involved and really stretching their limits, much like IP does in regards to painting.
Ok, better get back to work (I'm not allowed to access the site from there, so I popped home real quick).