MARKET UPDATE BULLETIN
Tariffs
& Economic Outlook
February 2025
Lead Author: David Hamilton, Senior Vice President, Construction Procurement Solutions
Introduction
The construction industry is at an interesting inflection point. Tariffs and fluctuating energy prices are beginning to reshape how projects are planned and executed. While some developers are pausing to reconsider projects amid escalating costs, others see opportunity in the shifting landscape. Recent tariff measures have driven some major corporations to invest in U.S.-based manufacturing facilities, creating domestic jobs and strengthening the local economies This shift, while potentially positive in the long-term, introduces short-term complexities, as typical Q1 price increases now overlap with tariff-driven cost surges and volatility in energy markets. These converging factors demand strategic foresight and flexible approaches to keep projects on track and budgets in check. The construction industry continues to demonstrate its resilience and capacity to adapt.
Economic Outlook
• Despite ongoing uncertainty surrounding tariffs, they have already driven substantial shifts in corporate strategies, prompting companies to reassess supply chain, sourcing decisions, and market expansion plans. The true extent of the impact, particularly from reciprocal tariffs, will be revealed after the April 2nd deadline implemented by President Trump
• Reshoring efforts will not only bolster the domestic economy but are expected to gradually ease some supply chain bottlenecks over the coming year
• Fuel price volatility continues to impact logistics and raw material costs, increasing the pricing challenges that tariffs have introduced
• Despite these complexities, construction spending remains stable across key sectors. Developers and contractors are adopting proactive strategies to navigate cost fluctuations and supply chain disruptions
Manufacturer Viewpoints
• The impact of tariffs on manufacturers varies. While some suppliers have seen minimal disruption, others face sharply rising costs and supply chain pressures that affect the broader industry.
Manufacturer Viewpoints (cont’d)
• Material Cost Increases: Steel and aluminum remain key pressure points Some manufacturers report price hikes over 16%, especially for components sourced from China. Even modest increases raise concerns about long-term impacts on commodity pricing and procurement strategies.
• Sourcing and Supply Chain Adjustments: Many manufacturers are turning to domestic suppliers and multi-sourcing strategies. While major lead time delays have been rare, certain product lines like specialized HVAC systems have seen minor delays of 1-2 weeks.
• Logistics and Freight Challenges: Freight costs are fluctuating. While some suppliers report stability, others face rising logistics expenses driven by shipping dynamics and tariff-related pressures. Many expect continued volatility throughout the year.
• Looking Ahead: Most manufacturers predict moderate price increases (1-5%) over the next 12 months, though some foresee sharper hikes in specialized products. Strong collaboration with procurement partners, such as Construction Procurement Solutions, remains key to minimizing client impacts through strategic planning and early purchasing
TRADE PARTNERS AND LABOR IMPACTS
Trade partner resilience
• Tariffs and rising material costs are straining trade partners, tightening margins and increasing financial risks. Higher material costs, tighter credit markets, and growing insurance premiums have made cash flow a top concern, with delayed payments and change orders creating a storm that they cannot navigate.
• Many subcontractors are lowering margins to stay competitive, heightening the risk of financial instability mid-project. Subcontractor Default Insurance (SDI) remains a critical tool for mitigating this risk.
• Construction Procurement Solutions (CPS) plays a key role in alleviating these pressures by directly procuring HVAC and electrical equipment. This approach reduces subcontractor exposure to cost fluctuations and supply chain risks, improving overall project stability and safeguarding client interests.
Labor impacts
• Labor shortages remain a major hurdle, now worsened by tariffs, rising costs, and increased deportations. Skilled labor gaps continue to drive up wages, strain project schedules, and create fierce competition for talent.
• Regional Pressure: The Southwest and Southeast face the worst shortages, with booming data center, healthcare, and manufacturing projects fueling wage spikes and schedule delays.
• Deportation Strain: Workforce deportations have deepened shortages in labor-heavy trades like concrete, framing, and mechanical, leading to higher costs and onsite crew gaps.
• Tariff Fallout: Material cost hikes has slowed some projects, leading to inconsistent labor demand and frequent crew reshuffling resulting in inefficiencies and training gaps.
• Mitigation Tactics: Prefabrication, modular construction, and early procurement help contractors cut on-site labor needs and stay ahead of supply chain volatility.
CURRENT IMPACTS / COST CHANGES
• Steel & Aluminum – a 25% import tariff is leading to projected price increases of 10-25% for steel and 15% or more for aluminum products. This is expected to affect structural components and framing materials, with lead times remaining volatile, especially for custom orders.
• Electrical & HVAC Systems: Tariffs on imported components have driven up prices, speculation of 15% increases for electrical items and 15% or more for HVAC systems should tariffs be ratified Smaller breakers face severe shortages, while larger HVAC units, such as rooftop systems and chillers, are seeing extended lead times due to material shortages and production slowdowns. If tariffs go fully in place then we expect these percentages to increase even more.
• Drywall & Ceiling – Manufacturers have announced price increases for drywall some as high as 20% and 5-10% for insulation materials, citing higher energy costs and supply chain adjustments.
Mitigation strategies
• Early Procurement & Bulk Purchasing: Locking in prices through early procurement and leveraging bulk can shield projects from future cost escalations, particularly for high-risk materials like steel, aluminum, and electrical components.
• Alternative Sourcing & Domestic Suppliers: Exploring alternative materials can reduce exposure to tariffs and international shipping delays. Multi-sourcing strategies also provide greater flexibility in managing supply chain disruptions.
• Prefabrication & Modular Construction: HVAC, electrical systems, and structural components reduces on-site labor needs, minimizes schedule risks and offers cost efficiencies.
• Construction Procurement Solutions (CPS): As a wholly owned STOBG subsidiary, CPS directly procures HVAC and electrical equipment, helping clients bypass supply chain bottlenecks and avoid subcontractor markups. This streamlined approach not only reduces costs but also mitigates risk by improving control over lead times and material availability.
