Rising geopolitical tensions and erratic US trade policy are having an increasingly large bearing on construction cost escalation. Factors informing our escalation forecasts are:

• Current activity – construction activity in Canada has been sluggish of late but emerging signs of growth are visible in recent data as interest rates come down and inflation settles.
• Leading indicators – geopolitical tensions and tariff induced ambiguity have knocked confidence and tempered growth sustainability. Expenditure could be constrained as investors wait for certainty.
• Materials cost and availability – construction materials and components softened in 2024, albeit recent months have rallied due to stockpiling and forward purchases ahead of tariff enactment.
• Workforce – increasing labour market slack has softened wage growth of late, albeit renewed unionized wage rates could keep a floor under earnings growth despite moderating demand.
• Machinery and equipment – costs are still increasing due to healthy infrastructure workloads, although growth is mellowing and should dampen further.

Prior to the advent of tariffs, cost pressures in Canada were reducing and bid prices were moderating due to idle workloads feeding through into intensified competition. Even with the construction industry experiencing a recent nascent recovery in activity, prolonged sluggishness and thinning workloads had already narrowed escalation growth.

Now, increased market turbulence is having a notable impact on industry pricing. Uncertainty has risen; forward purchasing is in play and material costs are starting to grow as supply chains notify buyers of increases.

Cost increases, however, may not outweigh, or cancel out, weak demand and as a result escalation growth in 2025 could soften to 2.0 percent. Initially though, costs could grow at a faster pace before negative trade effects and hesitancy dampen economic and construction growth as time passes.

Escalation growth in 2026 is expected to soften to 3.0 percent due to knock-on adverse effects from delayed decision making alongside increasing labour market slack. For 2027, another growth rate reduction is expected, with escalation moderating to 3.5 percent on the year - down by 0.5 percentage points from the previous forecast of 4.0 percent in Q4 2024.

The strength, coverage and duration of potential tariffs will significantly influence escalation allowances. Policy indecision will also play a starring role, potentially rewriting the escalation script after each implementation, repeal and retaliation. As such, we’re proposing a broader range of escalation outcomes +/-3.0 percentage points around baseline predictions as uncertainty builds.