Construction cost escalation continues to grow; however, increases are not uniform. Some projects, sectors and geographies are seeing prices become increasingly competitive, whereas others are resistant to change. Factors informing our escalation forecasts are:

• Current activity – lower interest rates, curbing escalation growth and increased affordability are starting to unlock projects, although activity remains weak.
• Leading indicators – building permits have been boosted by improving market conditions, construction start forecasts look healthy and confidence is improving.
• Materials cost and availability – suppressed global demand is steadily contributing to more manageable cost pressures and lead time recalibration. Potential tariffs, and their impacts, remain a concern.
• Workforce – wage growth continues to moderate as jobs vacancies fall and employment opportunities dampen. Skills shortages are prevalent, particularly for specialist trades.
• Machinery and equipment – lower finance charges and increased access to loans are helping to moderate cost growth. A high volume of infrastructure work is adding to pressures though.

Softer workloads through 2024 have caught up with some contractors and strategic bidding is increasing in frequency. In some instances, recent tender returns have come in lower than pre-tender estimates. The net effect of this dynamic has seen our 2024 escalation forecast decrease by 0.5 percentage points, firming to 2.5 percent.

Large projects and programs tend to be excluded from this approach with secure pipelines, and buoyant sectors also appear sheltered from this practice (to a degree). Increasing commercial tension tends to be more prevalent across smaller contractors with fragmented workloads and sporadic cashflow and where order books need to be filled. While tenders are becoming more competitive, prices aren’t necessarily falling – rather the pace of growth is reducing at a national level. However, if the right conditions arise, prices could well fall in isolation.

2025 might be a year of two halves regarding escalation. Increased competition at the end of 2024 should pass through into the early part of 2025. An uptick in confidence and improved demand conditions should see activity levels strengthen in the latter half of the year. In addition, even with the exemptions on cuts to temporary foreign workers within construction, there will be a degree of tightness in the labour market. On balance, however, our 2025 escalation forecast is set to remain the same at 3.0 percent.

Tariffs, should they arise, will undoubtedly be problematic and inflationary in nature. An election year in Canada is likely to cool institutional workloads and alter policy decisions as well. The impact of these events, however, will be difficult to unpick and will need to be revisited on a regular cadence. Assumptions, for now, are that incendiary tariff actions are hopefully avoided and an orderly transition of power is delivered if governmental changes materialize.

In our forecast horizon, 2026 and 2027 are twinned from an inflation perspective, with escalation predicted to increase by 4.0 percent per annum on average. A firmer operating environment, steady demand growth and supply chain recalibration should see market conditions stabilize and pricing normalize. Although labour availability is likely to be constrained, and volatility persists (while less prevalent), predictions could deviate from the baseline provided.