What do current market conditions mean for our escalation forecasts?

The Supreme Court’s 20 February 2026, validation of IEEPA tariffs, combined with a cooling construction market, is reshaping the escalation outlook. Key trends informing our forecasts are:

Current activity – Nominal spending continues to contract, with real output declining further after adjusting for cost increases. Public and utility-sector work carried volume while private activity softened.

Capital – Three Fed cuts have eased financing pressures but continue to weigh on private project starts.

Materials cost and availability – The BLS construction materials composite accelerated in Q4 at its fastest pace since early 2023, led by tariff-exposed metals. Non-metal inputs remained relatively flat to declining.

Labor – Wage growth moderated but still outpaces inflation. The vacancy-to-unemployed ratio eased to 0.54 in Q4, suggesting modest improvement in hiring conditions.

Machinery and equipment – Machinery and equipment costs re-accelerated to 5.0% year-over-year, driven by generators and transformers.

Trade policy – The tariff environment continues to pose challenges for builders. The AGC reports that two-thirds of contractors have seen at least one project postponed or scaled back.

Our 2025 escalation estimate closes at 4.0%, in line with our prior forecast, as federally backed megaprojects and data-center construction filled the gap left by softer general commercial work. In 2026, bid price escalation is expected to rise slightly - from 4.0% to 4.25% - driven by trade realignment and persistent labor tightness. However, market fundamentals are cooling: nonresidential spending is flat, residential is down 2%, and backlogs have fallen to a four year low. Conditions remain firm enough to keep costs elevated, but not enough to drive meaningful acceleration.

In 2027, we expect bid-price escalation to ease to 4.0%. A more stable lending environment improves project feasibility, the tariff picture gets clearer, and demand softens further. Labor availability will remain competitive, but conditions should be improved. For 2028, we project 3.75% as IIJA-funded work starts to plateau and private activity stays quiet. Outside data centers and select infrastructure there just isn’t the volume to sustain above-trend cost growth.