What do current market conditions mean for our escalation forecasts?

Elevated borrowing costs and a complex trade policy backdrop are heavily influencing the overall rate of construction escalation. Key trends informing our escalation forecasts are:

• Current activity – Total construction spending has been contracting. Continued growth in public spending, buoyed further by tailwinds from the BBB, could help offset weaker private demand.
• Capital – Elevated financing is limiting private projects, capping upside pressure but also delaying any broad cost relief.
• Materials cost and availability – Tarriff impacts are starting to build, with many construction materials and components starting to record price increases.
• Labor – Wage growth has moderated alongside softer demand and while vacancies have eased, availability remains tight.
• Machinery and equipment – Heavy-equipment inflation has cooled year on year, though generators still carry premiums.
• Trade policy – Steel and pending copper tariff increases are adding upward pressure on escalation projections.

Bid price expectations for 2025 remain unchanged this quarter at 4 percent, as federally backed megaprojects filled the gap left by softer general commercial work.

With US tariffs on steel doubling to 50 percent, and a recent levy on copper of the same, contractors will be in a rush to secure orders before any further increases. Even so, overall material inflation is running only about 3 percent year over year because flat cement, weak lumber and cheaper diesel offset the metals spike. High interest rates continue to sideline many private projects, keeping supply and demand roughly in balance.

In 2027, bid prices should ease to 3.75 percent, albeit that is an increase on our Q1 2025 forecast of 3.0 percent. This is as rate cuts eventually arrive and federal project pipelines taper. A sharper slowdown would need deeper rate relief or a pause in megaprojects; conversely, faster monetary easing or fresh commodity tariffs could nudge costs above our baseline.