While some construction material prices have stabilized or even declined over the past year, others continue to be stubbornly elevated – and the threat of more tariffs could throw a monkey wrench into supply chains, further exacerbating project budgets.
Overall, material prices in 2024 remained stable, falling just 0.6 percent year-over-year, according to the US Bureau of Labor Statistics. Plywood, plastic construction products and fabricated structural metal led the price decline, while softwood lumber, cement and gypsum products saw price gains.
“Demand for infrastructure and megaprojects has kept upward pressure on concrete and cement prices, while demand for housing and the somewhat constrained supply of lumber has kept upward pressure on softwood lumber prices,” says Sarah Martin, associate director of forecasting for Dodge Construction Network.
EFFECT OF TARIFFS
Materials prices this year will likely be impacted by various factors, says Anirban Basu, chief economist for the Associated Builders and Contractors Inc.
“Tariffs could push input prices meaningfully higher, especially if enacted at elevated rates on Chinese, Mexican and Canadian imports, and the electrification of certain segments could push copper demand and prices higher,” Basu says. “On the other hand, sagging demand in certain interest rate-sensitive segments, like residential or office, could put downward pressure on overall materials prices.”
While 2024 brought good news overall on material prices compared to recent years after the pandemic hit in 2020, the “good news” might very well be over, says Ken Simonson, chief economist at AGC of America. January saw some price increases on copper and oil, and prices for crude oil, gasoline and diesel could start increasing further.
The wild card is more tariffs – and how steep and extensive they could last.
“Construction is more vulnerable to tariffs than many industries,” Simonson says. “A significant amount of steel and aluminum products and other raw materials are imported, as well as many specific types of equipment and machinery. Construction costs for certain materials could go up a lot and supply chains could also be disrupted again as they were in 2020 through 2022.”
Indeed, if other countries adopt quotas to avoid tariffs, supplies of those materials or equipment would be completely cut off once the quota is met until it resets the following year, he says.
Material prices -- a sizable portion of construction budgets -- remain 39 percent higher than where they were in February 2020. However, the stabilization in recent years has allowed for pricing contracts to more accurately build in price assumptions, compared to 2021 when inflation was soaring.
Sarah Martin
Associate Director of Forecasting, Dodge Construction Network
OTHER FACTORS
Higher material prices aren’t the only factor driving up project costs -- higher labor costs and project delays are also significantly impacting budgets, Martin says.
Since the pandemic, projects across most construction verticals are taking longer to move through the planning process and reach start, she says. For example, hotel projects under $500 million took a median 24 months to move through planning in 2024, versus 19 months in 2019, according to Dodge Construction Network project data.
“Material prices -- a sizable portion of construction budgets -- remain 39 percent higher than where they were in February 2020,” Martin says. “However, the stabilization in recent years has allowed for pricing contracts to more accurately build in price assumptions, compared to 2021 when inflation was soaring.”
Contractors typically don't buy materials in advance, and if they can get the owner to agree to a price adjustment or to buy materials sooner than they would otherwise, that provides a degree of protection, Simonson says.
“But there are a lot of materials where that's just not feasible -- you don't buy ready mixed concrete in advance,” he says. “If cement is being imported and that supply is cut off where the price shoots up, the contractor is going to be vulnerable.”
Even if the owner agrees to buy materials earlier than otherwise, there's a risk associated with that if they haven't settled on the final design or if they change the scope of the project, Simonson says.
“After the contract is signed, then you may have the wrong specs or the wrong quantity of materials,” he says. “You also may have to pay for storage and insurance for materials. So, there's no foolproof solution to avoiding tariffs or passing on the cost of tariffs.”
ACTIONABLE STEPS FOR CONTRACTORS
Mostly what contractors can try to do is to first look for alternative suppliers of material, Simonson says. Contractors typically seek multiple quotes for materials, but also if they're able to work with the owner and its design team to see if it's possible to spec some alternative materials or to change the design in some way that reduces the exposure to something that's going up in price or that has limited availability or long lead time.
“But that really does depend very much on what the original design is and whether there is scope for changing that,” he says. “The best that contractors can do is to engage early and remain in close touch with all the other interested parties, whether it's the owners or the design team.”
Another potential sting on budgets: financing costs.
Borrowing costs are likely to prove far more prohibitive than materials costs in 2025, Basu says.
Despite the equivalent of four 25 basis-point cuts since the Federal Reserve began lowering rates in September, financing costs have actually risen since then due to higher inflation expectations and bond yields.
“Demand for construction in certain segments, like data centers and manufacturing, is so elevated that high rates will not affect starts, but other rate-sensitive segments are likely to struggle until borrowing costs fall meaningfully lower,” he says.
According to the Senior Loan Officer Survey, the net percentage of domestic banks tightening standards for commercial and industrial loans this quarter was at 6.2 percent, and C&I lending generally remains tight, Martin says. But as the Fed lowers rates, short-term interest rates will marginally improve and prop up demand in some sectors.
While material prices remain a sizable portion of project budgets, contractors’ bottom lines ultimately hinge on working as efficiently and quickly as possible, Simonson says.
“Whether or not the job winds up being profitable depends on how well the contractor can manage its own costs – such as labor costs and financing costs -- and how efficiently and promptly they can get the job done,” he says.
Photo credit: STOCKCENTRAL/BIGSTOCKPHOTO.COM
