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The Impact of Tariffs on Construction Estimating

The recently imposed tariffs on materials like steel and aluminum have led to price increases that are impacting CRE. These cost increases stretch project budgets and can make some projects no longer viable.

Our study relies on data on upstream trade remedies to estimate the effects of protectionism on domestic construction materials prices. We find that an increase in upstream protection measures raises domestic construction material prices by 0.9 percent after six months.

Increased Materials Costs

During the past two years, construction professionals have experienced unprecedented material price hikes and supply chain bottlenecks. Projects have been stalled by material scarcity, budgets have gone through the roof, and market uncertainty has reduced the shelf life of bids and estimates from weeks to days.

In addition, increased tariffs on imported materials have further fueled material cost increases. According to Associated Builders and Contractors, the cost of some construction materials has increased by as much as 20 percent due to the tariffs, including aluminum products (20%), lumber and plywood (18.3%), and steel products (12%).

While many construction companies are unable to pass these increased costs onto their clients, those that can are implementing escalation clauses in their contracts. While these tactics may mitigate the impact of increasing material prices, the resulting fluctuating profit margins are frustrating for contractors and their clients.

Fortunately, most construction materials are expected to reach a more normal rate of increase by the end of 2023. But the uncertainty of the current trade situation will likely make it difficult to predict future pricing for many types of construction inputs. To stay on top of the most recent commodity price trends, builders should talk to subcontractors and other project partners who have insight into where construction material prices are headed and communicate that information with their client.

Increased Labor Costs

The steel and aluminum tariffs may indirectly affect construction costs if they increase the cost of building materials in the United States. However, the overall impact will likely be muted for single-family homes because they rely more on lumber than metals. But the impact on multi-story buildings like apartment buildings and condos will be more pronounced because they require much more steel.

As a result of price increases, contractors must now carefully manage material procurement and forecasting. If the costs of steel, aluminum, and other building materials rise quickly, this could have a significant effect on the profitability of projects. It will also force contractors to recalculate project budgets and estimates, potentially increasing the time to complete these tasks.

Construction is a high-risk industry that often involves working with short timelines and tight deadlines. A few months of price volatility can have significant impacts.

Many raw materials that make up important construction products have increased in price over the past year due to the imposition of tariffs and retaliatory trade actions. These price increases have pushed up related manufacturing and construction labor costs. These price increases, combined with market uncertainty and supply chain bottlenecks, have made estimating a complicated task. It’s important for contractors to purchase all necessary materials at the outset of a project, draft price increase provisions into contract documents ahead of time, and provide a range of engineering and project contingency mechanisms.

Increased Taxes

Many construction companies must account for a variety of taxes on their projects. For example, a construction company may need to pay sales tax on materials or equipment. These taxes can add up and increase the cost of a project significantly.

In addition, some construction businesses are paying higher taxes due to the tariffs on steel and aluminum. The tariffs have also led to retaliatory tariffs by Canada on American products like Kentucky bourbon and Harley Davidson motorcycles. This has a direct impact on American construction business owners as well, as they must now pay additional fees for Canadian products.

Construction is a risky industry, so it’s common for contractors to include contingencies on their estimates. Typically, these are meant to cover costs that may arise unexpectedly, such as price increases for material goods or a labor shortage. However, it’s important to know how these contingencies are affecting the overall project estimate.

For example, the steel tariffs are pushing up the price of metal studs, which will push up the cost of a multi-story building. In addition, these tariffs are forcing some CRE firms to reconsider or rework their plans because of the increased costs. This can have a ripple effect on the rest of a project’s budget, including financing, construction timelines and more. This uncertainty can lead to fewer deal opportunities, extends the time it takes to finalize deals and reduces the risk tolerance of all stakeholders.

Decreased Productivity

The Trump administration’s tariffs have caused a massive price increase in construction materials, which is being reflected in the prices for home builds and remodeling projects. With prices expected to continue rising, contractors are scrambling to add escalation clauses to their quotes and find other ways to remain within their clients’ budget.

The effect of the tariffs on labor cost is also a concern. With much of a construction company’s budget going towards material costs, the lack of funds left for labor will make it even more challenging to find top-tier workers and keep their projects on schedule.

In the case of new construction, the higher costs associated with the tariffs will be passed on to buyers, which could lead to fewer homes being built and a lack of affordable housing in many cities. Builders will need to be strategic about their pricing to attract buyers, and they may also need to offer amenities that are appealing to younger generations.

While a spiraling trade war can have a dramatic impact on the cost of raw materials and decrease related US production, for developers and contractors who are able to anticipate these changes, there are important measures they can take to minimize risk of project default or litigation to resolve disputes over additional expenses. These include purchasing all necessary raw materials at the outset of the project (thereby avoiding sudden price spikes later), drafting price increase provisions into contracts ahead of time, and providing a range of engineering and project contingency mechanisms.