Tariffs
Challenge Increased Escalation
Although the actual cost impact of U.S. tariffs on construction materials is uncertain, the consensus suggests a moderate impact on overall construction costs. Estimates indicate that a typical cost escalation of 3-5% could increase by an additional 2-5 percentage points, resulting in a total escalation of 5-10%.
Response Plan
Planning is more critical than ever to a project’s success. By investing time up front to map out the project schedule, we can optimize pricing stability and identify cost-driving materials that may need to be reconsidered if they are affected by tariff pricing.
Build Contingencies and Alternates
When planning capital projects, clients should account for elevated construction costs in the near future and budget accordingly with higher escalation factors or more robust contingencies.
Alternate schemes create competition, and competition is favorable to project cost. It is also wise to identify alternates to facilitate cost reduction if construction costs escalate beyond what is anticipated.
Challenge Slowing Economy
The larger potential impact is the uncertainty that the constantly-changing tariff landscape brings to the economy at large. Uncertainty slows the economy and decreases investor activity, which may result in paused or cancelled construction projects.
Response
Verify Finances
Confirm funding sources and the lending landscape frequently when planning and launching capital projects.
Tariffs (continued)
Challenge
Product Cost/Availability
Tariff pressures may cause some products, materials, and systems to become cost prohibitive or difficult to procure, even after bids are accepted and construction contracts are executed.
Challenge
Protective Contract Language
To address tariff-related uncertainty, contractors are considering two strategies: including cost escalation or force majeure clauses in their owner-contractor agreements and building contingencies into their project budgets.
Response
Engage in Early Conversations with Partners
Communication with construction managers, general contractors, manufacturers, fabricators, suppliers and distributors is important in an escalating market. They know what is happening in the market and can offer sound guidance, which can lead to early procurement or selection of different materials or products. Engage with these partners as early in the project as possible.
Be Mindful of Product Substitutions
Prepare for an increase in substitution requests from contractors and be willing to consider alternatives to save time and money. It is especially important for clients and designers to take care in the evaluation of substitutions to ensure project quality is maintained.
Lock in Early Pricing
Consider releasing early bid packages for materials or systems that may be disproportionately impacted by tariffs to lock in pricing and expedite procurement.
Response
Engage in Early Conversations with Partners
Have early, frank conversations with potential construction managers and general contractors to ensure these risks are accurately reflected in project budgets. Include budget contingencies to account for potential cost increases.
Build Contingencies and Alternates
After selecting a construction manager or general contractor, negotiate contractual limits on cost escalation and force majeure clauses to help control potential budget impacts.
Explore Collaborative Project Delivery
If the project is still in its initial stages, consider a collaborative project delivery method such as progressive design-build. This methodology fosters collaboration between the owner, architect, and constructors, while allowing the owner to retain full decision-making authority. It enables informed evaluation of multiple materials and systems solutions, while providing greater transparency into costs and schedules—helping to reduce the risk of unexpected costs later in construction.
Labor
Challenge Labor Shortage
A surge in data center construction, a shrinking pipeline of new construction workers, and the impacts of recent immigration enforcement and deportations, has created a labor shortage. Demand for both skilled and unskilled workers now exceeds supply, driving up wages and escalating overall construction costs.
Response
Build Contingencies and Alternates
When planning capital projects, clients should account for elevated construction costs in the near future and budget accordingly with higher escalation factors or more robust contingencies.
It is particularly important to understand the local labor market. In rural and ex-urban areas, demand is increasingly being met by workers from urban centers, who typically command higher wages. At the same time, sending these workers to outlying projects can deplete the urban and suburban labor pool, placing upward pressure on costs in those markets, as well.
Understand the Micro-Market
Labor issues are hyper local, which makes it essential to understand the construction climate in a project’s specific market. According to cost consultant Currie & Brown, sites separated by as little as 100 miles can face dramatically different conditions depending on local labor demand and the level of contractor competition. These differences are especially pronounced in rural areas experiencing rapid growth in data center construction.
About
This paper was prepared by Mark Walsh and Carolyn Cooney from Perkins&Will, in collaboration with Currie & Brown representatives Chad Chapman and Rachel Personius.
Questions?
Contact Mark Walsh, Firmwide Director of Technical Design mark.walsh@perkinswill.com
