The construction industry is bracing for another potentially turbulent era marked by escalating costs.
Material prices are rising, labor shortages are intensifying and inflation, though down from recent historic highs, is continuing to strain budgets across the sector. While these challenges alone are significant, the incoming 2025 Trump administration’s policies on infrastructure, domestic manufacturing and sustainability, among others, are set to further reshape the economic landscape for construction firms.
With demand for construction services expected to remain high, construction firms must navigate this storm of challenges while seeking innovative solutions to manage costs.
Why Construction Costs Are Rising in 2025: Key Drivers Explained
Material Price Volatility: The cost of key construction materials like steel, lumber and concrete has risen sharply due to continuing supply chain disruptions, geopolitical tensions and trade restrictions. The Producer Price Index for construction materials jumped nearly 20% over the past year, according to the U.S. Bureau of Labor Statistics. Tariffs on imported goods and limited global availability are compounding these issues, creating substantial budgetary pressures for construction projects.
These price surges are particularly challenging for long-term projects, where fixed budgets offer little room for adjustment. Firms must either absorb the additional costs or renegotiate contracts, both of which impact profitability.
Labor Market Pressures: The construction industry is grappling with a significant shortage of skilled workers. According to the Home Builders Institute’s Fall 2024 Construction Labor Market Report, there are currently 8.3 million payroll construction workers in the US, with 3.4 million employed in residential construction. The report estimates that approximately 723,000 new hires are needed annually to meet industry demand.
This labor gap, driven by demographic trends and fewer younger workers entering the trades, has led to higher wages and increased competition for talent. Retaining skilled workers has become a costly priority for many firms.
Inflation and High Demand: Inflation has affected nearly every aspect of construction, from the cost of fuel and equipment to administrative expenses. The Consumer Price Index (CPI) remains elevated, squeezing margins for construction firms.
Simultaneously, robust demand for private development and federally funded infrastructure projects is driving up competition for resources, further escalating costs.
2025 Policy Changes and Their Impact on Construction Costs
The Trump administration’s return to office in 2025 brings with it an ambitious agenda that will significantly affect the construction industry. Policy details are emerging, but several key areas are expected to drive change.
Infrastructure Investments: President Trump has reiterated his commitment to infrastructure development. Reports suggest the administration plans to expand funding for highways, bridges and broadband projects under the continuation of initiatives like the Infrastructure Investment and Jobs Act.
While these projects will create new opportunities, they are likely to increase demand for materials and skilled labor, exacerbating existing shortages.
“Buy American” Mandates: The incoming Trump administration has signaled a commitment to expanding “Buy American” mandates, which require federally funded projects to source materials domestically. This policy aims to reduce reliance on international supply chains and bolster US manufacturing.
Industry experts, however, caution that in the short term, this shift may lead to higher costs for construction firms as domestic suppliers scale up production to meet increased demand.
Sustainability and Deregulation: The Trump administration has signaled intentions to roll back certain environmental regulations affecting the construction sector, with a focus on promoting energy infrastructure projects. In April 2019, during his first term, President Trump signed executive orders aimed at accelerating energy infrastructure developments by easing environmental review processes.
While such deregulation may reduce compliance costs for some projects, firms committed to green building practices will need to adapt to evolving market and client expectations for sustainability.
Proven Strategies for Managing Construction Costs Effectively
Embrace Digital Tools: Digital platforms like Bluebeam provide powerful tools for tracking costs, optimizing workflows and improving collaboration across project teams. By minimizing errors and enhancing resource allocation, these tools can help firms streamline operations and reduce expenses. For instance, a study by Dodge Data & Analytics found that 71% of contractors using digital tools reported a measurable improvement in project efficiency.
Adopt Value Engineering: Value engineering offers a way to redesign projects for cost efficiency without sacrificing quality. By focusing on essential features and exploring alternative materials, firms can achieve significant savings. Prefabrication and modular construction, for example, allow for faster assembly and reduced labor costs, helping projects stay on budget and on schedule.
Strengthen Supplier Relationships: Long-term contracts and bulk purchasing agreements can help stabilize material costs and ensure availability during periods of volatility. Strong supplier relationships also foster collaboration, enabling firms to explore innovative solutions such as alternative materials or flexible payment terms.
Explore Modular Construction: Modular construction is emerging as a game-changer in the industry. According to McKinsey, modular techniques can reduce project costs by 20% to 30% while improving timelines. Off-site fabrication minimizes on-site waste and labor demands, aligning with both cost-saving and sustainability goals.
Address Workforce Challenges: Firms can mitigate labor shortages by investing in training programs, apprenticeships and partnerships with vocational schools. Offering competitive wages, benefits and clear career advancement opportunities can also improve retention rates.
How Sustainability Can Help Reduce Construction Costs
Implementing sustainability practices in construction may involve initial expenses, but they offer substantial long-term savings and revenue opportunities. Energy-efficient designs, waste reduction measures and the use of renewable materials can significantly lower operational costs and attract environmentally conscious clients.
Moreover, firms can benefit from government incentives, such as tax credits for green building projects. For instance, the Inflation Reduction Act of 2022 expanded tax credits for energy-efficient home improvements, allowing eligible contractors to claim up to $5,000 per home. These incentives not only offset initial costs but also enhance a firm’s market competitiveness by aligning with growing sustainability standards.
Future-Proofing Construction Firms Amid Cost Challenges
The construction industry faces a challenging landscape, with rising costs, labor shortages and shifting policies shaping its future. Still, these challenges also present opportunities for firms willing to innovate and adapt. By leveraging digital tools, exploring modular construction and aligning with government initiatives, construction companies can position themselves for long-term success.
