Today’s construction market volatility is unprecedented when one considers the collective impact of weak demand, tariffs, and labor market tightness. With all of these forces in motion, it can be difficult for firms to decide how to use their limited working capital.
Firms could sit tight on their cash, use it to load up on inventory and avoid potential future price hikes, or use it in any number of other ways. Unfortunately, one of the first uses of a portion of that capital may be to spend away some of it as firms honor existing obligations on in-progress, fixed-price contracts.
Tariffs have created new complications in today’s already challenging construction economy by creating an unanticipated price shift in the cost of materials and, with it, bid prices. Double-digit tariffs on a wide range of goods, including steel and aluminum, will squeeze firms on fixed-price contracts that must absorb the cost of tariffs.
In 2018 and 2019, when 25% tariffs were last imposed on Canadian steel and aluminum, material prices rose by double-digits, and overall annualized construction costs rose by over 5% for a brief period of time. These facts alone, however, hide the greater picture that smart business owners need to consider first.
In 2018 and 2019, inventory-to-sales of construction materials was 1.4, 30% lower than today’s historically high ratio of 1.8. Today’s high inventory levels could ease the transition toward higher prices as distributors and suppliers sell off excessive holdings of goods purchased at pre-tariff prices. However, this would be highly dependent on the objectives of upstream players.
Beyond this, price escalation clauses and material price allowances should be the industry’s first line of defense against the worst of any upcoming material price gyrations. Furthermore, it is overly simplistic to think that all materials everywhere will increase by the size of the tariffs being levied.
When it comes to lumber, for example, the industry has seen relatively minimal price movements relative to recent years. This likely reflects the fact that weak US home construction coupled with ample US lumber and lumber mill capacity means that tariffs on Canadian lumber are having only a negligible impact on prices.
As such, there is little reason to expend precious free cash on lumber that may only modestly increase in price. In short, no one should expect that prices for every material, everywhere, will increase by the size of the latest tariffs.
No project can be completed without laborers. Winter always marks a seasonal low point for construction labor demand. According to recent reports, today’s weak construction demand may have eased the current demand for laborers. However, in just a few months, the industry will once again reach its seasonal peak for labor at a time when 10% or more of the construction labor force may be missing due to a lack of proper authorization.
This could mean that the industry sees one of the worst fights for talent in its history in the months to come. As such, it may be very wise for firms to hold their free cash to the side so that they can best compete for labor, not if but when the next talent shortage arises.
Today’s average construction wage at over $39/hr. is a testament to the fact that craft workers have experienced multiple years of 4% or greater wage increases since 2021. Data from the Association of General Contractors’ last 10-years of workforce surveys indicate that labor shortage trends have only worsened with time.
In 2024, 84% of firms cited trouble filling hourly craft positions, marking a 15-point increase from 2016. The difficulty in filling some roles over the years has become extremely acute, especially for cement masons, drivers, mechanics, and even traffic controllers. For many of these positions, the percentage of firms having difficulty filling these roles has doubled in recent years.
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