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By Dan Turpin | Published August 5, 2026
Construction cost inflation is expected to remain a central concern for the industry in 2026 and into 2027. This white paper provides an updated analysis of key drivers, market trends, and data-informed forecasts shaping construction costs in the coming year.
The overall forecast remains generally consistent with prior projections: construction costs are expected to increase approximately 3% to 6% overall, with regional variation. Sunbelt, Southeast, coastal, and fast-growth markets are expected to experience the strongest upward pressure, while Midwest markets remain particularly exposed to labor-wage volatility.
Labor remains the most significant inflationary driver. Skilled-trade wage inflation is expected to continue through 2026, with increases generally estimated at 3% to 5% depending on region and skill set. Material costs remain uneven: lumber is expected to trade at elevated levels due partly to tariffs and supply constraints, steel prices are supported by trade policy and domestic mill behavior, and roofing / asphalt roofing and asphalt products appear comparatively more stable but still exposed to petroleum and energy-market movements.
The construction sector is a critical component of the global economy, influencing infrastructure development, housing, and employment. In recent years, cost inflation has emerged as a sustained challenge affecting owners, contractors, consultants, investors, insurers, and policymakers. This updated white paper examines the outlook for construction cost inflation in 2026, identifies the leading drivers, summarizes material-specific trends, and outlines practical strategies for managing cost risk.
Current State of Construction Costs
The industry continues to face elevated cost pressure following the volatility of 2021 through 2024. Although some material categories have stabilized from peak pricing, construction costs remain above pre-pandemic levels, and labor pressure has become increasingly influential. As of early 2026, construction cost indices continue to show persistent increases, with average annual increases still generally within the 4% to 7% range across major markets.
Overall U.S. construction activity is expected to remain modestly positive. Spending is projected to rise slightly, about 0.4% year-over-year, reaching approximately $2.05 trillion. Residential construction is projected at approximately $879 billion, while civil engineering projects are projected at approximately $493 billion. Non-residential spending is expected to remain comparatively flat, reflecting cautious investment in commercial sectors.
This environment creates a mixed outlook: demand growth may be modest, but cost pressure remains meaningful because labor shortages, tariffs, supply constraints, energy inputs, and regional capacity limitations continue to affect pricing.
Labor Market Dynamics
A persistent shortage of skilled labor remains the primary inflationary force in construction. Wage inflation for skilled trades is expected to continue through 2026, generally in the 3% to 5% range depending on region and skill. Wage trends vary by location and trade, with the Midwest and Sunbelt states seeing the fastest wage growth. In-demand roles include electricians, welders, HVAC professionals, and renewable-energy specialists.
Union and non-union wage dynamics also remain important. The historical union wage premium has narrowed compared with levels before the 2000s, but union wages still generally exceed non-union wages. Current hourly rate examples include union classifications such as general laborers and restoration technicians at $115 to $150 per hour (contractor billing rate), roles at $75 to $95 per hour (labor rate), and specialized union environmental services at $165 to $250 per hour (labor rate). The construction wage gap varies by region, averaging approximately 22% nationally and reaching as much as 45% in the Midwest and Northeast.
Labor compensation growth has accelerated sharply in recent years. As of March 2025, average compensation costs reached $45.38 per hour worked. For a full-time employee working 40 hours per week year-round, this equates to roughly $94,000 annually. Five-year labor-cost growth accelerated from 12% in 2020 to 19% in 2023 and 28% in 2025. Several structural labor factors are likely to keep pressure on costs. More baby boomers are retiring, some markets have experienced labor disruption connected to actual or rumored immigration actions, and industry groups continue to call for policy changes and workforce-training investments. Unless immigration levels increase or related policies change, labor shortages and related project delays are likely to persist over the next year.
Workplace Pipeline and Trade Education
The workforce pipeline is beginning to show signs of change. Forty-five percent of Americans do not see the value in a four-year college degree, with that figure rising to 52% among members of Gen Z. Total U.S. student debt is approximately $1.62 trillion, and many U.S. employees have expressed concern that AI could make some roles obsolete. These pressures may increase interest in skilled trades over time, because many blue-collar roles involve hands-on work that is less directly replaceable by AI. However, trade-school growth is unlikely to resolve near-term labor shortages quickly enough to materially reduce 2026 cost pressure.
Material Costs
Material prices remain elevated, though volatility varies by category. Prices for several key inputs have stabilized compared with recent peaks, but steel, lumber, and petroleum-based products remain exposed to trade policy, energy prices, freight rates, supply constraints, and regional demand cycles.
Lumber Market Outlook
Lumber remains exposed to tariff policy, supply constraints, domestic production capacity, and labor availability in the timber industry. Current lumber pricing is approximately $618.05 per thousand board feet. Increased U.S. tariffs on Canadian softwood lumber imports have pushed duties above 34%. Canadian mills supply about 25% of U.S. lumber demand, making tariffs a meaningful pricing factor for the U.S. supply chain.
U.S. reliance on Canadian timber is expected to decline by approximately 15% to 20%. Increasing U.S. production may take one or two quarters to ramp up, which could create a sharp short-term price increase by mid-2026 before easing as production catches up. Federal timber supply constraints, environmental regulations, and ongoing litigation have also restricted harvesting and contributed to mill closures, especially in states such as Oregon.
Lumber is expected to continue trading in the $550 to $650 per thousand board feet range over the next 12 months.
Tariffs, trade negotiations, and government policy are expected to create short-term volatility, even if production catches
up later in the forecast period.
Steel Market Outlook
Steel pricing remains shaped by trade policy, domestic mill utilization, raw-material costs, energy prices, freight rates, and global supply conditions. Cold-rolled steel used in roofing and siding is trading around $1,173 per ton. Section 232 tariffs on steel imports doubled to 50% in June 2025, supporting domestic prices and limiting downward pressure from imports. U.S. mills are operating at a 76% to 77% capacity utilization rate, up from the prior year, while restricting order books to manage inventories and maintain price floors.
Cold-rolled steel prices in the United States are expected to remain stable or rise slightly over the next 12 months, with most forecasts in the $1,100 to $1,300 per ton range. Prices could rise modestly in the last half of 2026 into 2027, reaching an estimated $1,300 to $1,450 per ton. Structural hot-rolled coil steel is also trading around $1,173 per ton. Global oversupply may weigh on prices, but U.S. tariffs and steady to modestly rising domestic demand could sustain current pricing. Analysts expect structural steel to continue trading in the $1,000 to $1,200 per ton range.
Asphalt and Roofing Materials
Roofing and asphalt-related materials appear comparatively more stable than several other construction inputs. Based on current Kansas-area market conditions, asphalt roofing material costs have increased by nearly 25% since January 2020, according to the Producer Price Index (PPI). Many roofing products are petroleum based, so their costs remain closely tied to crude oil prices and asphalt derivatives.
Shingle pricing has declined by approximately 2.19% over the past year. Factors contributing to pricing stability include reduced construction activity and reduced infrastructure spending, while demand for impact-resistant and energy-efficient shingles has provided some support. Roofing material prices are expected to remain relatively stable, with increases of approximately 2% to 5% over the next year.
Supply Chain, Regulatory, and Macroeconomic Factors
Supply chain conditions have improved from the most acute pandemic-era disruptions, but residual effects remain. Geopolitical tensions, tariff changes, freight costs, and logistics constraints continue to affect imported materials and equipment. These pressures are especially relevant for lumber and steel, where trade policy and supply availability can materially shift costs over short periods.
More stringent regulations on emissions, waste management, and building standards continue to add compliance costs. The transition to sustainable construction practices may provide long-term benefits, but near-term implementation often increases project budgets through higher material specifications, documentation requirements, training needs, and compliance efforts.
Interest rates, general inflation, currency fluctuations, capital costs, and project-financing conditions continue to influence construction decisions. When borrowing costs remain elevated, marginal projects face greater scrutiny, and owners may delay or resize projects. Even with modest overall spending growth, cost inflation can remain sticky if labor and material inputs remain constrained.
Forecast for 2026: Projections and Scenarios
Based on current market conditions, construction cost inflation in 2026 is expected to remain in the 3% to 6% overall range. Regional variation remains one of the most important planning considerations. Sunbelt states, Southeast markets, coastal areas, and high-growth markets are expected to see stronger upward cost pressure. Midwest markets also remain notable for labor-wage volatility, especially where construction wage gaps and skilled-labor shortages are more pronounced.
Impacts on the Construction Industry
Project Budget: Rising input costs are forcing developers, owners, insurers, and contractors to revise budgets, seek cost-saving alternatives, and in some cases delay or cancel projects.
Timelines: Labor shortages and extended lead times for materials can increase project duration and raise the risk of cost overruns.
Investment Decisions: Cost inflation affects the viability of marginal projects and increases scrutiny of return on investment. Projects with faster payback periods or stronger resilience to cost volatility may receive preference.
Industry Structure: Smaller firms with limited pricing power and capital reserves may be more vulnerable, potentially accelerating industry consolidation
Regional Pricing: Budgeting should be localized. National averages may understate cost pressure in Sunbelt, Southeast, coastal,
Midwest, and other high-growth or labor constrained markets.
Use Escalation Contingencies: Build realistic escalation allowances into estimates, especially for labor-intensive scopes and materials affected by tariffs or energy prices.
Procure Early Where Practical: For steel, lumber, mechanical equipment, and other key inputs, early buyout can reduce exposure to short-term volatility.
Qualify Multiple Suppliers & Subcontractors: Broader sourcing options can reduce schedule and pricing risk when regional capacity is tight.
Monitor Labor Availability: Labor should be treated as a schedule and cost risk, not only a staffing issue. Contractor capacity and trade availability should be confirmed early.
Consider Alternative Methods: Modular construction, prefabrication, improved project sequencing, and selective automation may reduce risk, though upfront investment can limit immediate savings.
Update Budget Frequently: Because tariffs, freight, energy, and regional wage trends can change quickly, estimates should be refreshed at key project milestones.
Conclusion
The current data supports a 2026 construction cost inflation forecast of approximately 3% to 6% overall, with possible stabilization moving into 2027. While this level remains elevated by historical standards, it is more comparable to normal inflationary periods than the extreme escalation experienced
from 2021 through 2024.
Labor remains the dominant driver, with skilled-trade wage growth expected to continue and the industry requiring nearly 499,000 additional workers to meet demand. Lumber is expected to remain elevated and volatile due to tariff and supply constraints. Steel pricing is expected to remain stable to slightly higher, supported by tariffs and domestic price floors. Roofing and asphalt products appear more stable, with expected increases of 2% to 5% over the next year.
References:
Global Construction Cost Index Reports, 2024-2026.
U.S. Bureau of Labor Statistics: Construction Labor Market Data.
International Monetary Fund (IMF) World Economic Outlook, 2025-2026.
Industry association reports on building materials and supply chains.
Policy briefs on construction regulation and sustainability initiatives.
*Source data is a snapshot in time and will change as the market adjusts in the future.
