Navigating Escalation and Market Trends: A Construction Outlook for 2025

Navigating Escalation and Market Trends: A Construction Outlook for 2025

The construction industry is constantly evolving, and understanding the factors that drive costs is crucial for project success. In this post, we'll delve into the intricacies of escalation, analyze current market trends, and offer insights into the construction outlook for 2025.

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What Is Escalation in Cost Estimating?

Let's talk escalation. Clients often misunderstand. They see "escalation" as a blanket term covering every cost increase, including those unexpected disasters like the pandemic. But true escalation, at its core, is our way of accounting for predictable, market-driven increases in costs over time. This includes annual increases in union wages / prevailing wages, and material cost changes in normal market conditions. Think of it as the construction industry's equivalent of the inflation you experience in everyday life (CPI) - at the grocery store, for example.

Force majeure events – such as pandemics, natural disasters, unforeseen supply chain disruptions are unpredictable and can significantly impact costs. These events fall outside of the scope of typical escalation mark-up and require separate risk mitigation strategies. If clients are concerned about these unforeseen circumstances, they should consider incorporating a separate contingency or risk allocation into the project budget.

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Analyzing Current Market Trends

Now, let's look at the bigger picture. The AIA Billings Index is whispering caution, while the Dodge Momentum Index tries to sound optimistic. In my experience, both have their biases. The reality, as I see it, lies somewhere in between. We're seeing pockets of growth, driven by government infrastructure projects and a continued push in manufacturing and healthcare. But the shadow of rising interest rates looms large, and skilled labor remains a persistent challenge.

Here's my take on 2025:

• Labor and Wage Growth: Expect continued wage growth, particularly in unionized sectors, driven by the CHIPS and Science Act and the Inflation Reduction Act. Skilled labor shortages will further intensify upward pressure on wages.
• Materials: Material costs will stabilize, but volatility will remain. We've seen the rollercoaster ride of the past few years. While steel prices might find some relief, other materials will inevitably face their own supply and demand challenges in early 2025.
• Interest Rates & Barrowing Costs: The Federal Reserve’s cautious approach to monetary policy in 2025 will influence borrowing costs. In construction, high interest rates increase the cost of borrowing for both public and private projects, which can constrain budgets and delay starts. Conversely, when interest rates are low, the increased availability of financing tends to drive up demand for materials and skilled labor, further influencing price escalation. As Jerome Powell, Chair of the Federal Reserve, explained, 'It's kind of common-sense thinking that when the path is uncertain, you go a little bit slower.' This cautious approach highlights the uncertainty facing the construction industry.
• Market Stability: The construction industry is transitioning toward a more stable trajectory compared to the high volatility of recent years. Government investment in infrastructure, healthcare, and manufacturing will continue to fuel activity in key sectors.
• Focus on efficiency will be paramount. Contractors who can streamline operations, improve productivity, and minimize waste will gain a competitive edge.

This isn't doom and gloom. The construction industry is resilient. We've weathered storms before. The key is to be proactive, adapt to changing market conditions, and leverage our experience and expertise to navigate the challenges ahead.

Understanding escalation and keeping a pulse on industry trends isn’t just about managing costs, it’s about helping clients plan better, mitigate risks, and achieve successful project outcomes. As we navigate the challenges and opportunities of 2025, collaboration, innovation, and resilience will remain at the heart of our industry's success.

How are you preparing for these trends in your projects? I’d love to hear your perspective—let’s discuss in the comments!

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Disclaimer: This is my personal perspective based on years of experience in the industry. Market conditions can change rapidly, so this analysis is intended for informational purposes only

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