As U.S. trade policies continue to evolve, developers, investors, and lenders in commercial real estate are closely watching the potential effects of tariffs on construction costs.
While media headlines often highlight worst-case scenarios, many trade negotiations remain unresolved. Tariffs are being imposed, adjusted, or lifted regularly, making it difficult to forecast their long-term impact. Still, by examining regional construction trends, project-specific variables, and risk management strategies, stakeholders can better navigate the uncertainty.
A Softer Market Could Cushion The Blow
Tariffs are one of many forces influencing material costs. Past administrations have used tariffs to protect U.S. industries—George W. Bush introduced steel tariffs in the early 2000s, Barack Obama added duties on Chinese steel pipes, and Donald Trump imposed a 25% tariff on steel and 10% on aluminum in 2018. The Biden administration has largely maintained these measures.
Today, market conditions may help ease some of the pressure. Construction activity slowed in late 2024 after the post-COVID boom, reducing demand and easing inflation. With fewer projects underway, contractor availability has improved, helping to moderate labor and material costs—even as tariffs push up prices for imported goods and their domestic alternatives.
Additionally, the COVID-era supply chain crisis reshaped procurement strategies. Many developers and contractors shifted away from Chinese suppliers, favoring domestic sources or imports from more stable trade partners like Vietnam and South Korea. This diversification helps reduce exposure to newly imposed tariffs.
Tariffs Are Just One Part of the Budget Equation
A 25% tariff on steel or aluminum may sound dramatic, but the real impact on a project budget is more nuanced. Materials typically account for 40–60% of total construction costs. Most materials used in U.S. construction—over 80%—are sourced domestically. Imported materials might represent 0–30% of a project’s total materials, and tariff rates vary by source country.
When all factors are considered, the average impact of tariffs on total construction costs is often in the range of 3–5%, and in many cases, even less. While still significant, this may be more manageable than initial reactions suggest—especially for project teams with a proactive approach.
Strategic Risk Management Is Key
The greatest challenge right now is uncertainty. Projects already underway—especially those finalized in late 2024—are the most vulnerable, particularly if their budgets didn’t anticipate rising material costs tied to new tariffs.
Developers should begin by identifying which materials are imported and from where, then assessing tariff exposure accordingly. Budgeting for a worst-case scenario may derail some deals, but having contingency plans—such as alternative suppliers or materials—can provide flexibility.
Larger, better-capitalized projects are better equipped to navigate these changes. These teams often have the purchasing power to lock in pricing and diversify supply chains. Some are even accelerating material purchases to beat tariff deadlines, though storage costs and the risk of paying tariffs at customs still apply—even if materials were pre-paid.
Clear contract language is critical. Standard AIA contracts don’t directly address tariffs, but they do state that contractors are responsible for taxes enacted by the time bids are received. That said, disputes may arise if costs spike mid-project. Owners with fixed-price contracts might assume contractors must absorb the increases, but without specific provisions, some costs could still fall to owners. Building in higher contingencies is a smart move.
Planning Ahead For A Shifting Landscape
For project teams seeking guidance amid the uncertainty, construction risk management consultants—like Partner—can help assess and manage tariff-related risks through tools like Project Budget Reviews and Document and Cost Reviews. For lenders, products like Surebuild project completion insurance offer added protection against unexpected cost escalations. Surety bonds, project completion insurance, and higher contingencies are among the most common tools used today.
While tariffs add another layer of complexity to construction deals, experienced industry professionals know that uncertainty is nothing new. With the right risk management strategy, even in this unpredictable environment, successful project delivery remains well within reach.
Source: GlobeSt
