Tariffs Are Changing the Math on Construction. Here’s What Developers Need to Know.
The numbers coming out of construction right now are not subtle. Nonresidential construction input prices surged at a 12.6% annualized rate during the first two months of 2026 — the fastest pace since the supply chain disruptions of early 2022. Engineering News-Record’s Building Cost Index rose 4.2% for 2025, with structural steel prices up 11.9%. And that was before the latest round of tariff adjustments fully worked their way through supply chains.
For developers and owners weighing new projects or mid-cycle renovations, this isn’t background noise. It’s a fundamental change to project economics, and understanding the full picture of what’s driving it is the first step toward managing it.
What the Tariff Structure Actually Looks Like Right Now
The specifics matter here, because the tariff landscape is more layered than most headlines suggest.
As of April 2026, steel, aluminum, and copper items made entirely or mostly from those metals carry a 50% tariff. Derivatives of those metals — think structural components, curtain wall systems, piping — sit at 25%. Industrial and electrical equipment incorporating those materials, including transformers, panel boards, and conduit systems, faces a 15% tariff. Softwood lumber carries a 10% tariff, with derivative products at 25%. A global 10% baseline tariff is also in effect through July 2026.
The 50% Section 232 duties on steel and aluminum were doubled from 25% midway through 2025. The immediate ripple effects have been significant. Steel mill products are up over 20% and aluminum mill shapes up 33% year-over-year as of January 2026. Coil-based steel products have surged even more sharply in certain categories.
What makes this environment particularly difficult for developers isn’t just the level of the tariffs; it’s the instability. Frequent policy revisions throughout 2025 complicated pricing assumptions and procurement strategies. For lenders and developers, the challenge was not tariffs alone but their unpredictability. When you can’t trust the number you locked in last quarter, budgeting becomes a fundamentally different exercise.
What It Actually Costs on a Real Project
The abstract percentages become concrete fast when you run them through an actual project budget.
In one case study shared by Skanska, the new tariffs could add around $22 million to a $375 million healthcare development — nearly half of that jump tied to derivative components that embed steel or aluminum in their assemblies. That’s not a rounding error. That’s a project that may no longer pencil out under its original assumptions.
For a typical commercial construction project, industry analysts estimate tariff-related cost increases of 5-25% depending on material type, with an aggregate impact of roughly 8% on overall construction costs. At the same time, the Brookings Institution estimates tariffs could add as much as $30 billion in costs to the housing sector, translating to roughly $17,500 per new home.
Those numbers are already showing up in how the market is behaving. Developers and lenders are proceeding with well-capitalized projects while marginal deals continue to stall under financing pressure. The market has shifted toward stronger sponsorship, tighter underwriting, and projects with clear demand drivers. The deals that were barely working before are not working now.
The Labor Problem on Top of the Material Problem
It would be easier if rising material costs were the only challenge. They’re not.
Labor remains the industry’s most acute structural challenge. Approximately 439,000 additional workers were needed in 2025, with nearly 500,000 required in 2026 to meet projected demand. About 94% of contractors report difficulty filling open positions, contributing to schedule risk, selective bidding, and continued wage escalation. Nearly 40% of skilled construction workers are over age 45, accelerating retirement risk.
The combination matters. Higher material costs plus tighter labor supply plus elevated interest rates produces a construction environment where the margin for error on any given project has essentially disappeared. A 20% rise in key materials can eliminate at least half of the expected profit on a typical job. Developers who are still underwriting deals on pre-2025 cost assumptions are not underwriting reality.
What Developers and Owners Should Be Doing Right Now
The reaction to this environment isn’t paralysis; it’s discipline. Developers who are moving forward on projects in 2026 are doing so with a different set of tools and habits than they were two years ago.
Contractors and developers are increasingly focused on risk management strategies including sourcing diversification, bulk purchasing, and renegotiating contracts to include escalation protections. Contract strategies worth considering include establishing unit pricing or index-based pricing for products where the supply chain cannot guarantee firm fixed pricing, explicitly tying key line items to producer price indices or supplier schedules. Structured allowances for high-volatility materials, with clear reconciliation mechanisms built into the contract, are becoming standard practice on well-run projects.
The outlook for 2026 is defined by persistence rather than resolution. Baseline construction cost escalation is expected to range between 4% and 6%, with potential for higher increases in tariff-sensitive or labor-intensive areas. Volatility will remain a constant factor, requiring disciplined budgeting and proactive management.
Brandon Charnas and Current Real Estate Advisors work with developers and owners navigating exactly this kind of environment — understanding not just what a project costs today, but how to structure deals and timelines that account for a cost environment that isn’t going to normalize on anyone’s preferred schedule. The developers who succeed in 2026 won’t be the ones who found a way to avoid the tariff impact. They’ll be the ones who planned for it honestly, built it into their underwriting, and structured their projects accordingly from the start.
The math has changed. The question is whether your budget reflects that yet.