As we submit this article for publication, about one month ahead of its scheduled release, one thing remains clear: Uncertainty continues to define the economic landscape for contractors and their carriers. As of early August, tariffs on Chinese and Mexican imports were set at 30%, and for Canada, tariffs increased to 35%. U.S. President Donald Trump doubled tariffs on imported steel and aluminum from 25% to 50% on June 3, fueling further potential cost spikes for construction materials. Some copper imports have additionally been subject to hefty tariffs as of Aug. 1.
Of note, goods qualifying under the USMCA (United States-Mexico-Canada Agreement) are exempt from these additional tariffs, according to an April 4 Kpler “Market Update” blog, suggesting that both steel and aluminum from Mexico and Canada face only a 25% Section 232 tariff. Copper is not currently under Section 232 tariffs, and most copper imports from Canada and Mexico meet USMCA rules and are exempt, so perhaps copper imported from Canada and Mexico does not face a tariff, adding to uncertainties, indeed.
According to the Feb. 10 issue of U.S. News & World Report, roughly a quarter of all steel used in the U.S. is imported, with Canada being the largest source, followed by Mexico and other allies like Japan and South Korea. Approximately half of all aluminum used in the U.S. is imported, with Canada again being the top source, followed by Mexico and other allies like Japan and South Korea. Although the U.S. has some domestic production, the aluminum smelting industry is relatively small, with total smelter capacity being just 1.73% of the global total.
Copper is the third-most-consumed metal, behind iron and aluminum. The U.S. imports nearly half of the copper it uses, with most of it coming from Chile, followed by Canada and Mexico.
Tariff cost impact will most certainly put pressure on project budgets, many of which are already challenged by the significant period of escalation experienced post-pandemic.
The Clear Risks Associated with Tariffs and Labor Issues
Reliance on imports is significant for the construction industry, as these materials are essential for building and infrastructure projects.
In the Aug. 1 edition of Construction Dive, Fluor’s CEO Jim Breuer states, “Over the past couple of months, we’ve seen more clients continue to take a wait-and-see approach due to a variety of reasons, including ongoing trade policy discussions and developments, cost escalation, and interest rates…in a few cases, we’ve seen project cancellations or extended deferments.”
As noted in that comment, material cost escalation is not the only downside effect of tariffs: Tariff-driven volatility is delaying or sidelining projects and shrinking overall backlog across the industry. In the July 9 edition of Construction Dive, author Sebastian Obando shares that nearly a quarter of builders reported tariff-related project cancellations in May, requiring some contractors to reduce their workforce as they adjusted operations in response to material costs and uncertain project timelines.
Despite recent layoffs due to sidelined projects, the shortage of skilled workers persists. One key area of labor shortage is for electricians, who are needed to support a significant increase in projects for data centers and manufacturing. According to the Associated General Contractors of America (AGC), the year-over-year percentage change in spending for data centers increased by 69% from May 2023 to May 2024, while the nearest sector, manufacturing, saw an increase of 20%. This shortage of electricians is expected to potentially worsen due to restrictive immigration policies, which limit the number of workers entering electrical training and apprenticeship programs. It is estimated that as many as one in five undocumented immigrants work in construction.
Addressing the Risks
Contractors and their insurance providers should start addressing these risks now—in the unlikely event they have not already—because waiting could be costly. In fact, large general contractors (GCs) have been dealing with price escalation since the pandemic, and have learned from those uncertain times the value of pre-planning and continuous planning throughout the execution of the project. The pandemic made many GCs realize the industry was evolving daily, and nothing was to be treated as “routine”.
According to the Q2 2025 Gordian “Construction Cost Insights Report,” while material prices remained mostly stable in Q2, the construction industry is preparing for potential ripple effects from newly announced tariffs. Preconstruction teams are already modeling cost scenarios and adjusting procurement timelines. The report quotes Andrew Ahrendt of PCL Construction as stating, “Companies are proactively adjusting procurement strategies and selectively stockpiling materials in preparation for anticipated tariff-driven price hikes.” This is precisely what two Top ENR 400 panelists at a recent construction conference suggested as well. Part of their strategy was to pay for materials like steel and aluminum in advance of, even years before, breaking ground, getting the owner to pay upfront to avoid the likelihood of significant cost escalation. This approach has implications for insurance, as storage sites are often not covered by existing builders risk or inland marine policies, so it is imperative to keep this in mind. GCs are increasingly evaluating the risks associated with larger projects in response to the evolving tariff economy. Consequently, GCs are demonstrating a greater willingness to engage in both smaller and shorter-duration projects to reduce their exposure to material escalation and labor shortage. To mitigate the labor shortage risk, GCs are reevaluating their approach to addressing this issue. With skilled labor, it is not simply a matter of throwing manpower at the problem, but rather an issue of retaining qualified workers on current projects and gaining their favor for future projects. According to the 2024 AGC “Workforce Survey Analysis,” GCs have 1) increased hourly wage rates across the board for all skilled labor positions, and 2) heavily invested in training, both on-site and third-party training, to increase the number of skilled workers at their disposal.
Using Past Experience to Predict the Future
Subcontractor default insurance (SDI) is a highly specialized product that provides coverage to GCs for costs caused by the default of one of their subcontractors. These claims are typically the first type GCs would see on a project. Data from these claims often provides guidance and foresight into other types of claims as well, including, but not limited to, builders risk, contractor’s professional, and ultimately construction-defect claims.
Information gleaned from various carriers and brokers indicates a 40% to 60% increase in SDI claim frequency during periods of extreme cost escalation. Similarly, there are indications of a smaller but still significant percentage increase in the average SDI claim severity, primarily due to higher replacement costs and delay impacts.
It is reasonable to suggest, from our collective experience, that impacts from material cost escalation on SDI claims include higher default risks for subcontractors (due to thinner margins) and more financial distress, larger claim amounts due to higher replacement costs and project delays, and prequalification risks like the financials being evaluated not reflecting current pressures.
This data can undoubtedly provide guidance for actuaries to consider IBNR (incurred but not reported), for adjusters to consider case reserves, and for underwriters to consider proper premiums.
As we consider suggestions of best practices to help mitigate risks of volatile construction material costs amid an uncertain economic landscape, we see that successful contractors and developers are proactively managing these risks through strategic procurement, contract flexibility, and better forecasting tools.
Specifics of some best practices include early procurement and storage planning (as discussed previously), escalation clauses, supplier diversification, use of digital tools, alternative materials, dynamic cost indexing, robust initial and continuous financial prequalification, and a diversified subcontractor pool.
Mitigating Future Risks
Knowing the likelihood of significant material cost escalation due to tariffs and other contributing factors, it is important for contractors to limit exposure during contract negotiations.
Fixed-price contracts are now highrisk instruments. Without strong material escalation clauses, contractors are vulnerable to shrinking profit margins or even potential contract breaches.
By integrating strategic, tariff-savvy clauses into construction contracts, owners and contractors can safeguard their projects against market instability and take command of their financial future. A material escalation clause in an owner construction contract can protect against unforeseen price increases in materials by allowing for adjustments in the contract price.
Some potential approaches include:
• Scope of material price adjustments, including a bulleted list of materials that may have potential and/or current volatility—i.e., structural steel, concrete and cement products, lumber and wood products, asphalt and petroleum-based products, or electrical and mechanical components.
• Threshold for adjustment (a price adjustment shall be granted if the price increase exceeds __%, i.e., 5%) compared to the base price listed in the contract or bid submission, as verified by industry indices or supplier invoices.
• Time extension. If material escalation leads to procurement delays, the contractor may request a time extension under the contract’s force majeure provisions.
As volatility continues in the construction market, uncertainty remains elevated, construction spending has slipped, and material prices are starting to rise, according to Construction Executive’s July 27 edition. Even so, industry optimism persists. Anticipated interest rate cuts later in 2025 may offer relief. In the meantime, strategic planning, flexible contracts, and robust forecasting tools remain essential for navigating the challenges ahead.
About the Authors:
Chris Heider is a risk engineer at Optio Group. chris.heider@optiogroup.com
Robby Wells is an associate director at Proactive. rwells@buildwithproactive.com