As the construction industry navigates the complexities of 2025, the outlook for construction costs in the second half of the year reflects a mix of cautious optimism and persistent challenges. Influenced by material price volatility, labor shortages, policy shifts, and technological advancements, the trajectory of construction costs will require strategic planning from developers, contractors, and investors. Drawing on recent industry forecasts and economic trends, this article explores the key factors shaping construction costs from July to December 2025 and offers insights for stakeholders aiming to manage budgets effectively.
Moderating Inflation but Rising Costs
Construction cost inflation, which peaked in 2022, has shown signs of moderation. According to Rider Levett Bucknall, North American construction cost inflation rose by 4.69% year-over-year in 2024, with a modest 1.11% increase in the fourth quarter. However, forecasts suggest costs will rise by 5-7% globally in 2025, with the U.S. aligning closer to this range due to domestic and international pressures. The Building Cost Information Service (BCIS) projects a 17% increase in building costs over the next five years, with tender prices rising by 15% in the same period, indicating sustained upward pressure in the near term. For the second half of 2025, expect costs to grow modestly, driven by lingering inflation and specific input cost increases.
Material Costs: Volatility Persists
Material prices remain a significant driver of construction costs, with volatility expected to continue into late 2025. While some materials like lumber have stabilized—projected to range between $450 and $600 per thousand board feet—others, such as steel and electrical components, face upward pressure. Steel prices, which climbed to $709 per ton by December 2024, are likely to remain elevated due to global demand and potential trade disruptions. Concrete products, up 6% year-to-date in 2024, may see slight increases due to urbanization and infrastructure projects.
Proposed tariffs under the Trump administration, including a potential 25% tariff on imports from Canada and Mexico, could exacerbate material cost increases. Approximately one-third of U.S. construction materials are imported, with half sourced from these countries plus China.
Tariffs could disrupt supply chains, particularly for lumber, cement, and steel, leading to price spikes and project delays. JLL’s 2025 U.S. Construction Outlook warns that these trade policies may push costs higher, especially for commercial and multifamily projects, where material inputs are already 35% higher than five years ago.
However, supply chain recovery efforts are underway. The stabilization of global logistics and reduced pandemic-related disruptions could mitigate some cost pressures by late 2025, particularly for materials like plywood, which have seen minor declines. Contractors may benefit from strategic sourcing and bulk purchasing to hedge against price fluctuations.
Labor Shortages and Wage Growth
Labor remains a dominant cost driver, with shortages and wage growth expected to persist. The Associated General Contractors of America estimates a need for 450,000 to 550,000 additional craft workers in 2024 and 2025 to meet demand, a challenge compounded by an aging workforce and declining interest from younger generations. Construction unemployment stood at 4.4% in late 2023, reflecting a tight labor market. Wages are rising, with some sectors like remodeling seeing hourly increases exceeding 7%.
In the second half of 2025, labor costs are projected to grow by 4-5%, particularly in high-demand urban markets like Boston and New York. Pre-negotiated labor rate increases in cities such as Minneapolis (11%) and Seattle (7%) signal continued cost escalation. Potential immigration policy changes, including mass deportations, could further disrupt the construction workforce, which relies heavily on immigrant labor. Such disruptions may lead to longer project timelines and higher costs, as firms compete for a shrinking pool of skilled workers.
To address these challenges, firms are investing in training programs and automation. Robotics, 3D printing, and Building Information Modeling (BIM) are reducing reliance on manual labor, though adoption costs may offset savings in the short term.
Economic and Policy Influences
Economic conditions will play a critical role in shaping construction costs. The Federal Reserve’s interest rate cuts, which began in September 2024, are expected to lower borrowing costs by late 2025, spurring construction activity. Dodge Construction Network predicts stronger starts in Q1 2025, with momentum carrying into the second half. However, high interest rates in early 2025 may delay some projects, particularly in the commercial sector, where lending growth stalled at $3 trillion in 2024.
Federal infrastructure investments, including the $700 billion still unallocated from the 2021 Infrastructure Investment and Jobs Act, will bolster nonresidential construction, particularly in transportation and utilities. However, BCIS notes that strained public finances could limit infrastructure growth unless alternative funding emerges. Policy uncertainty, including potential regulatory rollbacks and tariff implementations, adds complexity to cost forecasting.
Sector-Specific Trends
- Residential Construction: Housing demand remains strong due to population growth and urbanization, but high costs and borrowing rates may temper growth. BCIS expects a recovery in housing output, though from a low base, with single-family starts projected to rise modestly by late 2025.
- Commercial Construction: Spending is expected to grow by 6.9% in 2025, driven by hotels (28% increase), retail (25%), and military projects (56%). However, traditional office and warehouse construction may lag due to oversupply and remote work trends.
- Institutional Construction: Education and healthcare sectors will see robust activity, with institutional starts projected to slow to 4% growth in 2025 after a 10% gain in 2024.
- Data Centers and Manufacturing: These sectors face intense cost pressures due to high demand for specialized materials like electrical components. Data center spending is forecast to rise 37% in 2025, though cancellations could temper growth.
Sustainability and Technology
The push for sustainability is increasing costs, particularly for net-zero energy buildings, which require advanced systems like solar panels and high-efficiency HVAC. These upfront expenses, highlighted in the 2025 Construction Costs Forecast by Neuroject, may rise in the second half of 2025 but could decline long-term as technology scales. Modular construction and prefabrication, projected to reach $110 billion by year-end, offer cost-saving potential by streamlining processes.
Technological advancements, including AI, IoT, and digital twins, are enhancing efficiency. These tools improve project visualization and reduce delays, though their integration requires significant investment, potentially straining budgets for smaller firms.
Strategies for Cost Management
To navigate rising costs in the second half of 2025, industry professionals can adopt several strategies:
- Proactive Sourcing: Build supplier partnerships and consider stockpiling critical materials to mitigate tariff-related price hikes.
- Leverage Technology: Invest in BIM, automation, and AI to optimize project management and reduce labor dependency.
- Flexible Budgeting: Account for inflation and potential policy shifts by using final cost indices, as recommended by Construction Analytics, to adjust budgets from current costs to the project midpoint.
- Skilled Labor Retention: Prioritize workforce development and retention to avoid costly delays from labor shortages.
- Sustainable Design: Balance upfront costs of green materials with long-term savings from energy efficiency.
A Final Word
The outlook for construction costs in the second half of 2025 points to moderate growth, with a 5-7% increase driven by material volatility, labor shortages, and policy uncertainties. While interest rate cuts and infrastructure investments offer opportunities, tariffs and workforce constraints pose significant risks. By staying informed about market trends, leveraging technology, and adopting strategic cost management, stakeholders can navigate this dynamic landscape and deliver projects successfully. As JLL emphasizes, working with experienced partners and prioritizing resilience will be key to thriving amidst 2025’s volatility.
