How contractors can overcome cost pressures, labor shortages and regulatory hurdles in 2026

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Several forces are expected to make construction particularly challenging in 2026, including costs, labor, regulations and project delivery. These issues will affect owners, contractors and businesses in both vertical and horizontal work.

Cost pressures

Material costs for steel, concrete, wood and key mechanical/electrical components are expected to remain high or rise again due to tariffs and supply volatility, keeping bids and trade orders high. This could lead to an increase in contractual disputes, especially in long-term projects, which are harder to predict and control. More conflict means even more cost in terms of legal fees and higher insurance premiums.

Government job and spending cuts portend a slow 2026 for federal projects. Major U.S. cities also report flat incomes for 2026, a significant turnaround after years of COVID relief. As a result, municipalities are proceeding with caution, taking on only construction projects that are necessary to continue operating.

In the private sector, tighter lending standards (combined with a gradual reduction in interest rates) are expected to tighten project financing and reduce contractor margins, particularly in the commercial and residential sectors.

This tighter environment means greater control and documentation, higher capital contributions, higher contingency reserves, stronger borrower profiles, an emphasis on specific asset classes, technology integrations and a focus on sustainability. These lender requirements are particularly prevalent with larger traditional banks, prompting a shift to private credit, which offers more flexibility, but often at a higher interest rate.

Policy, rates and public funding

Tariff and trade policy uncertainty is expected to keep input prices volatile and complicate long-term procurement. Construction contract language is evolving to contemplate rate adjustment or escalation clauses, which work to pass these costs directly onto the owner. On the public side, large infrastructures and programs related to energy, such as the Infrastructure and Employment Act of 2021 they face completion dates and possible federal spending cuts at the end of 2026, posing a risk to companies that rely heavily on government work and require more careful cash flow and backlog planning. However, current trends suggest that the need for institutional, infrastructure, data center and certain energy projects remains relatively stable.

Lack of labor

The industry continues to face a severe shortage of skilled artisan workers and supervisors, driven by an aging workforce and too few young entrants, with projections indicating the need for hundreds of thousands of additional workers in 2026 in the US only.

In addition, construction wages are rising faster than the broader economy, and tighter immigration policy has added more upward pressure. As a result, project costs will increase, schedules will lengthen, and this will make staffing complex projects (data centers, manufacturing, and infrastructure) especially difficult.

To position themselves against labor and talent shortages, contractors could consider adopting digital tools. This could include BIM, drones, data analytics to control costs and mitigate disputes and harness artificial intelligence.

Demand changes

Forecasts point to slow or declining spending in some business and manufacturing segments as data centers, energy and infrastructure projects expand. This uneven demand will pressure contractors to adjust portfolios, seek new sectors and manage overcapacity or understaffing by region and specialty. Data centers and megaprojects are the place to be in 2026, but with that comes increased competition for those jobs, as well as the skilled workers needed to build them.

In response to the continued housing shortage, rebuilding and adaptive reuse projects are gaining momentum, which attempt to solve the housing shortage while also utilizing underutilized commercial and office buildings. To that end, the ROAD to Housing Act directs HUD to develop best practices to provide municipal governments with options to increase housing at the local level.