A few weeks ago, we spoke about the impact Trump’s short-lived tariffs on imports from Canada, Mexico and China would have on the construction industry. And in another move reminiscent of his first term, on Monday, February 10, 2025, President Donald Trump announced the re-imposition of tariffs on steel and aluminum imports. The tariffs, set at 25% for steel and 10% for aluminum, are intended to bolster domestic production and protect American jobs. However, much like the currently stayed tariffs, the construction industry, which heavily relies on these materials, may face significant challenges.
Rising Material Costs
As discussed in our January 9, 2025, insight, The Potential Impact of Trump Tariffs on the Construction Industry, not surprisingly, our first expectation considering the latest wave of tariffs will be an increase in the cost of construction materials. The most fundamental components of building materials are steel and aluminum; these materials are utilized in every project, from residential buildings to large infrastructure developments. The new tariffs will increase the cost of imported steel and aluminum, leading to higher overall project costs. Projects that have already been mobilized or are in the early stages of construction will feel this the most as contract values have been agreed upon under a pre-tariff cost structure; recovery may be difficult for the construction industry in these cases. Those in the estimation stage of the construction cycle have the opportunity to pivot into the higher cost structure, but who is to say President Trump won’t walk this move back over the next few days as he recently did with Canada and Mexico.
Inflationary Pressures
Inflation has become a commonplace conversation over the last few years, and this move will certainly not alleviate it. The increased cost of materials will likely contribute to broader inflationary pressures within the construction industry. Inflation does not discriminate depending on the type of contractor, so the industry may find it necessary to pass these costs onto customers, who then pass those costs to their customers. Ultimately, this increases prices for newly constructed assets such as new homes, commercial buildings, and public infrastructure projects. Further, this could slow down the pace of new construction, as higher costs deter spending, especially when coupled with the current interest rates.
Supply Chain Disruptions
We also recently discussed the California wildfires’ impact on the national construction materials supply chain in our article, The California Wildfires – Another Disruption to the Construction Industry?, from January 16, 2025. Couple national construction demands with these tariffs and the supply chain will buckle. The industry relies on a steady supply of imported steel and aluminum to meet committed project timelines. With tariffs in place, contractors will find themselves with limited resources to meet backlog demands and may need to pick and choose where to deploy their resources. As contractors wait to replace consumed materials, other projects will incur extended general conditions costs, causing project timelines to extend and potentially leading to overruns. Ultimately, the argument is, who is responsible for those extended costs?
Impact on Small and Medium-Sized Enterprises (SMEs)
The construction industry is home to numerous small and medium-sized companies that are family owned and operated. Most operate on tighter margins and can pivot in and out of projects as customer needs change. But steel and aluminum tariffs can become onerous on SME construction firms, who don’t have the cash flow or balance sheet to navigate this challenge. While a strategy may be to dip into their working capital line of credit, the cost of interest is prohibitive and will shrink already thin gross profits. To compensate for this, SME contractors facing financial difficulties must implement other cost-cutting strategies, such as layoffs or even business closures.
Potential Benefits for Domestic Producers
However, the ultimate goal of this executive order is to increase domestic steel and aluminum production, and those companies do stand to benefit from the tariffs. By making the competition from foreign imports more costly and unappealing, we hope to see an increase in demand for U.S.-produced steel and aluminum. As demand increases, so should job creation and investment in domestic steel and aluminum facilities, transportation and industries.
In Closing
While Trump’s intention behind steel and aluminum tariffs is to protect American jobs and industries, the construction sector will likely face significant challenges. Contractors should work with their financial professionals to forecast the impact of rising material costs, inflationary pressures, and supply chain disruptions, to proactively identify where triage will be needed. While all signs point to a challenging road ahead for the construction industry, we have been here before and must learn from our past experiences and utilize the best practices from those events.
