Contractors are entering 2025 with a mix of optimism and concern as major trends, including the return of Donald Trump’s administration and tight financing conditions, shape the year ahead. Here are three critical indicators to monitor:

Indicator 1: Construction Costs

‍The possibility of tariffs under the Trump administration looms large. Materials like steel, lumber, and MEP components are vulnerable, according to Luke Lillehaugen, senior economist at S&P Global Market Intelligence.

“Should the proposed 25% tariff on all goods from Canada be implemented, the North American lumber supply would see disruptions as prices would go up significantly,” Lillehaugen noted.

Steel could also see rising prices, said Christos Rigoutsos, another economist at S&P. “Rebar and wire rod prices are likely to be affected, as Mexico and Canada are some of the biggest exporters of these products to the U.S.”

However, Bryan Ehrlich, president of NCE General Contractors, sees a potential silver lining: “The tariffs will force out-of-country suppliers to find ways to cut their prices to maintain competitiveness.”

On the flip side, domestic manufacturers may struggle to meet demand. Michael Guckes, chief economist at ConstructConnect, warned, “Without a significant increase in domestic laborers, manufacturers’ output will be limited, potentially driving up costs further.”

Indicator 2: Inflation

‍Inflation remains a critical challenge. “The big number I believe we all need to continue watching is inflation,” said Chad Prinkey, CEO of Well Built Construction Consulting.

Projects are becoming increasingly expensive, said Ehrlich. “What cost $1 million five years ago is now $1.8 million to $2 million. There’s nothing we can do about it,” he added.

To combat rising costs, some contractors are leaning on value engineering. “The more cost exercises we provide, the more creative we can get with value engineering options to mitigate inflation,” Ehrlich explained.

Anirban Basu, chief economist at Associated Builders and Contractors, cautioned that inflation might tick back up in 2025, impacting financial pressures and monetary policy. “Inflation is still meaningfully higher than the 2% Federal Reserve target,” Basu said.

Indicator 3: Interest Rates

‍Although rate cuts in 2024 improved financing conditions, the Federal Reserve’s outlook suggests limited easing ahead.

“A small movement in interest rates on large projects in the millions makes a big difference,” said Chris Fisher, managing principal at Ducker Carlisle.

However, higher borrowing costs may persist, warned Basu. “Expect to slow down because of these higher interest rates,” he said.

Despite challenges, contractors are pressing forward, said Ehrlich. “If you’re running a business, you’re not gambling on interest rates going down. It makes deals harder to get done, but it’s the current state of the environment.”

These indicators will play a significant role in shaping building activity throughout 2025, as contractors navigate economic pressures and emerging opportunities.