Construction Sector Adds Jobs Amid Rising Wages and Tariff Uncertainty

The construction sector has shown remarkable resilience in the face of economic headwinds, adding 13,000 jobs in March 2025. This growth outpaced the overall economy, driven by rising wages that enabled the industry to attract and retain workers more effectively than other sectors. However, the sector faces significant challenges due to newly announced tariffs and potential retaliatory measures from U.S. trading partners, which could undermine future employment growth and project timelines.

Diagnosis: A Sector in Transition

The construction industry's recent job growth is a testament to its ability to adapt to changing economic conditions. In March 2025, construction employment totaled 8,313,000, seasonally adjusted, an increase of 13,000 from February. This growth rate of 1.8 percent over the past 12 months outpaced the 1.2 percent growth rate in total nonfarm payroll employment. The industry's ability to add workers more rapidly than other sectors is a clear indication of its strength and resilience.

However, the sector is not without its challenges. The newly announced tariffs and potential retaliatory measures from U.S. trading partners have the potential to significantly impact the industry's employment growth and project timelines. The tariffs will raise the cost of imported construction materials, which are critical to the industry. For example, softwood lumber, a key material in new home construction, is largely sourced from Canada. The U.S. imported $5.9 billion worth of sawmill and wood products from Canada in 2024, and the tariffs on Canadian products, including softwood lumber, are on top of the existing 14.5% lumber tariffs. The Department of Commerce has signaled that it plans to roughly double the 14.5% tariff rate later this year, which could mean that the overall tariff rate on Canadian softwood lumber will rise above 50% in the fall and could approach 60%.

Prognosis: Short-Term and Long-Term Impacts

The short-term impacts of the tariffs and potential retaliatory measures are already being felt. The uncertainty caused by tariffs and potential retaliatory measures could lead to project delays and budget overruns. For example, contractors may face increased risks of material shortages and cost escalation, which could disrupt project timelines. Projects already in the planning phase may require revisions, while those under construction face increased risks of material shortages and cost escalation.

The long-term impacts of the tariffs and potential retaliatory measures are also significant. The sustained increase in the cost of building materials due to tariffs could lead to a long-term increase in project costs. For example, the cost of building materials has already risen by 34% since December 2020, which is far higher than the rate of inflation. This trend is likely to continue, leading to higher project costs and potential delays.

The tariffs and potential retaliatory measures could also reduce the profitability of construction projects. The increased cost of materials and potential delays could reduce the profitability of construction projects. For example, contractors may be unable to pass along tariff-related increases from the past several months, leading to potential financial losses. Some firms may attempt to manage the disruption by resequencing construction activities, but that could still cause delays.

Prescription: Strategies for Mitigation

Construction firms can adopt several strategies to mitigate the rising costs of materials and labor due to tariffs. These strategies include reviewing and negotiating contracts, diversifying supply chains, and adjusting pricing and procurement practices.

1. Reviewing and Negotiating Contracts:

- Force Majeure Provisions: Construction firms should review their existing contracts to understand the force majeure clauses. These clauses often protect against delays but may not cover cost increases due to tariffs. Firms should consult with legal counsel to determine if these clauses can be broadened to include tariff-induced price increases.

- Change Provisions: Firms should consider negotiating their contract's change provisions to define events constituting a compensable change to include the implementation or proposed implementation of new tariffs or modification of existing tariffs that increase the contractor's cost of materials and equipment. This can help in passing on the increased costs to the client, thereby mitigating the impact on profitability.

2. Diversifying Supply Chains:

- Domestic Sourcing: Firms can explore sourcing materials domestically to reduce reliance on imports. For instance, the White House issued executive orders on March 1, 2025, to expand American timber production, which could help reduce the reliance on imported lumber. However, this strategy may not be feasible in the short term due to limited domestic capacity.

- Alternative Suppliers: Firms can look for alternative suppliers from countries not affected by tariffs. This can help in maintaining a steady supply of materials and avoiding price hikes.

3. Adjusting Pricing and Procurement Practices:

- Contingency Budgets: Firms can expand contingency budgets to account for potential price increases due to tariffs. This can help in managing project budgets more effectively and avoiding financial losses.

- Price Escalation Clauses: Firms can incorporate price escalation clauses in their contracts to pass on the increased costs to the client. This can help in maintaining profitability in the face of rising material costs.

- Avoiding Fixed-Price Contracts: Firms can avoid strict fixed-price contracts and opt for cost-plus contracts, which allow for adjustments in costs due to unforeseen circumstances like tariffs. This can help in managing the financial risks associated with tariffs.

Global Interconnectivity: The Broader Economic Context

The construction industry's challenges are not isolated but are part of a broader economic context. The newly announced tariffs and potential retaliatory measures from U.S. trading partners are likely to have significant impacts on the construction industry's employment growth and project timelines. The increased cost of building materials, project delays, and budget overruns, along with reduced profitability and slower employment growth, are all potential outcomes of these tariffs.

The construction industry's ability to adapt to changing economic conditions will be crucial in navigating these challenges. The industry's recent job growth is a testament to its strength and resilience, but the sector will need to continue to innovate and adapt to maintain its competitiveness in the face of rising material costs and labor shortages.

Conclusion: A Call for Action

The construction industry's recent job growth is a positive sign, but the sector faces significant challenges due to newly announced tariffs and potential retaliatory measures from U.S. trading partners. Construction firms can adopt several strategies to mitigate the rising costs of materials and labor due to tariffs, including reviewing and negotiating contracts, diversifying supply chains, and adjusting pricing and procurement practices. The industry's ability to adapt to changing economic conditions will be crucial in navigating these challenges and maintaining its competitiveness in the face of rising material costs and labor shortages. Policymakers must also play a role in supporting the industry by addressing the root causes of these challenges and providing the necessary support to ensure the sector's continued growth and success.