In a recent conversation with Eddie Thompson, Director at Brown Edwards & Company and construction industry expert, we discussed the significant challenges contractors are facing in today's market. As someone who works with real estate professionals on the tax side, I found Eddie's insights particularly valuable for understanding the full picture of what's happening in construction.
Material Cost Escalations
One of the biggest challenges contractors face is the dramatic increase in material costs following the pandemic. Eddie emphasized that price escalations have been eating into profit margins, particularly when contractors aren't prepared with price escalation clauses in their contracts.
The problem compounds when you consider ongoing supply chain issues and material shortages. Contractors who locked in prices when bidding jobs have found themselves squeezed when those prices increased before materials could be procured.
The Tariff Impact
Looking ahead, Eddie predicts we'll start seeing significant effects from tariffs on construction materials:
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Aluminum: Tariffs can reach up to 50% on many aluminum products
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Copper and electrical components: Expected to see substantial cost increases and longer procurement lead times
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Lumber and wood: A staggering 84% of lumber imported into the United States comes from Canada, making this particularly vulnerable to tariff impacts
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Steel: Another critical material facing tariff-related cost increases
These tariffs will lead to cost inflation, tighter margins, and potentially even project re-scoping or cancellation. Contractors will need to evaluate whether it's more feasible to procure materials within U.S. borders or continue buying from international sources despite the added costs.
Contract Structure Matters
Eddie explained how the type of contract can determine who bears the burden of cost increases:
Lump-sum fixed-price projects: Contractors are locked into their bid price, with limited ability to pass increases to customers. This is common for school construction and many horizontal building projects.
Time and materials contracts: These offer more protection, allowing contractors to charge for actual costs plus markup.
Unit price projects: Contractors bill for specific units but must still be careful about the cost per unit established in the contract.
The key takeaway? Contractors need to work with the right professionals to ensure they're not entering contracts that will squeeze their margins to unsustainable levels. Price escalation clauses and tariff protection language can help hedge these risks, though Eddie noted these are often afterthoughts rather than standard practice.
The Labor Shortage Crisis
Perhaps the biggest barrier Eddie identified is the shortage of skilled labor. This has been prohibitive for growth for many companies, preventing them from taking on additional work even when demand is high.
There's good news on this front, however. Construction associations have been making concerted efforts to recruit at the middle school and high school levels. The message is resonating: students can attend vocational school, enter the workforce immediately making $60,000-$70,000 with no student loan debt, and enjoy a good 35-40 year career with retirement benefits.
This represents a shift from the old mindset that a four-year college degree was the only path to a successful career. As these recruitment efforts take hold, Eddie expects the labor situation to rebound.
Cost Inflation in Perspective
To illustrate how dramatically costs have risen, Eddie shared a striking comparison: schools that could have been built for $10-$20 million just 15-20 years ago now cost $100 million or more. While some of this reflects better technology and larger, more advanced facilities, much of it is simply inflation and cost-of-living increases.
The bottom line, as Eddie put it: you can't be the same contractor you were 15-20 years ago and still be bidding on the same types of jobs today.
Protecting Your Business
For contractors navigating these challenges, Eddie's advice is clear:
- Include protective language in contracts: Price escalation clauses and tariff protection provisions should be standard, not afterthoughts. Contractor associations often have boilerplate language available.
- Understand your contract type: Know whether you're entering a fixed-price, time and materials, or unit price agreement, and understand the risks of each.
- Work with experienced professionals: CPAs, attorneys, and advisors who understand construction can help you structure deals that protect your margins.
- Lock in vendor prices carefully: When you promise prices to customers based on vendor quotes, ensure those vendors are committed to honoring those prices throughout the project timeline.
Looking Forward
Despite these challenges, Eddie remains optimistic about the construction industry. The boom of the last 10-15 years continues, with substantial spending still on the horizon. For contractors who navigate these challenges smartly—with the right contracts, professionals, and business practices—opportunities abound.
From my perspective working with real estate professionals, understanding these construction challenges is crucial. Development projects depend on contractors who can deliver quality work at predictable costs. When contractors struggle with materials, labor, or margin compression, it affects the entire real estate development ecosystem.
Evan Ross is a Tax Director with Brown Edwards & Company based in Roanoke, Virginia, and host of the Real Estate Tax
Playbook podcast.
