Key topics covered in this article:
- Economic and Market Conditions: Construction costs remain high, with tariffs and labor shortages impacting budgets, but gradual interest rate cuts are expected in 2026.
- Sector-Specific Performance: Data centers and manufacturing sectors are thriving, while residential construction faces challenges due to high mortgage rates and zoning restrictions.
- Strategic Considerations: Contractors are encouraged to invest in workforce development, strengthen supplier relationships, and adopt technology to enhance efficiency and growth.
Construction activity is expected to stay strong heading into 2026, with data centers, manufacturing, and infrastructure projects leading the way. Contractors are still dealing with high material costs, labor shortages, and tariffs, but the new tax law may offer some relief to some. Others are already adapting through proactive planning and increased use of technology. The contractors that continue to focus on execution and efficiency are best positioned to compete and grow in 2026.
Economic and Market Conditions
Economic conditions are showing signs of improvement, though many construction companies are still facing higher costs and tighter margins. For reference, prices are rising at about 3% per year, much lower than the spikes in 2022 but still above the Federal Reserve’s 2% target. In this environment, the majority of forecasts expect gradual interest rate cuts throughout 2026.
On the cost side, overall inputs for nonresidential construction are only a few percent higher than in 2024, yet they are about 44% higher than in 2020. Recent tariff increases on steel, aluminum, and some copper products, in some cases reaching 50%, are showing up directly in bid prices. Many contractors report at least one project in the past year that was canceled, or scaled back because updated material quotes pushed the budget beyond what the market was willing to accept. Some contractors are incorporating more innovative building materials, such as structural insulated panels (SIPs), to help speed-up installation and save on costs that way.
Construction unemployment is low and job openings are high. ABC estimates the industry will need about 500,000 additional workers in 2026. Skilled trades are harder to hire and keep, and immigration-related reductions are shrinking the pool in some markets. Many contractors are paying more to retain experienced crews. These factors all drive up costs and make it harder to take on new work.
The government is a source of uncertainty. The recent 43-day federal shutdown delayed funding for some infrastructure projects. Another deadline is already approaching, because current funding only runs through January 30, 2026. On top of that, the rollback of several energy-related incentives has changed project plans for many contractors. One example is the popular Section 179D deduction for energy-efficient commercial buildings, which will not be available for projects that begin construction after June 30, 2026.
Technology is one of the few levers companies can pull to protect profitability right now. Project management software is common on jobsites, but outcomes hinge on user skill. In a recent study, more than 80% of high-skill users experienced benefits, including overhead cost reductions of at least 5% and profit margins that increased by approximately 4%. Industry surveys also show most construction companies now use some form of AI for planning, document review, and data analysis. Adoption is still early, and the potential is quickly expanding.
Sector-Specific Performance
Backlog numbers heading into 2026 show just how different the experience can be depending on what type of work a contractor does. Contractors tied to data centers and advanced manufacturing are seeing average backlogs of 10.9 months. Others are closer to 8 months, and smaller contractors are reporting just 5.8. An October survey from ABC reinforces that divide; 65% of contractors said they believe the industry is contracting, and 23% expect sales to decline in the next six months. It’s a split market right now, but contractors in high-demand sectors are still seeing strong pipelines.
Nonresidential construction remains one of the more stable areas. Nonresidential building starts grew at roughly 13% in 2025; forecasts expect continued growth in 2026, led by education, healthcare, and public safety projects.
Infrastructure work is also holding up. Federal funding is still flowing into transportation, water, utilities, and broadband. Growth has cooled, with recent data showing about 3% year-to-date increases in infrastructure starts, but backlogs are still healthy given the long timelines usually involved.
Residential construction has moved in the opposite direction. Higher mortgage rates have slowed both single-family and multifamily construction in recent years. At the same time, many homeowners are “staying put” in traditional starter homes to keep the low mortgage rates they locked in earlier, which keeps inventory off the market. In many Mid-Atlantic markets, including, restrictive zoning rules and high multifamily construction costs also make it hard for builders to bring new units online even when demand is strong. This combination has contractors waiting longer for permits on fewer viable sites while dealing with tighter margins. Over the long term, demographic demand from millennials should keep demand for housing strong, but today’s environment remains challenging.
Standout areas this year continue to be data centers and manufacturing. There’s been record-breaking growth in data center starts, thanks to cloud growth, AI workloads, and the need for more power and capacity. Manufacturing construction is also staying high, driven by federal incentives tied to semiconductor production, electric vehicles, and clean-energy projects.
Strategic Considerations
Not every strategy will fit every contractor, but there are a few areas worth considering to build resilience and support growth:
- Strengthen material and supplier relationships. Look at whether stronger relationships or longer-term agreements with key suppliers could help reduce price swings or delays.
- Invest in workforce development and retention. Training, safety, and career advancement opportunities may make it easier to keep experienced workers and develop the next generation of skilled talent.
- Evaluate opportunities in stronger markets. Some contractors may benefit from pivoting to sectors with greater demand, such as data centers, manufacturing, or infrastructure.
- Use technology to work smarter. Project management software and AI are going to drive automation and growth for contractors in 2026. Innovative building materials are also gaining traction. Exploring these new technologies now can help contractors take advantage of emerging opportunities.
Conclusion
The outlook for 2026 is cautiously optimistic. The numbers point to a divided market, but that doesn’t mean opportunity is limited. Contractors that stay agile, focus on performance, and lean into technology are likely to find the edge, no matter which way the market turns. For more information, contact Jennifer French, Partner on PBMares’ Construction & Real Estate team.
