Annual Construction Cost Hikes Reach Pandemic-Era Rates as Iran War Winds Down

The U.S. and Iran have struck a preliminary deal to end the war, but the conflict has left a painful impression on the U.S. construction industry.

Analyses of recent government data released last week by Associated Builders and Contractors (ABC) and Associated General Contractors of America (AGC) revealed the largest year-over-year hikes in construction input prices since the pandemic. 

The industry-wide impact of several months of closures along the Strait of Hormuz are yet to be quantified. Surging prices linked to the geopolitical conflict, alongside tariffs and labor costs, have squeezed contractors’ margins for months. These pressures have persisted in tandem with relatively soft demand for new development, aside from data centers.

ABC reported that input prices in May rose 2.6 percent over the month and 9.6 percent annually. 

“Suppliers have endured several months of elevated input prices and, based on anecdotal evidence, are starting to pass on those higher costs,” Anirban Basu, chief economist at ABC, said in a statement to CO. “The extent to which those higher costs are passed through to contractors, and how that affects broader input pricing, remains to be seen.”

It’s plausible, Basu added, that the prices of construction materials will continue to be adversely affected by supply shocks, even when traffic resumes moving through the strait.

AGC officials warned last week of runaway construction input prices not seen since 2021. The AGC’s analysis found that inputs for nonresidential construction in May notably outpaced a 3.5 percent rise in contractors’ bid prices for new nonresidential building construction.

“Runaway prices for key construction inputs are pushing up costs twice as fast as the 4.2 percent rise in the consumer price index,” Ken Simonson, AGC’s chief economist, said in the report. “Contractors are being hit by a double whammy of rising materials prices and much lower increases in what they can charge for new projects.”

Oil prices pushed higher by the Iran conflict made a substantial contribution to rising material prices, according to ABC’s analysis, but continued price growth for tariff-affected metal products — such as iron, steel and copper — are of even greater concern. 

Global construction and project development firm Skanska’s own spring market trends report, published in May, detailed the particularly volatile metal markets. Prices for products such as aluminum and copper rose year-over-year by 45.3 percent and 29.5 percent, respectively. The upticks, according to the report, were driven by electrification, artificial intelligence-related demand and supply chain pressures. 

Skanska’s report added that technology-driven projects, like data centers, continue to outpace  traditional commercial and residential activity. 

Seth Carpenter, chief global economist at Morgan Stanley, speaking at the National Association of Real Estate Investment Trusts’ conference in early June, predicted the conflict’s approaching conclusion would see oil fall to around $90 a barrel by the end of the year and interest rates poised to decline. An end to months of energy market volatility would offer a breath of fresh air to the construction industry, but concerns for the costs facing contractors remain.

“While there is still much to be learned about the framework deal between the United States and Iran, oil prices have already receded to levels not seen since the first week of March,” Basu told CO. “While that will provide immediate relief for certain key construction inputs like diesel, the price of which is already down more than 50 cents per gallon over the past month, other forms of materials’ price escalation are likely to linger.”

Emily Davis can be reached at edavis@commercialobserver.com.