Recommendations for Owners

Five moves that follow directly from this quarter’s data. The common thread: the cost risk has shifted from what you buy (materials, equipment) to who installs it (trade labor).

1

Budget for MEP volatility, not material inflation

Carry trade specific contingency on mechanical, electrical, and plumbing scope. We are seeing bid spreads up to 100%, and MEP coming in ~50% higher on like sized, like program projects in the same city with the same subcontractors. Institutions with stringent requirements are paying a meaningful premium.

2

Capture the softening in equipment & commodities

Air handlers, chillers, switchgear, generators, and structural steel are all trending down; copper and steel buying power is returning. Where schedule allows, lock equipment pricing and long lead procurement now.

3

Protect the finish trades with broad, early bidding

Drywall and paint are a growing challenge: a labor, not material, issue (e.g. high $/SF paint on large public work). Qualify subs early and widen the bid list on labor intensive trades to keep pricing honest.

4

Use market heat to flex scope by 2–5%

In contracting or soft local markets, owners gain buying power; design add-alternates (2–5%) to capture it. In busy markets, pre-identify scope reductions (2–5%) to deploy if bids worsen.

5

Plan to 4–6% escalation, watch two upside risks

Hold 2026 escalation at 4–6%, settling toward a 4% long term average. The two things that could push the high end: tariff pass through on goods and the Iran war feeding inflation. Both are live as of the June FOMC.

Forecast — National Trend

Nonresidential prices rose about 5% in 2025. As tariffs feed through, we forecast 4–6% for 2026, settling toward a long term average of 4%.

Rates have held steady through 2026 after 0.75% of cuts in 2025, and the Committee dropped forward guidance in June, there is no signalled path to plan against. The median SEP participant puts the rate slightly above today’s upper bound by year end. Construction employment is growing about 1% over the year; the trade labor pool is growing more slowly still. The net is a market that keeps escalating unevenly, the average masking very different outcomes trade by trade and city by city.

Risk to watch

The forecast assumes tariff effects are largely one time. The energy risk is not hypothetical: the Iran war pushed energy costs up 23.5% year over year by May, easing to 15.7% in June. A renewed spike would push escalation past the top of the range.

Recommendation

For projects bidding in 2026, carry 4–6% annual escalation to your mid-point of construction. Bias to the high end in tight metros and on MEP heavy programs; bias to the low end where the local market is contracting.

Volume is falling despite adding new jobs

Total nonresidential volume rose just 0.6% in the second quarter. Private nonresidential spending is down 4.7% year over year before any adjustment for escalation. That is a real contraction across most of the market, even as the industry stays on pace to add about 98,000 workers in 2026.

Recommendation

Strip out data centers (subcategory of office spending) and traditional nonres volume is falling. GCs without data center work have reported contracting backlogs compared to those that do. Expect some competition among small and mid-size contractors on non-data center projects, and none on mechanical and electrical packages as the data center buildout continues.

A leading indicator the market is overriding

Billings have been contracting for 41 straight months, the longest run in the index’s 30-plus year history, and firm backlogs slipped to 6.3 months in the second quarter from 6.6 in the first. Ordinarily that points to easing prices in 12–18 months.

So why are we still forecasting +4–6%? The indicator isn’t broken, it’s being overridden by a supply side constraint. Weak future demand is real, but a slow growing, specialized trade labor pool is keeping installed pricing firm today.

Risk to watch

If labor loosens before the pipeline recovers, the ABI signal could reassert quickly; a downside to pricing.

Trade labor is the cost story of 2026

Construction unemployment sits near 4.7% at the end of Q2 with a slow growing labor force; reduced immigration and lower participation. Tight, specialized labor is why pricing stays firm even as volume and the pipeline soften.

Where the volatility lives. The spreads are concentrated in the MEP trades, with drywall and paint close behind. These are the trades most exposed to skilled- and low-skilled labor availability and they are producing the widest, least predictable bids we see. Equipment and commodities, the material side of these same trades, are moving the other way, trending down.

Growth rate = current 12-month average construction employment vs. the prior 12-month average. We tier every metro on this scale to calibrate local escalation and bidding strategy.

Recommendation

On MEP heavy programs, de-risk before bid day: pre qualify and broaden the subcontractor list, scrutinize stringent specs that drive premiums, and where possible decouple equipment procurement (softening) from field labor (volatile). In contracting labor markets, add scope via add alternates (2–5%); in high growth markets, hold scope reduction options (2–5%) in reserve.

Where prices sit relative to trend

Bid prices for nonresidential projects are tracked against the Vermeulens Trendline; consumer prices are tracked against the PCE Trendline and target. Construction continues to run above its long-term trend.

What this means

Prices above trend, with escalation still positive, argue against waiting out the market on a discretionary schedule basis; the carrying cost of delay is real. The opportunity is in procurement strategy and scope, not in timing the index.

A slow labor market — but not a price decline

Total nonfarm job growth averaged roughly 29,000/month over the year to June. Measured against a breakeven rate that has collapsed as immigration reversed, that is a slow but balanced labor market, not slack.

Historically, sustained negative job creation precedes dips in construction prices. This is not that. Breakeven, the monthly gain needed to hold unemployment steady, has fallen from roughly 150,000 to a 2026 range near 15,000–87,000 as net immigration reversed, and unemployment declined through the second quarter. Slow hiring against a shrinking labor force is a tight market, not a loose one. We do not expect it to produce outright declines in construction prices.

Recommendation

Don’t budget for a price correction that the labor data doesn’t support. Plan for continued positive escalation and concentrate savings efforts on value engineering and procurement, not on a hoped for market downturn.

Fed Watch

The FOMC has held the target range at 3.50–3.75%, after cutting three quarters of a point from September through December 2025. Inflation has refirmed on goods/tariffs and an oil shock; the labor market is soft.

Elevated readings are mostly goods inflation boosted by tariffs. Near term inflation expectations rose on higher oil prices from Middle East supply disruptions, while long term expectations stay anchored near 2%. Job gains are low but unemployment is little changed.

Recommendation

Plan on a flat policy rate with an upward tail, not an easing cycle. The Committee dropped forward guidance in June, so there is no signalled path to build into a schedule. The SEP splits evenly, half of participants put the rate at or below today’s level by year end, half above, with a median of 3.8%, just above the current upper bound. With inflation refirming, that supports our 4–6% escalation call, tilted to the upside.

Fed Watch

Indicator	Direction	Effect on prices
Consumer inflation	refirming (goods/tariffs)	Inflationary
Energy prices	rising (Iran war)	Inflationary
Nominal interest rates	flat since December	Neutral
Government deficits & spending	increasing	Stimulative
Construction backlog	8.8 months, highest since 2023	Inflationary
Construction volume	up 0.6% Q2/Q1, negative in real terms	Neutral
Construction employment	+49,000 jobs this year	Inflationary

Let’s put this to work on your project

Since 1972 we have specialized in pre-construction cost control, estimating from programming through construction documents, reconciliation of scope to budget, value engineering, and bid review. We benchmark institutional buildings against our bid and reconciliation database to set realistic budgets from the outset.

Data & methodology

Forecasts reflect Vermeulens’ nonresidential bid database reconciled against leading indicators. Public sources: U.S. Census Construction Spending (C-30); AIA Architecture Billings Index; BLS construction employment; and the FOMC Summary of Economic Projections and Chairman’s press conference of June 17, 2026.