As we arrive at the midpoint of 2025, the construction industry continues to evolve at a rapid pace, shaped by a confluence of economic shifts, technological breakthroughs, and an increasing emphasis on sustainability. At Deltek, we believe that understanding these dynamics is not just about staying competitive but about truly building for the future. This year is proving to be a period of significant transformation, demanding agility, innovation, and a strategic approach to business operations.
Economic Environment: Cooling Inflation Holds Steady
At the beginning of 2025, we anticipated a cooling inflationary environment and a relatively stable overall economic backdrop. Mid-year data largely supports this. According to the U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) rose 2.4% over the 12 months ending May 2025, indicating that consumer prices have continued their modest decline. This aligns closely with the Federal Reserve’s long-term inflation target of 2%, reinforcing a stable economic climate. While 30-year fixed-rate mortgages have seen slight fluctuations, they haven't dramatically destabilized the market.
Construction Spending: Mixed Signals and Sector Shifts
Our initial outlook suggested an easing of spending on building construction, particularly in commercial and manufacturing sectors, with some specific declines in lodging and retail. Mid-year trends show a nuanced picture:
Commercial & Manufacturing
While the anticipated moderation in manufacturing spending (projected at 2.2% growth) seems to be materializing, the cooling has been more pronounced than initially expected in certain sub-segments. High-tech manufacturing, while still active, is seeing a slightly slower pipeline of new mega-projects compared to the rapid pace of the past few years. Construction Dive reports that non-residential construction starts are up 3% year-over-year in the first half of 2025, buoyed primarily by continued, albeit decelerated, industrial investment.
Lodging & Retail
These sectors continue to experience softness, mirroring the initial predictions of declines (5.7% for lodging, 11.2% for retail). This suggests a continued shift in consumer behavior and investment priorities.
Institutional Sector
The good news here is that our forecast for healthy growth in healthcare, education and public safety facilities is proving accurate. U.S. Census data shows institutional construction spending remains strong, with notable increases in public education and hospital projects. Investment in essential services remains a crucial pillar of stability for the industry.
Labor Market Dynamics: Persistent Challenges, New Strategies
The labor market remains a critical and persistently challenging area. Our initial report highlighted a reliance on foreign-born labor and ongoing skilled trade shortages among the approximately 12 million workers. Mid-year confirms these issues have not abated. The demand for skilled workers, especially in specialized trades like electrical and HVAC, continues to outpace supply. A June 2025 survey from Associated Builders and Contractors (ABC) indicates that 88% of contractors are still struggling to find qualified workers, with specialty trade contractors reporting the most acute shortages.
Compounding these challenges, recent policy discussions and enforcement actions in states like California and Florida have led to heightened apprehension among undocumented workers regarding deportation. This climate of fear can influence workforce availability and stability in regions heavily reliant on this segment of the labor force, potentially exacerbating existing labor shortages in specific markets.
A notable mid-year shift is the increased focus on upskilling and reskilling existing workforces, alongside accelerated adoption of prefabrication and modular construction techniques. These strategies are gaining traction as practical responses to the labor crunch, a more pronounced trend than perhaps emphasized at the year's outset.
Tariffs and Trade Policies: A Watchful Eye
The impact of trade policies and tariffs was identified as a profound influence on material costs. So far this year, we've seen some fluctuations, particularly with commodities like steel and lumber, influenced by global supply chain adjustments and ongoing trade negotiations.
Construction Dive noted that steel and aluminum tariffs have driven up costs, with steel prices escalating 5-8% and some materials rising as much as 50% since January.
ABC also noted that construction backlog fell to 8.4 months in May due to tariff-related project delays and cancellations after a two-year high.
Navigating the Future of Construction
The construction industry in mid-2025 continues its journey at a "pivotal crossroads." Our initial forecast emphasized adaptability and innovation, and these qualities are proving more vital than ever. The resilience shown in navigating economic nuances, addressing labor shortages through strategic shifts, and responding to evolving market demands underscores the industry's strength.
As we look to the second half of the year, continued strategic investments in infrastructure—particularly in transportation and clean energy—are expected to drive growth, alongside a deeper embrace of technological solutions to labor challenges and proactive adaptation to environmental considerations. The groundwork laid at the start of the year is proving robust, but the ongoing need for foresight and agility remains paramount.
Implications for Contractors: Practical Strategies for the Future
For contractors, mid-2025 presents both challenges and significant opportunities. Navigating this environment successfully requires not just awareness of trends, but proactive strategic shifts. Here's what these dynamics mean for your business and practical tips for what you should be doing and thinking about:
- Strategic Project Selection & Diversification: Prioritize projects in stable institutional and infrastructure sectors, while carefully evaluating commercial and retail ventures
- Aggressive Workforce Development & Retention: Invest in upskilling existing workers, improve retention through competitive benefits and explore prefabrication/modular construction to mitigate labor shortages
- Embrace Technology as a Core Strategy: Leverage digital project management and construction accounting, BIM, automation, and data analytics to enhance efficiency, safety, and decision-making
- Proactive Supply Chain Management: Diversify suppliers, consider early procurement or hedging for volatile materials, and stay informed on trade policies to manage costs
- Financial Prudence & Risk Management: Implement rigorous bidding and cost control, optimize cash flow, and build robust contingency plans for unforeseen challenges
- Commitment to Sustainability: Integrate green building practices and pursue relevant certifications to meet client demands and enhance competitiveness
- Foster Agility and Continuous Learning: Cultivate a company culture that embraces change, encourages innovation, and stays informed about industry trends and policy shifts
By adopting these practical strategies, contractors can not only navigate the current complexities but also position themselves for sustainable growth and leadership.
