As 2025 winds down, contractors across the U.S. are closing the books on another unpredictable year for construction materials and input costs. While general inflation has eased since 2023, the construction industry continues to face pockets of volatility, especially in steel, asphalt, and fuel. According to the U.S. Bureau of Labor Statistics’ (BLS) August 2025 Producer Price Index (PPI), costs for “inputs to construction industries” were up 1.7 percent year-over-year, driven by renewed increases in key industrial commodities.
For contractors preparing bids for early 2026, understanding what the PPI data reveals and how to integrate it into cost models can make the difference between maintaining margins and absorbing unexpected losses. As the Associated General Contractors of America (AGC) recently noted, “Price relief in some categories is offset by stubborn inflation in others, making cost-tracking and contingency planning essential tools for contractors entering 2026.”
The 2025 Cost Landscape: What PPIs Reveal About Construction Inputs
PPI: The Industry’s Most Reliable Cost Signal
The Producer Price Index measures average changes over time in selling prices received by domestic producers for their output. For construction, the most relevant categories are:
- Inputs to construction industries (goods)
- Materials and components for construction
- Inputs to nonresidential construction
Each index captures a portion of the overall cost picture from raw inputs like steel, diesel, and lumber to the materials and services purchased for projects. When tracked monthly, these indices form a near-real-time snapshot of input cost direction, helping estimators anticipate shifts before they show up in supplier quotes.
Key Material Trends Through Q3 2025
According to the BLS August 2025 release and AGC analysis:
- Diesel fuel: Up roughly 6 percent from June through September, according to EIA retail diesel price data. Prices rebounded due to refinery disruptions and steady freight demand.
- Steel mill products: After softening in late 2024, prices rose 3.8 percent year-over-year in August 2025, reflecting tighter global supply and recent tariff reviews.
- Asphalt paving mixtures: Increased 2.9 percent year-over-year, driven by energy costs and summer paving demand.
- Concrete and cement: Steady with minimal monthly change, though still about 6 percent higher than two years ago.
- Lumber and plywood: Flat compared to last year, marking the first sustained stabilization since the pandemic-era spikes.
- Gypsum products: Essentially unchanged year-over-year, following several quarters of moderation.
AGC’s August report highlighted that volatility remains “category-specific.” Contractors depending heavily on steel, asphalt, or diesel-based operations, such as road builders and structural contractors, should continue modeling costs at the upper end of 2024–2025 ranges when projecting into 2026.
Regional Cost Differences
Engineering News-Record (ENR) construction cost indexes show that material pricing has diverged regionally. As of September 2025, Southern and Midwestern markets have seen smaller increases in steel and cement costs than coastal metros. Regional diesel logistics and freight costs continue to widen those gaps, emphasizing the importance of using regional cost indices rather than national averages in bid preparation.
From Index to Estimate: Turning PPI Data into Actionable Insights
Converting Index Movement Into Cost Projections
For estimators, the most practical use of the PPI is as a benchmark for escalation modeling. For example, if the steel mill products PPI increased 3.8 percent year-over-year, a contractor procuring fabricated steel in six months might reasonably assume a 1–2 percent additional escalation unless market indicators suggest otherwise. This kind of forward-looking adjustment ensures bids stay competitive yet resilient to cost increases.
Bid Escalation Clauses and Supplier Negotiations
AGC recommends contractors revisit escalation clause language before entering new fixed-price agreements. A best practice is to link escalation thresholds directly to relevant PPI categories—such as “Inputs to Nonresidential Construction”—so that any material cost changes above a specified percentage trigger equitable adjustments.
These clauses not only protect contractors from absorbing unexpected increases but also promote transparency with owners. Referencing official BLS indices lends objectivity to negotiations and minimizes disputes over subjective supplier pricing.
Using Long-Term Data for Better Forecasting
The Federal Reserve’s FRED database tracks decades of construction PPI data, allowing contractors to identify cyclical patterns. When combined with ENR’s local indexes, firms can build dynamic cost models that reflect both long-term trends and regional realities. This approach helps refine contingency planning, lending accuracy to both bids and cash-flow forecasts.
External Pressures Still Shaping 2026 Costs
Interest Rates and Financing Costs
Although inflation has cooled, the Federal Reserve has maintained relatively high interest rates through late 2025 to ensure price stability. These higher borrowing costs ripple through the supply chain, raising financing costs for suppliers and contractors alike. For construction firms relying on credit lines for materials or equipment purchases, these expenses should be factored into bid pricing and overhead projections.
Shipping and Global Supply Chain Challenges
Global shipping routes remain unpredictable. While freight rates have eased from early-2025 peaks, disruptions in the Red Sea and Panama Canal have continued to affect delivery times and fuel consumption. AGC notes that “extended lead times are still influencing availability of imported steel, electrical components, and HVAC systems.” Contractors should adjust schedules accordingly and, where possible, lock in early orders for long-lead items.
Labor Shortages Persist
While not directly reflected in the PPI, rising skilled labor costs remain a significant pressure point. Many contractors report labor expenses up 4–5 percent year-over-year, reflecting sustained demand for qualified tradespeople. Estimators should therefore treat PPI trends as only one half of the inflation picture; labor modeling must complete the forecast.
Bid Smarter for 2026: Strategies for Protecting Margins
Track PPIs Monthly, not Annually
BLS updates PPI data monthly, usually by the second week of each month. Contractors who integrate these figures into internal dashboards or accounting systems can detect trends before they affect bids. Baldwin CPAs often recommends building monthly PPI updates into management reporting for construction clients, particularly those managing multiple concurrent projects.
Build Dynamic Contingencies
Rather than applying a static 5–10 percent markup to every bid, estimators can link contingencies to specific cost categories. For example:
- 2 percent for steel and rebar volatility
- 1 percent for asphalt
- 0.5 percent for stable categories like gypsum or concrete
This method keeps bids competitive while reducing exposure to volatility.
Align Procurement with Financial Planning
Early purchasing of long-lead materials can reduce cost uncertainty, but it also requires strong cash-flow management. Contractors should coordinate with their accountants and tax advisors to ensure that early material purchases align with year-end financial strategy, depreciation timing, and available tax deductions.
How Baldwin CPAs Can Help
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FAQ: Construction Cost Forecasting for 2026
- What does the Producer Price Index tell contractors about future costs?
It shows how average prices for materials and services sold by producers are changing. Contractors can use it to anticipate shifts in input costs before supplier quotes adjust.
- How does PPI differ from CPI?
The PPI tracks wholesale prices paid by businesses; the CPI tracks retail prices paid by consumers. For construction cost forecasting, the PPI is far more relevant.
- Which materials are expected to stay volatile in 2026?
Steel, asphalt, and diesel remain the most unpredictable based on late-2025 data from the BLS and AGC.
- How can escalation clauses protect profit margins?
They allow contractors to adjust contract pricing if key material costs exceed a certain threshold, using official indices like the BLS PPI for reference.
- How often should contractors update cost forecasts?
Monthly updates are ideal. Tracking each PPI release helps contractors stay ahead of price changes rather than reacting to them.
