Q2 2026

How we read construction inflation, and what makes our read different from what you have seen before. This primer appears near the front of every issue. The full version, with sources for every ratio, lives on the methodology page.

The seven principles

Final cost beats input. Most construction cost commentary references PPI Inputs, ENR's Building Cost Index, or RSMeans. None of these capture what an owner actually pays. They miss margins. They miss productivity. They miss the difference between mill price and installed cost. We lead with final-cost (selling-price) indices for whole-project escalation. Input indices are reported separately and labeled as such.

Margins are the primary driver of inflation movement. Material and labor costs move slowly. Contractor and supplier margins move with activity. A large share of inflation movement over a cycle comes from margin shifts that input indices never see. We read activity indicators (Architecture Billings Index, Dodge Momentum Index, ABC Construction Backlog, ENR Confidence Index) as margin signals alongside the headline indices.

Escalate to the midpoint of construction. Not to project start. Not to completion. To the midpoint, which is roughly 50-60% into schedule duration. Half the project's spending happens before that point.

PPI Final Demand is a quarterly series. It is published monthly, but BLS revises it through quarterly contractor surveys that can flip the sign of the previous two months. We read it quarterly and report it that way.

Annual averages beat Dec-over-Dec. December-over-December comparisons can diverge sharply from annual averages in volatile years. We report annual averages as headline.

Tariffs cause shadow inflation in PPI. PPI excludes imports by definition. But tariffs cause domestic producers to raise prices on competing domestic products, which is what PPI sees. Watching PPI alone understates tariff impact because it misses the imported portion entirely.

Stage-of-input dilutes shocks. A 25% tariff on mill steel does not produce a 25% increase in installed cost. We walk this ladder transparently and show the math.

The ladder, worked: 25% mill steel tariff to building cost

Stage	Share of next stage	Shock landing
Mill steel tariff		25%
Mill steel within installed structural steel	~25%	6.25%
Structural steel within building cost	~10%	0.625%

How to use this report

Each section identifies its methodology, sources, and limitations. Ranges are reported as ranges, not point estimates. If a number in this report would change a bid by more than 1%, verify it against your firm's own historical cost data before relying on it. Our work is rigorous, but no third-party analysis substitutes for your firm's experience.

Revised July 4, 2026: market figures re-anchored to post-ceasefire levels and the May 2026 PPI, with sources linked. Material corrections from the original edition: the crude price range and current level, the war-risk insurance multiple, container freight multiples, and the switchgear lead-time figures.

Strait of Hormuz: a worked example of how a shock propagates to your bid

The 2026 Iran conflict has done something rare. It has activated four simultaneous cost-transmission channels into US construction, and most quarterly market reports cover one or two of them at best. What generally goes unwalked is how a 65% oil shock, a tenfold war-risk-insurance premium, and a two-week Cape-of-Good-Hope reroute actually combine and dilute through the stage-of-input ladder to land in a specific bid.

This section does the walk-through. The estimator's question is not "what is the geopolitical situation." The estimator's question is "what do I carry as an allowance on a 150,000 sf office bid starting Q3 2027."

What is actually happening

Between February 28, 2026 (the start of Operation Epic Fury) and the June 17 US-Iran memorandum, Brent crude ran from roughly $70 pre-war to a spot peak of $138 on April 7 (Fern calculation from EIA daily data); the World Bank called March's 65% ($46/bbl) rise the largest monthly oil-price increase on record. The June 17 memorandum reopened the Strait of Hormuz and lifted the US blockade, and crude has since retraced fully: both benchmarks sit near $72 as of June 29, roughly the pre-war level.

The Strait, through which roughly 20% of global crude transits, was closed from March 4. Iran declared it open on April 17, 44 days later, but that reopening lasted about a day against the continuing US blockade; effective transit did not resume until mid-June, and traffic is recovering but still below pre-conflict levels. Qatar's Ras Laffan LNG complex sustained missile damage to two trains (about 17% of export capacity) that owner QatarEnergy says will take three to five years to repair. The Houthi situation in the Red Sea remains active, and a substantial share of Asia-to-Europe and Asia-to-US-East-Coast container traffic continues to reroute around the Cape of Good Hope, adding roughly 10 to 18 days of transit (GEP, EIA). War-risk premiums on Gulf transits peaked at 2-5% of hull value against 0.15-0.25% pre-conflict, a ten-to-thirty-fold increase (Lloyd's List), and have eased since the ceasefire while remaining elevated.

The Dallas Fed's March scenario analysis projected WTI averaging $98 in Q2 2026 under a sustained closure, with global real GDP growth lowered by 2.9 percentage points annualized for the quarter; actual Q2 WTI averaged about $96 (Fern calculation from EIA daily data). On materials, AGC's February commentary on the January PPI reported aluminum mill shapes up 33% year over year, steel mill products up 20.7%, and copper and brass up 15.7% (about +31% after BLS revisions). As of the May print: aluminum +33.6%, copper and brass +42.5%, steel +6.7%, diesel fuel +105.9% (Fern calculations from current BLS data).

Fern's read: the energy-linked lines peaked with the conflict, and the question for Q3 is how fast they decay now that crude has round-tripped. The tariff-driven metals lines are a separate story and have not decayed.

Four channels of transmission to construction

Fern decomposes the shock into four channels. Each has different propagation through the stage-of-input ladder, different lag, and different exposure by project type.

Channel 1: Direct petroleum. Diesel drives all on-road and most off-road freight, all heavy equipment operation, and is a major input to asphalt production. Asphalt binder is roughly 25-35% of asphalt paving cost (estimator practice). Petroleum admixtures appear in concrete in small but non-trivial quantities. Retail diesel peaked at $5.64 per gallon in the April 6 weekly print, 48% above its pre-conflict level, and has retraced to $4.67 as of June 29, still 23% above pre-conflict (Fern calculations from EIA weekly data); the PPI for diesel fuel was +105.9% year over year in the May print.

Channel 2: Petrochemicals. Petroleum is the feedstock for the entire plastics and synthetics chain. Construction uses substantially more of these than most estimators carry explicitly: PVC pipe and conduit, polyethylene vapor barriers, polypropylene geotextiles, polyurethane rigid insulation and spray foam, polystyrene foam (XPS and EPS), synthetic rubber roofing membranes (EPDM, TPO), epoxy and acrylic coatings, PEX plumbing, vinyl flooring and wallcoverings, synthetic carpet, sealants, adhesives. The BLS PPI for Plastic Construction Products tends to lag crude by several months and was still only +3.3% year over year in the May print. Had crude held at wartime levels, this index would have pushed materially higher through Q3-Q4; with the June retrace, expect a smaller, lagged bump instead.

Channel 3: Energy-intensive manufacturing. The Qatar LNG disruption tightens global natural gas markets. The US is relatively insulated from this shock due to massive domestic gas production, but the US is also the world's largest LNG exporter, and tighter global LNG demand pulls US Henry Hub modestly higher. Aluminum smelting is particularly electricity-cost-sensitive, and electricity in some grids is heavily gas-fired. Steel via the electric arc furnace route, cement, glass, and brick all carry energy cost exposure. The shadow-inflation mechanism Zarenski has documented for tariffs (domestic producers raising prices in response to import constraints) is now compounded by energy cost increases at those same domestic producers, especially for aluminum.

Channel 4: Container freight and war-risk insurance. Cape of Good Hope rerouting adds roughly 10 to 18 days of transit on Asia-to-Europe and Asia-to-US-East-Coast routes. Container spot rates ran 45-75% above pre-conflict by lane in early June per Xeneta, and the Drewry World Container Index composite reached $4,530 per 40-foot container in the week to July 2, roughly double its early-2026 level. War-risk insurance on Gulf transits peaked at ten-to-thirty times pre-conflict rates (2-5% of hull value versus 0.15-0.25%; Lloyd's List). This channel disproportionately affects imported electrical gear, HVAC components with Asian electronics content, imported finishes (tile, stone, fixtures), and anything with a significant European or Asian supply chain element. On lead times, the honest read cuts the other way from the original edition of this section: published trackers put medium-voltage switchgear at roughly 30-52 weeks (44-week average per Wood Mackenzie's survey) and substation power transformers near 128 weeks, and neither is primarily a conflict story: US electrical lead times are driven by grid and data-center demand and predate the war. The conflict's contribution is freight cost and transit time on imported gear, not a step change in factory lead times. Sourced ranges live on the Pulse long-lead tracker.

Stage-of-input math (the part most reports skip)

A 30% increase in crude oil does not translate to a 30% increase in building cost. The stage-of-input ladder dilutes the shock at each step. Here is the math, worked through for two materials. The 30% sustained-crude input used below is conservative against the event: Q2 2026 crude averaged roughly 45% above pre-war levels even with the June retrace (Fern calculation from EIA daily data).

Asphalt paving (highway resurfacing example)

Stage	Cost share	Shock exposure
Asphalt binder (petroleum-derived)	~30%	Direct crude exposure
Aggregate, fillers, additives	~25%	Minimal
Plant operation, paver diesel, field labor	~20%	Partial via diesel (~5% of paving)
Trucking and logistics	~15%	Partial via diesel (~5% of paving)
Contractor OH&P	~10%	Indirect

A 30% crude shock translates to roughly 9% direct binder impact plus 1.5% diesel-driven trucking and operation impact, for approximately 10-11% impact on asphalt paving installed cost. For a highway project where paving is 30-40% of total project cost, the building-level impact is roughly 3-4%.

Structural steel (commercial office example)

Stage	Cost share	Shock exposure
Steel mill products	~25-30%	Mill PPI shock
Fabrication labor, shop OH	~30%	Partial via energy
Delivery freight	~5%	Diesel
Field labor, crane, equipment	~25%	Partial via diesel
Sub OH&P	~10-15%	Indirect

A 20% steel mill PPI shock (the January 2026 year-over-year print; by May the rate had compressed to +6.7% on base effects) translates to roughly 5% impact on installed structural steel. For a commercial office where structural steel is roughly 8-12% of total building cost, the building-level impact is roughly 0.4-0.6%.

The implication, which is widely missed: headline material PPI moves rarely translate to even 1% of building cost on their own. Estimators who multiply the headline PPI by the structural-steel-share-of-building-cost and stop there are double-counting the dilution. Estimators who ignore the propagation entirely understate the exposure. Both errors are common.

Three project archetypes

Fern estimates the combined four-channel impact on representative projects starting Q3 2026, midpoint of construction in Q1-Q3 2027. Ranges, not point estimates. Sources for the underlying ratios are on the methodology page.

Combined four-channel impact, additive to baseline escalation

Archetype	Direct petroleum	Petrochemicals	Energy-intensive mfg	Freight + insurance	Combined
150,000 sf commercial office	0.3 to 0.6%	0.4 to 0.8%	0.5 to 1.2%	0.4 to 1.5%	1.6 to 4.1%
1 mile urban highway resurfacing	2.8 to 4.5%	0.2 to 0.5%	0.4 to 0.8%	0.1 to 0.3%	3.5 to 6.1%
200-unit garden apartment	0.6 to 1.2%	0.6 to 1.4%	0.3 to 0.7%	0.4 to 1.3%	1.9 to 4.6%

These ranges were built assuming the Hormuz situation persisted through Q2 2026 and partially normalized by Q4. Normalization arrived early: the June 17 memorandum reopened the strait and crude round-tripped by late June. Post-ceasefire read: bids pricing now should carry the lower halves of these ranges, and release the allowance if normalization holds. The direct-petroleum channel decays first; freight and insurance normalize with a lag and remain elevated as of early July. If the ceasefire fails and a sustained full closure runs two or more quarters, multiply the freight-plus-insurance and direct-petroleum channels by roughly 2x.

These estimates are layered on top of baseline escalation, not replacements for it. Baseline escalation for nonresidential buildings is running roughly 4.4% year to date per Ed Zarenski's Construction Analytics (April 2026); Fern's own selling-price series run +2.6% to +4.1% year over year as of May. The geopolitical-channel impacts above are additive to that baseline.

What to carry as an allowance

For a bid pricing today on a project with construction midpoint Q1-Q3 2027:

• Commercial vertical: carry the geopolitical risk channel as 2-4% above your baseline escalation (lower half post-ceasefire), with explicit allowance language naming the Strait of Hormuz and Red Sea conditions.
• Horizontal asphalt and earthwork: carry 4-6% above baseline, with the largest single line exposure being asphalt binder.
• Residential garden and low-rise: carry 2-5% above baseline, with attention to petrochemical exposure across many small line items.
• Add lead-time premium for long-lead electrical gear, especially switchgear and transformers, regardless of project type.

These are allowance ranges, not point estimates. Document the methodology in your bid file. If conditions normalize before construction starts, the allowance can be released. If they escalate, the bid is protected.

Methodology and limitations

Sources used in this section: BLS PPI series and EIA daily crude and weekly diesel benchmarks via the Fern data pipeline (all change figures recomputed from current data); Dallas Fed economic letter, March 20, 2026; CRS R45281 on Hormuz commodity exposure; World Bank Data Blog on the March 2026 oil shock; Lloyd's List on war-risk premiums; Drewry WCI and Xeneta via The National on container rates; AGC PPI commentary; Zarenski Construction Analytics for the baseline escalation composite. Stage-of-input shares are derived from estimator practice, are the assumptions most open to challenge, and are shown in full so you can substitute your own.

Limitations: this is scenario analysis, not prediction. Geopolitical events are non-stationary. Historical analogs (1973 Yom Kippur, 1979 Iranian Revolution, 1980 Iran-Iraq War, 1990 Gulf War, 2022 Russia-Ukraine, 2023-24 Red Sea / Houthi) inform parameter ranges but each event has its own shape. The combined-range table assumes the four channels propagate independently. In reality they correlate and may compound. Fern's live Pulse module carries these ranges forward as conditions evolve.

Revised July 4, 2026: figures re-anchored to the May 2026 PPI and current tariff law, with sources linked. Material corrections from the original edition: the Canadian lumber duty stack, the copper pass-through read, and the addition of a wire-and-cable stage to the copper ladder.

Section 232 doubled, and most reports are reporting the wrong impact

In June 2025, the administration doubled Section 232 tariffs on steel and aluminum from 25% to 50% (effective June 4, 2025). In August 2025, a 50% tariff on semi-finished copper products and copper-intensive derivatives took effect, with refined cathode exempt (Federal Register). These actions survived the Supreme Court's February 20, 2026 IEEPA ruling (Learning Resources v. Trump) because they were imposed under separate trade laws, and were restructured effective April 6, 2026 into full-customs-value tiers: 50% on primary metal articles, 25% on derivatives above 15% metal content, and a transitional 15% for electrical-grid and industrial-base equipment through 2027 (Phillips Lytle). Section 301 tariffs on Chinese imports remain in place. Canadian softwood lumber carries a combined 35.19% AD/CVD rate plus a 10% Section 232 timber tariff, roughly 45% at the border (ITA, Global Affairs Canada). Layered on top, a February 2026 action imposed a general 10% tariff under Section 122 with a statutory 150-day limit: the Court of International Trade struck it down May 7, the Federal Circuit stayed that ruling June 11, and it lapses July 24, 2026 unless Congress extends it.

The shorthand response in industry coverage has been to multiply the tariff rate by the share of building cost attributable to the tariffed material and report the result as the tariff's contribution to project cost. That math overstates the impact in some cases and understates it in others. It also misses the more important number, which is what the tariff lands as after walking the stage-of-input ladder.

This section walks the math honestly.

What the PPI is showing so far

As of the May 2026 PPI: copper and brass mill shapes up 42.5% year over year, aluminum mill shapes up 33.6%, steel mill products up 6.7% (all Fern calculations from current BLS data). Steel's year-over-year rate has compressed on base effects even as the index level kept rising; it printed +20.6% in January, the largest since 2022. Copper's readings are the largest since 2021. AGC's February commentary on the January data reported aluminum +33.0%, steel +20.7%, and copper +15.7%; subsequent BLS revisions put January copper and brass at about +31%.

PPI does not include imports. What we're seeing is the domestic producer price response to tariffs on competing imports, not the tariff cost itself. This is the shadow-inflation mechanism: domestic producers raise prices on domestic products in response to import constraints. In 2018, a 25% steel mill tariff applied to roughly 30% of US steel use (CRS) was followed by a roughly 18% rise in the domestic Steel Mill Products PPI from February to its September 2018 peak (Fern calculation from BLS data), implying that domestic producers passed through roughly 70-75% of the tariff rate to domestic prices.

With Section 232 now at 50% (double the 2018 rate), expect similar pass-through on the larger base. Current PPI readings are consistent with the early-to-middle stages of that pass-through and likely have further to run as tariff effects propagate through contracts that renew on rolling schedules.

Stage-of-input ladder for steel

For a 50% tariff with the historical pass-through pattern:

Direct effect on imports: 50% times 30% import share contributes 15% to the weighted market price increase.

Shadow effect on domestic: roughly 70-75% pass-through of the 50% tariff implies a 35-38% increase in domestic Steel Mill Products PPI. Observed at +20.6% year over year in January before base effects compressed the rate; the index level has continued rising through May.

Weighted market increase, blending imports and domestic: roughly 40% above pre-tariff baseline by the time pass-through completes (0.3 × 50 plus 0.7 × 36, about 40.6).

Apply the stage-of-input ladder:

Stage-of-input ladder: 50% Section 232 steel tariff

Stage	Cost share	Shock exposure
Steel mill products	~25-30%	~40% increase
Fabrication labor, shop OH	~30%	Minimal direct exposure
Delivery freight	~5%	Minor
Field labor, crane, equipment	~25%	Minor
Sub OH&P	~10-15%	Indirect

A roughly 40% mill steel cost increase translates to a roughly 10-12% increase in installed structural steel cost. For a commercial office where structural steel is roughly 8-12% of total building cost, the building-level impact is roughly 0.8-1.5%. AISC's own tariff analysis frames it the same way: mill material is less than a third of framing-system cost and the frame is around 12% of project cost (AISC).

Stage-of-input ladder for aluminum

Aluminum at 50% follows the same pattern with different base ratios. Aluminum mill shapes appear in curtainwall, storefront, window systems, electrical enclosures, and some structural elements. Aluminum is more import-dependent than steel (roughly half of unwrought input supply historically; Aluminum Association via Check Your Fact), so the direct tariff effect is larger.

Direct: 50% times 50% import share contributes 25% to the weighted market increase.

Shadow: domestic producers passing through roughly 70% of 50% implies roughly 35% domestic PPI increase. Observed at +33.6% year over year in May (Fern calculation from BLS data), suggesting we are roughly at full pass-through already.

Weighted aluminum mill shapes increase: roughly 40% (0.5 × 50 plus 0.5 × 35, about 42.5).

Stage-of-input: aluminum mill products are roughly 30-40% of installed curtainwall cost. Curtainwall is 4-8% of typical commercial office cost. Translates to roughly 0.5-1.4% building cost impact for offices with significant aluminum curtainwall. For projects without significant aluminum exposure (most highways, most residential), the impact is closer to 0.1-0.2%.

Stage-of-input ladder for copper

Copper at 50% (effective August 2025) appears mainly in electrical wire and cable, mechanical piping, and some roofing and cladding. A scope note that matters: the copper action covers semi-finished products and copper-intensive derivatives, while refined cathode is exempt (Federal Register), so the direct import effect lands on mill products rather than the metal itself.

The domestic response has not been muted. The PPI for copper and brass mill shapes is up 42.5% year over year as of May 2026, and January's print now reads about +31% after BLS revisions (Fern calculations from current BLS data; a correction to this report's original edition, which read the pre-revision +15.7% January print as early pass-through). Copper is at or beyond the pass-through the 2018 steel analog would predict.

Weighted copper mill-product increase: roughly 40%, blending tariffed imports at 50% with the observed domestic response.

Stage-of-input, with the ladder walked one more step than most coverage: copper conductor is 30-50% of finished wire and cable cost; wire and cable is roughly 20-30% of the electrical package (estimator practice); electrical is 8-12% of typical commercial building cost. A 40% copper move translates to roughly 0.2-0.7% of building cost through electrical. Mechanical copper piping adds 0.1-0.3% for projects with copper piping (less common in commercial new construction, more common in healthcare and high-end residential). The original edition of this section skipped the wire-and-cable share and overstated the range; the correction cuts the copper line roughly in half, an instance of the dilution error this report exists to catch.

Stage-of-input ladder for Canadian softwood lumber

The original edition of this section carried a badly outdated 14% duty figure; the correct current stack is much larger. Most Canadian producers pay a combined 35.19% in antidumping and countervailing duties (20.56% AD plus 14.63% CVD, finalized July and August 2025; ITA AD results, ITA CVD results), plus a 10% Section 232 tariff on softwood timber and lumber since October 14, 2025: roughly 45% at the border. Canada supplies roughly 24% of US softwood consumption (NAHB).

Why hasn't the market exploded? Because the stack phased in through 2025 and is largely priced into current levels: the softwood lumber PPI is up just 4.8% year over year as of May 2026 (Fern calculation from BLS data), with US mills' spare capacity damping the shadow response. And a relief valve is visible: preliminary AR7 results (April 2026) point to the AD/CVD component falling to about 24.83% when finalized in late 2026 (NAHB).

Stage-of-input: framing lumber is 15-25% of residential framing labor-and-material cost, and framing is roughly 25% of garden apartment total cost. A 5-8% duty-attributable market increase translates to roughly 0.2-0.5% building cost impact for garden apartments and similar light-frame residential.

This is separate from broader lumber market volatility, which has its own drivers (housing demand, mill capacity utilization, fire-season supply disruption). The duty effect is one component layered on those.

Three project archetypes

Combined tariff impact on representative projects, additive to baseline escalation, separate from the geopolitical channel impacts in the prior section.

Combined tariff impact, additive to baseline escalation

Archetype	Steel + aluminum	Copper	Lumber	Combined
150,000 sf commercial office	1.3 to 2.9%	0.3 to 1.0%	minimal	1.6 to 3.9%
1 mile urban highway resurfacing	0.4 to 0.7%	minimal	minimal	0.4 to 0.7%
200-unit garden apartment	0.6 to 1.0%	0.3 to 0.8%	0.2 to 0.5%	1.1 to 2.3%

For projects with significant copper exposure (healthcare, data center MEP, electrical-intensive industrial), where the electrical package runs well above the 8-12% commercial norm, add 0.5-1.5% to the building impact. For projects with significant imported aluminum exposure (high-end commercial with extensive curtainwall), add 0.5-1% to the building impact.

These ranges assume tariff rates hold through the construction midpoint. The 10% Section 122 general tariff lapses July 24, 2026 unless Congress extends it, and the Court of International Trade has already ruled it unlawful (stayed on appeal); if it lapses, building impacts drop by roughly 0.3-0.5%. If Section 232 rates rise further or new tariffs are imposed, building impacts scale roughly proportionally.

What to carry as an allowance

For bids pricing today with construction midpoint Q1-Q3 2027:

Commercial vertical: carry tariff allowance as 1.5-4% above baseline, with steel-aluminum-copper exposures called out by line item where significant. Add 0.5-1.5% for copper-heavy projects.

Horizontal infrastructure: carry 0.5-1% above baseline. Tariffs are a smaller driver than baseline escalation for asphalt-heavy projects, where the larger exposure is petroleum (covered in the Geopolitical Risk section).

Residential garden and low-rise: carry 1-2.5% above baseline, with framing lumber as the main residential-specific line.

These tariff allowances stack with the geopolitical risk allowances from the prior section. For a commercial office project, that means roughly 2-4% geopolitical plus 1.5-4% tariff, or 3.5-8% combined above baseline escalation. Carry as a single allowance line or split by category. Either works. Document which.

Methodology and limitations

Sources: BLS PPI series via the Fern data pipeline (all PPI change figures are recomputed from current BLS data, so they reflect revisions); AGC Data DIGest commentary (January release); Federal Register and trade-bar analyses of the tariff actions linked inline above; CRS IN12519 on the 2018 steel action; AISC's tariff analysis for framing cost shares. Stage-of-input ratios are derived from estimator practice and are labeled as such; they are the assumptions most open to challenge, which is why every ladder is shown in full. Historical 2018 steel tariff pass-through behavior is used as the analog for current Section 232 pass-through, with adjustment for the larger 50% rate.

Limitations: tariff rates are political. They can change with a presidential proclamation or court ruling faster than this report's quarterly cadence. The February 2026 SCOTUS IEEPA ruling and the May-June 2026 Section 122 litigation show how fast the legal picture moves; the July 24, 2026 statutory expiration of the 10% general tariff is the nearest-term variable. Historical pass-through behavior from 2018 may not repeat exactly under 2026 conditions, especially with domestic capacity constraints in copper and the layering of multiple tariff actions. The ranges above are point-in-time estimates with the tariff regime as observed on the revision date.