Q2 2026
The inaugural Fern Quarterly lands in an unusually loud quarter. A 50% Section 232 tariff regime working through domestic prices, an active Strait of Hormuz disruption moving oil, freight, and insurance simultaneously, and headline PPIs that have not yet caught up to either. This issue opens with how Fern reads construction inflation, then walks both shocks through the stage-of-input ladder to what they actually mean for a bid.
Section 01
Methodology Primer
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 track 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 mislead by 5 to 10 percentage points 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.
| 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.
Section 02
Geopolitical Risk and Supply Chain Pulse
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 are covering one or two of them at best. ENR has reported the news. Cumming and Linesight have noted volatility in their commodity sections. Zarenski has written about diesel and petrochemical exposure qualitatively. None of them have walked through how a 30% oil shock, a 4x war-risk-insurance premium, and a 2-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 mid-May, Brent crude has oscillated between $80 and $114, settling around $100 as of this writing. WTI sits around $95. The Strait of Hormuz, through which roughly 20% of global crude transits, was nominally closed for 44 days before Iran's April 17 declaration that the Strait was open to all shipping. Traffic has not returned to pre-conflict levels. Qatar's LNG complex, the world's single largest, sustained missile damage that owner QatarEnergy says may take up to five years to repair. The Houthi situation in the Red Sea remains active. 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 two to three weeks of transit. Lloyd's underwriters have quoted war-risk premiums on Gulf and Red Sea transits at four to five times pre-conflict rates.
The Dallas Fed projects WTI averaging $98 in Q2 2026 with global real GDP growth lowered by 2.9 percentage points annualized for the quarter. AGC's January PPI commentary noted aluminum mill shapes up 33% year-over-year, steel mill products up 20.7%, and copper and brass mill shapes up 15.7%, the largest year-over-year increases since 2022 or 2023.
Fern's read: those PPIs do not yet reflect the full Q2 disruption. Expect Q2 and Q3 PPIs to push higher.
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. Petroleum admixtures appear in concrete in small but non-trivial quantities. Diesel ULSD futures are up roughly 40% from pre-conflict levels and have not retraced.
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 has historically lagged crude by three to six months. Expect that index to push significantly higher in Q3-Q4 2026.
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 two to three weeks of transit on Asia-to-Europe and Asia-to-US-East-Coast routes. Container spot rates on the affected lanes are running roughly 2-4x pre-conflict levels based on press reports of the Drewry World Container Index and Freightos Baltic Index. War-risk insurance on Gulf and Red Sea transits is running 4-5x normal. This channel disproportionately affects imported electrical gear (switchgear, transformers from European manufacturers), HVAC components with Asian electronics content, imported finishes (tile, stone, fixtures), and anything with a significant European or Asian supply chain element. Lead times for already-long-lead items extend further: medium-voltage switchgear that was 60-100 weeks pre-conflict is reasonably 80-120 weeks now. Power transformers behave similarly. Fern will publish a separate long-lead-item tracker in the next quarterly.
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.
| 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%.
| 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 (close to the current year-over-year) 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.
| 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 assume the Hormuz situation persists in current form (intermittent, ceasefires fragile) through Q2 2026 and partially normalizes by Q4. If escalation produces a sustained full closure for 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 in Q2 2026 is running roughly 4.4% per AGC and the Zarenski composite. 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, 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 Inputs (steel, aluminum, copper, plastics, paving mixtures), BLS PPI Final Demand for new nonresidential construction, EIA daily crude and diesel benchmarks, Dallas Fed Q1 2026 economic letter on Strait of Hormuz scenarios, CRS R45281 on Hormuz commodity exposure, AGC PPI commentary January and February 2026 releases, Zarenski Construction Analytics on tariff-driven shadow inflation (methodology applied here to energy-driven domestic price response). Stage-of-input shares are derived from estimator practice and standard cost references. Full ratios with citations are on the methodology page.
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, 2024 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 geopolitical risk module will update these ranges as conditions evolve.
Section 03
Tariff Landscape
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%. In August 2025, a 50% tariff on products containing copper took effect. These actions survived the Supreme Court's February 20, 2026 IEEPA ruling because they were imposed under separate trade laws. Section 301 tariffs on Chinese imports remain in place. The Canadian softwood lumber duty remains at roughly 14%. Layered on top, a February 2026 administration action imposed a general 10% tariff with a 150-day expiration unless renewed.
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 January 2026: aluminum mill shapes up 33.0% year-over-year, steel mill products up 20.7%, copper and brass mill shapes up 15.7%. These are the largest year-over-year increases for these inputs since 2022 (aluminum and steel) or 2023 (copper).
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 caused average domestic Steel Mill Products PPI to rise 18%, 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. As of January, observed at 20.7% year-over-year, with further pass-through expected.
Weighted market increase, blending imports and domestic: roughly 30-40% above pre-tariff baseline by the time pass-through completes.
Apply the stage-of-input ladder:
| Stage | Cost share | Shock exposure |
|---|---|---|
| Steel mill products | ~25-30% | 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 30-40% mill steel cost increase translates to roughly 8-12% 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 0.7-1.4%.
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 50% imports historically for the categories used in construction), 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% year-over-year in January, suggesting we are roughly at full pass-through already.
Weighted aluminum mill shapes increase: roughly 30-35%.
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 0.4-0.9% 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.
Direct: 50% times roughly 35% import share for refined copper contributes 17.5% to the weighted increase.
Shadow: domestic copper price response has been muted relative to expected pass-through. PPI for copper and brass mill shapes up 15.7% year-over-year as of January, against an expected pass-through closer to 30-40% based on the 2018 steel analog. Possible explanations: the tariff only took effect August 2025, so we are still in early pass-through; domestic refining capacity is constrained; or mid-stream manufacturers are absorbing more than expected. The next two PPI releases will clarify.
Weighted copper increase: roughly 15-20% as observed, with potential to reach 25-35% if full pass-through develops.
Stage-of-input: copper conductor is 30-50% of finished electrical wire and cable cost. Electrical is 8-12% of typical commercial building cost. Translates to roughly 0.4-1.0% building cost impact through electrical alone at current pass-through. If pass-through completes to the 30-35% range, building impact rises to 0.8-2.0% 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).
Stage-of-input ladder for Canadian softwood lumber
The 14% duty on Canadian softwood lumber applies to roughly 30% of US softwood lumber supply.
Direct: 14% times 30% contributes 4.2% to the weighted market increase.
Shadow: limited because US domestic lumber production has spare capacity in some regions, dampening domestic pass-through. Expect roughly 3-5% domestic price response from this source alone.
Weighted softwood lumber market increase from the duty: roughly 4-6%.
Stage-of-input: framing lumber is 15-25% of residential framing labor-and-material cost. Framing is roughly 25% of garden apartment total cost. Translates to roughly 0.2-0.4% 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.
| Archetype | Steel + aluminum | Copper | Lumber | Combined |
|---|---|---|---|---|
| 150,000 sf commercial office | 1.0 to 2.3% | 0.5 to 1.3% | minimal | 1.5 to 3.5% |
| 1 mile urban highway resurfacing | 0.4 to 0.7% | minimal | minimal | 0.4 to 0.7% |
| 200-unit garden apartment | 0.5 to 0.8% | 0.4 to 0.8% | 0.2 to 0.4% | 1.1 to 2.0% |
For projects with significant copper exposure (healthcare, data center MEP, electrical-intensive industrial), add 1-2% 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. If the 10% general tariff from February 2026 expires at the 150-day mark without renewal, building impacts drop by roughly 0.3-0.5%. If Section 232 rates rise further or new tariffs are imposed (lumber duties, additional Section 301 actions), 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 1.5-3.5% above baseline, with steel-aluminum-copper exposures called out by line item where significant. Add 1-2% 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% 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 1.5-3.5% tariff, or 3.5-7.5% combined above baseline escalation. Carry as a single allowance line or split by category. Either works. Document which.
Methodology and limitations
Sources: BLS PPI Inputs and Final Demand (steel, aluminum, copper, lumber, plastics), AGC Data DIGest commentary January and February 2026 releases, US Trade Representative tariff schedules, CRS commodity exposure analysis. Stage-of-input ratios derived from estimator practice. Historical 2018 steel tariff pass-through behavior used as 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 shows that legal challenges can also reshape the picture. The 150-day window on the February 2026 10% general tariff is a near-term variable that may or may not be renewed. 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 today.