Construction costs have risen sharply over the last couple of years. Will 2025 be different? Could this finally be the year that breaks the construction crisis?
As a home services business, you should be rooting for lower construction costs. Here’s why. With increasing construction costs, fewer and fewer people will afford to buy or build a house. That also means a decline in demand for home services.
Fluctuating costs can impact your business success in other ways besides decreasing remodel leads. Rising construction costs will inevitably affect your pricing, budgeting, profitability, and business growth.
So, are construction costs going down?
Let’s find out by exploring the current trends and forecasts in construction costs. We’ll also discuss the key drivers for these trends and what you can do about rising home renovation prices.
Current Trends in Construction Costs
In 2019, an average single-family home cost $296,652 to build. The construction cost accounted for 61.1% of the final price. Fast forward to 2024, and that same house now costs $428,215. This time, the construction cost takes up 64.4% of the overall price. That’s according to NAHB’s most recent Cost of Construction Survey.
In just five years, the average cost of constructing a new home jumped 44%. With that track record, will construction costs go down in 2025?
While we can’t say for sure, things are starting to look up. For starters, construction prices seem to be stabilizing. It’s nothing like the 2022-2023 period when inflation surged to 9.1%, and lumber prices shifted drastically every day.
Today, the price of lumber holds steady at around $428 per 1,000 board feet. Even better, lumber prices are dropping, though they are still higher than pre-pandemic prices. And it’s a similar story with many other materials, including concrete and steel.
Generally speaking, construction costs, particularly material prices, are stabilizing. We’re even seeing slight price reductions here and there. Even at elevated figures, price stabilization is a good thing. It reduces costing risks on the contractor’s part.
However, the ongoing political shifts in trade and immigration policies may shake things up. There’s a lot of talk about how the newly imposed tariffs are bad news for building materials price forecast. And how recent changes to immigration laws might threaten the construction workforce, which is roughly 30% immigrant.
Such developments are likely to disrupt the supply and cost of building materials. But we’ll have to wait and see.
In a nutshell, that’s where we are with construction costs in 2025. It’s a bit of a mixed bag, really. But there are plenty of reasons to be optimistic about lower (or at least constant) construction prices throughout the year.
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Key Factors Influencing Construction Costs
The last few years have seen a steady rise in construction costs. But why?
We’ve rounded up the five main culprits for price fluctuations in construction.
Materials
For most projects, a bulk of the construction budget covers materials. Even the slightest increase in material prices can significantly raise the overall cost.
Key construction materials have experienced dramatic inflation over the years. The aggregated price of steel, for example, has risen by 12.8% since 2020. Pre-pandemic prices for timber hovered well below $400 per thousand board feet. You’ll see the same trend in the prices of steel, concrete, and stone.
Labor
The United States is facing a decade-long labor shortage. There’s a particularly acute skilled trades gap that’s only widening. The Associated Builders and Contractors reckons the construction industry is short 439,000 workers this year.
A shortage of labor inevitably leads to wage inflation. And sure enough, construction wages have increased by 15.4% in just the last two years.
Cost of Logistics
Contractors are spending more to cover logistical expenses such as transportation, equipment, and storage. Rising fuel costs, supply chain delays or disruptions, and natural disasters all contribute to these costs.
Regulatory Changes
Changes in regulations are another reason for soaring construction costs.
Regulations are put in place for the good of everyone. However, complying with building standards related to energy efficiency, insurance, permits, and safety can be expensive. A 2021 study reveals that government compliance accounts for as much as 23.8% of the final cost of building a new single-family home.
Economic Conditions
Over the last five years, we faced a global pandemic, record-high inflation, the threat of recession, and political turmoil. All these factors have, in one way or another, impacted the construction and housing markets.
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How Construction Costs Vary by Region
Construction costs vary widely from region to region. Generally, the western and northeastern regions have the highest construction costs.
Massachusetts, New York, New Hampshire, California, Washington, and Hawaii are some of the most expensive states to build a house. The cheapest states include Florida, Alabama, and Mississippi.
So, what makes it cheaper to build in some areas than others?
It has to do with these factors:
- Cost of living. Areas with higher cost of living mean higher wages for construction workers. Covering construction materials and logistics might also be expensive. Such is the case for highly urbanized regions.
- Demand for housing. A high demand for housing translates into higher costs. This follows the undisputed rule of supply and demand.
- Material availability. In some areas, certain building materials are more readily available and less expensive than in others. One of the reasons it’s so expensive to build in Hawaii, for instance, is that nearly all the materials must be shipped from the mainland.
- Labor rates. Construction wages vary from state to state. It’s less expensive to build in areas with low labor rates.
- Local regulations. Government regulations add a significant cost to the price of a house. These regulations vary between states, counties, cities, and municipalities.
For a localized home services business, location is everything. You want a local market that supports the services you offer. The regional cost of construction might be a good indicator of that.
What Experts Predict for 2025 Construction Costs
The US housing market is holding strong. The Congressional Budget Office forecasts 1.6 million new houses every year for the next decade.
But what about costs? What do the experts say about the cost of construction in 2025?
The general consensus is that construction costs will remain relatively stable or increase slightly throughout the year.
According to Bankrate.com, construction costs will continue to rise — but at a much slower pace compared to previous years. Construction materials forecast in JLL’s 2025 US Construction Outlook shows an average price increase of 5.4%.
Construction costs are not going down in 2025. But the good news is that we’re starting to see some stability, especially in material costs. While we shouldn’t expect pre-pandemic construction prices any time soon, stability is a welcome relief for home service contractors.
What Home Services Providers Should Do Now
Erratic construction costs are a big problem for contractors. How do you make accurate job bids or quotes when costs fluctuate unpredictably? For instance, unexpected price hikes during an ongoing project can eat into your contractor’s profit margins.
We recommend dealing with cost uncertainties in the following ways.
Reevaluate Your Pricing Model
Choose a pricing model that protects you from the risk of overruns in building and renovation costs. Ideally, use the cost-plus pricing model.
With the cost-plus model, the client reimburses you for every penny spent on the project plus a predetermined service fee (as profit). In this arrangement, the client essentially absorbs any fluctuations in the costs.
Secure Long-Term Supplier Contracts Where Possible
Create lasting relationships with suppliers through long-term contracts. For example, if you only source your concrete from a particular supplier, they are likely to prioritize your deliveries in times of scarcity. Also, they’ll share valuable insights into future concrete availability and prices.
Optimize Procurement and Inventory Management
You have to be clever about how you source and store materials. Efficiency here is key. Plan your procurement processes to minimize spending on material purchase, transportation, and storage.
Cost efficiency could mean buying in bulk, choosing the optimal time to buy, or taking advantage of supplier perks. It also involves minimizing wastage and dead stock. A good digital construction dashboard can help with all that.
Invest in Workforce Development and Training
Having a hard time finding skilled construction workers? You’re not alone. In a recent survey, 94% of construction firms reported experiencing difficulty in finding workers to hire.
When labor is in short supply, it becomes costly. Get around this problem by diversifying your hiring strategies. For example, instead of only hiring skilled workers, consider hiring interns and apprentices and training them in-house. While at it, develop high-level training programs to equip your staff with new skills rather than seeking extra hands.
Build Flexible Project Budgeting Frameworks
The budgeting for a construction project can determine how well it hedges against cost overruns. A tight budget with no wiggle room is a bad idea when dealing with fluctuating costs. Instead, draft project budgets upon flexible frameworks that accommodate price elasticity.
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Prepare Your Business to Stay Competitive
There’s really nothing you can do about price volatility in construction. Material, labor, and regulatory costs are well out of your control. And although construction costs are more or less stable now, there’s no telling what the numbers will be like in the next couple of months or years.
However, don’t just cross your fingers and hope for the best. Find smart ways to navigate the unpredictable home contracting landscape. Develop proactive plans to anticipate and maneuver around changes in construction costs.
The main goal here is to balance profitability and competitiveness. But it can be difficult to work that out using pen and paper. Modeling prices, submitting proposals, calculating estimates, and managing crews can all be a bit too much.
Why do all that manually? Get CRM software to take the load off. MarketSharp’s CRM for remodelers does all the heavy lifting, from gauging customer satisfaction to crunching the numbers. It’s a contractor leads software and CRM all rolled into one.
See MarketSharp in Action
With the right tools, your business can confidently navigate 2025’s market challenges. Book a live demo to see how our CRM platform empowers home services companies to adapt, grow, and thrive.