The Impact of Tariffs on Construction Procurement

 

The Impact of Tariffs on Construction Procurement

Procurement of construction and engineering services is facing a new challenge in the form of substantial tariffs imposed by the US government on steel and aluminum imports. Tariffs, fees imposed on imported goods, typically increase prices in an affected market by making less expensive foreign goods more expensive in their destination market. These measures have been met by retaliatory tariffs from affected US trading partners, including Canada and the European Union, on a variety of US exports. These new tariffs are certain to have a considerable impact on the cost of construction, but they also have the potential to spur wide-ranging market turbulence, driving up costs throughout the US supply chain.

IHS Markit PEG Engineering and Construction Cost Index (ECCI)”

The IHS Markit Procurement Executives Group (PEG) Engineering and Construction Cost Index (ECCI), an index of construction and engineering costs created by PEG, has jumped significantly in recent months as the likelihood of the tariffs grew.  An index value of 50 indicates stable prices; any value greater than 50 indicates rising prices, such as increases due to new tariffs. The index stood at 57.7 in March and climbed to 63.8 in May. The sharp escalation is driven by the materials sub-index which stood at a significant 67.4 in May. The ECCI also indexes outlook on expected 6-month price changes. At 74.9 in May, the ECCI shows that the consortium of leading construction, engineering, and procurement firms who contribute data expect prices to continue to rise dramatically as a result of the tariffs and related economic uncertainty.

Companies with significant planned or routine capital investment should plan to adjust their procurement strategies to account for these new market dynamics in the construction and engineering markets. Primarily, the effect of the tariffs will be to make international producers much less cost competitive, so domestic firms will have increased power in the marketplace. Creating a competitive environment among domestic producers of construction materials will be essential to an organization’s next sourcing event. It will be important to cultivate strong, strategic partnerships with domestic firms to minimize the impact of these new tariffs on construction costs.

Procurement teams should consider doing a deep dive on construction spend to identify their exposure in contract terms and expirations as well as country of origin with their existing suppliers. Get ahead of construction demand to develop an accurate long-term forecast, and partner with suppliers by giving them visibility to future purchasing plans in-turn, winning discounts and priority fulfillment. Regulated utility firms should also prepare to incorporate these new market factors into upcoming rate cases to ensure adequate funding for upcoming capital investments.

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